Reddit filed its S-1 last week and is set to take the bold step of being the first venture-backed public listing of 2024. If successful, Reddit has the power to open the IPO window for other late-stage startups anxiously waiting in the wings. But to have any chance of sparking an exit trend, it needs to get one thing right: its valuation.

Investors who buy at the IPO want upside on their investment, so Reddit has to price itself at the sweet spot where shares don’t look undervalued but also have room to ascend. If Reddit prices too high out the gate, it loses out on potential buyer interest and could trade down from its IPO valuation instead of building momentum.

So what price should Reddit target? Secondary investors told TechCrunch that Reddit could have a pretty good shot at a successful IPO if it prices itself at $5 billion or less, even though that means some of its more recent investors are going to receive pennies on the dollar if they get any return on their investment at all.

Reddit’s most recent primary round in 2021 raised $410 million at a $10 billion valuation from investors, including Fidelity, Quiet Capital and Montauk Ventures, among others. The market has obviously changed since then, and going out at that $10 billion valuation wouldn’t be smart. Investors say $5 billion is the correct number for a variety of reasons.

That sweet spot

Javier Avalos, co-founder and CEO of Caplight, a secondary data tracking platform, said that going out at $5 billion would be a realistic price based on the company’s $800 million yearly revenue, as reported in its S-1 filing. He added that a $5 billion valuation would equate to a mid-single-digit revenue multiple, which is realistic for both today’s public market and what other companies in Reddit’s category tend to trade around.

“The valuation was way overvalued in the August 2021 round that they did,” Avalos said. “As the valuation went further and further down, it started to get more attractive from a pure revenue multiple as opposed to public comps.”

The other critical data point that supports the $5 billion valuation is secondary activity. Greg Martin, co-founder and managing director at Rainmaker Securities, said that recent secondary deals he’s seen price the startup between $4.8 billion and $5 billion. Caplight data showed that interested investors submitted bids for shares that value the company around $5 billion.

Secondary data is very telling here as the investors who are buying secondary shares in a company this close to an IPO are only going to come in at a valuation they expect will increase at, and after, its exit.

What happens next

The $5 billion valuation that Reddit may pursue is not risk-free. Even with the valuation dropped down to $5 billion, there hasn’t been a huge influx of secondary activity to the startup. Martin said this isn’t necessarily a bad thing, but it isn’t good, either.

Reddit offering shares to its top users is likely a ploy to avoid the stock entering meme-trading territory, Martin said. He thinks the lack of secondary and crossover investor interest in its shares today plays a factor into the company wanting its users to drum up early trading momentum.

“[Reddit] is not something that has been trading very aggressively. It’s kind of ho hum; people aren’t seeing a ton of upside,” Martin said. “The reason they come into secondary market is they want to get in before the IPO pop. You really have to believe there is an IPO pop; I don’t think people are feeling that with Reddit.”

No anticipated pop on IPO day is likely why Klaviyo and Instacart aren’t thought of as huge success stories or as the catalysts for the IPO window to reopen as many had hoped. John Avirett, a partner at StepStone, said Reddit should see more success if it tries to avoid that strategy.

“Bankers and management are really trying to make sure the valuation they go out at are not at levels where the company will have a difficult time maintaining those valuations,” Avirett said. “You have to underpromise and overdeliver in a consistent manner to bring those metrics up.”

While there are reasons why Reddit might try to price over $5 billion, it may be looking to latch on to the “halo” effect of its new AI deal with Google, Martin said. Or it could be trying to bring some liquidity to those late-stage investors who are positioned to likely get nothing if it goes out at $5 billion. Investors hope it doesn’t.

The secondary investors agreed that if Reddit prices low, it has enough revenue and enough of a household name — and, according to Martin, its users are undermonetized enough — to actually have a good shot at a successful IPO. This would be a good thing, not just for Reddit but also for the venture and secondaries industries.

“If Reddit comes out and prices its IPO to sell, meaning they price it in a way where they do well on the first day, that changes the math on a whole cohort of IPO candidates that [could] rush out and try to get out before the summer months,” Avalos said.