Reddit has been quietly reshaping how it sells ads, ditching programmatic internet pipes to build a more direct way of selling inventory on its site, and the change is already starting to have an impact on the company's bottom line. On Thursday, Reddit announced it topped $100 million in ad revenue in the second quarter, which ended in June.

Reddit discussed the ad revenue milestone while revealing its plans to raise up to $700 million from investors at a valuation of more than $10 billion. The emphasis on its advertising revenue was noteworthy because it comes on the heels of an update to Reddit’s ad platform in April, which tweaked how digital advertisers buy inventory on the site.

In the second quarter, Reddit stopped accepting programmatic ads, which is inventory sold through third-party ad exchanges like PubMatic and Xandr. Reddit instead changed all advertising to a direct-sold model, running through its internal team, representing a significant shift in strategy. Reddit is taking the “walled garden” approach akin to Facebook and other platforms that restrict the number of outside parties that can target users on their services. 

“On April 30, Reddit removed the last remaining programmatic ads on our platform, and moving forward, all ads on Reddit will be native ads sold through our direct Sales channels or on our Ads Platform,” the company said in a statement to Ad Age.

The move seems to be helping Reddit’s bottom line, so far this year. Reddit's first $100 million advertising revenue quarter represents a 192% increase compared to the same period last year, the company said in a statement. “And, we are investing in our products and diversifying the Reddit experience to include new ways for communities to connect through video and audio.”

Reddit’s ad business has been growing, but slowly, topping $100 million in total yearly revenue for the first time in 2019. The company, which was founded in 2005, has said it expects to hit $1 billion in ad revenue by 2023.

Reddit is betting the passion and loyalty of its users will create premium audiences for advertisers. Kolin Kleveno, senior VP of addressable media at Tinuiti, a performance marketing agency, says that Reddit has been rising in the esteem of advertisers in recent months, pointing to highly public moments like the rise of r/WallStreetBets. 

“Wall Street Bets” is one of 100,000-plus communities, or subreddits, that populate the site. In January, the Wall Street trading community lit a fire under so-called “meme stocks” like GameStop and AMC, which swung public markets and show the potential power when a brand connects on Reddit. Reddit has 52 million daily users on average. “[Those users] are sharing, seeking information, and becoming experts, and when you have that much data it makes sense to wall it off,” Kleveno says. Reddit’s pitch to advertisers is, “if you want our inventory, we’ll give it to you and we have all this data on our users,” he says.

Reddit is focused on native advertising, including promoted posts and tailored ad campaigns that offer advertisers control over where ads run. But brand safety remains a concern for advertisers worried about having their ads appear near offensive user posts. The site is known as a rough-and-tumble place where brands can sometimes run into users who are put off by the intrusion of commercial activity. That reputation has partly held back the service from reaching its full potential with marketers. Reddit is a powerful platform but is still trailing sites like Twitter, Pinterest and Snapchat in terms of ad sales. In the second quarter, Twitter topped $1 billion in ad revenue.

Creating a walled garden advertising environment helps Reddit better manage the setting in which ads run, and gives it more direct involvement with the brands. In March, Reddit announced a deal with Omnicom Media Group to open the platform to the agency’s brand clients. The deal had brand safety implications for the advertisers by providing better measurement and reporting data to the advertisers.

Now, Reddit is in the midst of its biggest fundraising round, with investors like Fidelity Investments coming on board. Reddit is expected to go public at some point, but the company has not announced a firm plan for an initial public offering. “All good companies should go public when they can,” CEO Steve Huffman told The New York Times during an interview reported on Thursday.
 

Contributing: Garett Sloane