How Reddit’s IPO and direct share program will impact the market’s momentum

There’s been a lot of noise around the Reddit IPO, which makes sense. The social media site is one of the largest community-based networks in the world. It is backed by a ‘who’s who’ list of venture capital investors, and you could argue that the formation of its Wall Street Bets sub-Reddit changed the face of retail investing. Even when Reddit filed its S-1, you knew it would be market-making news.

Beyond the typical things you’d find in an S-1, however, the company included the facility for some of its top users – a group it called ‘super Redditors’ – to buy into the offering. While only 8 percent of the deal was being offered through this ‘directed share program’, it was a novel idea for a process typically reserved for the big-name Wall Street funds.

The directed share program is not exactly new, though. Over the last five years, companies that have carried out these programs include Uber, which let some of its drivers in on its IPO. Airbnb also allowed some hosts to buy shares in its IPO, and restaurant chain Cava let its top rewards members in on the deal. In fact, the directed share model was pioneered by Netscape in 1995.

It’s not surprising Reddit took this same approach: it has a passionate user base that isn’t afraid to express its opinions on the platform. In fact, that’s the main driver of the company’s powerful network effect. The logic behind the decision is sound: reward its most-dedicated users with stock that hopefully increases in price, propagating how great the company is in the eyes of those users. After pricing its IPO at $34 per share, Reddit’s stock soared to $65 the last week of March.

Ultimately, however, I don’t think the fact that it offered a directed share program is all that significant. Companies with a strong community should consider it, and I’m assuming this won’t be the last time we see it. This structure won’t make sense to every company, but it’s an interesting way to reward those with a loyal user base.

What’s more interesting to me is whether Reddit can trade well. Coming back to the point of it being a bellwether, if Reddit can meaningfully sustain a price above its listing price, others will follow. We saw Astera Labs, a maker of advanced connectivity semiconductors for data centers, price around the time of Reddit, and its stock soared to $89. And during the first week of April, Rubrik, a cyber-security company with a valuation last listed at $4 bn, also filed its S-1; interestingly, it also specified a carve-out for a direct share program.

So where do we go from here? As the stock market sets new records, discussions of a possible IPO revival have taken center stage. But the recent stock market surge has been driven by the largest handful of technology stalwarts with strong operating fundamentals versus speculative, high-growth, venture capital-backed companies with untested track records.

I’m not a market prognosticator, but I do believe I have the pulse of a wide range of C-suite management teams that are evaluating which funding path to take next. Unfortunately, the

performance of tech start-up names that chose the IPO path over the past five years has dramatically underperformed the broader stock market. This obviously brings into question how receptive the market will actually be to a more speculative IPO.

If you look at some of the companies that have gone public in the last year, they’ve been large businesses with lengthy track records of performance. Birkenstock is a great example: it is a very different company from a high-growth start-up.

With broader public markets testing new highs and the drought of IPOs, however, my guess is we will start to see more stock market debuts in the coming months. But I believe they will be the largest venture capital-backed companies whose business models have the scale and predictability investors will want to see coming out of an IPO bear market.

If interest rates can come down and the earnings story for these new market participants is positive, it will raise investors’ risk appetite, opening the door for a wave of smaller IPOs to hit the market.

Cody Slach is senior managing director at Gateway Group, a financial communications and digital media advisory firm specializing in assisting emerging growth companies