San Francisco, California – Reddit Inc.’s recent successful initial public offering (IPO) is expected to have a significant impact on the tech industry, according to Rick Kline, a partner at law firm Latham & Watkins who played a key role in guiding the $748 million transaction. In an interview, Kline highlighted the transformative nature of the Reddit IPO, stating that “last week will change things.”
Kline pointed out that the rise of artificial intelligence (AI) will be a driving force behind increased IPO activity in the tech sector. However, he also emphasized that investor interest in IPOs will extend beyond technology companies. The strong pricing and trading performance of Reddit’s shares will likely contribute to growing investor appetite for new issuances.
On its first trading day, Reddit’s stock soared by 48%, resulting in a valuation close to $9.5 billion. This success sparked hope that the market for newly listed companies may be heating up. However, the company experienced a drop of nearly 9% in share price the following day.
Founded in 2005, Reddit filed confidentially to go public in December 2021, a period marked by heightened IPO activity. Interestingly, the IPO coincided with a successful IPO by semiconductor connectivity firm Astera Labs Inc., which raised over $700 million. This active week in the IPO market followed a period of stagnation, with only $26 billion raised through listings in 2021, compared to the record-setting $339 billion raised the previous year.
Kline, who specializes in IPOs and works in the San Francisco area, noted the long-awaited reopening of the tech IPO market. He acknowledged that companies are often hesitant to be among the first to venture into the market during a downturn. However, the promising performance of Reddit and Astera Labs’ IPOs may encourage companies to reconsider, sparking discussions in boardrooms about the optimal time to access the public markets.
With Reddit’s IPO being the fourth-largest of the year, data from Bloomberg shows that total funds raised through US IPOs in 2022 have reached approximately $8.8 billion, a significant increase of approximately 152% compared to the same period last year.
In addition to its IPO, Reddit is betting on the potential of AI by entering into deals to license its user-generated content for training large language models, which is expected to generate around $66 million in revenue this year. Kline emphasized that investors are particularly interested in companies that have a positive narrative surrounding the transformative effects of AI. He predicted that AI will play a prominent role in tech-related IPOs for the foreseeable future.
The legal teams involved in Reddit’s IPO included Latham & Watkins, led by partners Tony Richmond and Sarah Axtell, as well as Davis Polk, which represented several underwriters. Underwriters for the IPO included Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co., and Bank of America Corp, according to Reddit’s filings.