Making money online isn’t always easy, especially when you run an ad-supported business. And that’s not just true for the small fries; it can be even more true for popular, heavily-trafficked sites.

That’s the case for Reddit, the popular user-generated news site. It was purchased by Conde Nast Digital in 2006, but a blog post last Friday indicates that all is not well at Reddit.

The post, which is directed at Reddit users, is either refreshingly honest or disturbingly desperate, depending on your perspective. It states, in part:

The bottom line is, we need more resources.

Whenever this topic comes up on the site, someone always posts a comment about how reddit is owned by Conde Nast, a billion-dollar corporation like Time Warner or Cobra, and how if they wanted to they could hire a thousand engineers and purchase a million dollars worth of heavy iron. But here’s the thing: corporations aren’t run like charities. They keep separate budgets for each business line, and usually allocate resources proportionate to revenue. And reddit’s revenue isn’t great.

Since Conde Nast doesn’t see the wisdom in giving Reddit more money, Reddit is hoping that its users will. It’s asking them to donate money that can be put toward the hiring of more engineers and the purchase of more servers.

Unfortunately, Reddit is essentially asking its users to play the role of ‘greater fool‘. Since it apparently doesn’t have the ability to build the subscriber-only features it says it would like to offer, it isn’t currently providing those who pony up money with anything other than “our undying gratitude and an optional trophy on your userpage.

The problem: Reddit is clearly more focused on raising the money it ‘needs‘ than it is on developing a service that provides value to paying customers. Perhaps Reddit’s community is so loyal that the money will start pouring in regardless, but that would hardly be a long-term fix. After all, engineers add to the payroll, and the servers Reddit buys today probably won’t be the last it needs.

Reddit’s traffic “continues to grow by leaps and bounds“, but Conde Nast isn’t interested in helping Reddit hire more engineers or buy more servers. That says an awful lot about Reddit’s prospects as a business and I think it’s safe to say that the writing is on the wall: Reddit, in its current configuration, is in trouble.

That means it has two options: it can either find a business model that works, or it can try to survive as a charity. The former can be tough, but the latter is almost always much, much tougher. Right now, however, it appears Reddit’s best hope for buying time to build a better business model will depend on the charity of its users. That won’t be an easy sale. As one Reddit user commented:

I guess I fundamentally have an issue with this business model. If reddit were subscription based, then I’d probably pay. If it were a charity, then I’d donate. But it’s neither, and I’m not sure propping up a failing business model is a healthy pursuit for either the users or the site. I could see this being disastrous if reddit comes to rely on donations because it’s easier than reworking the business model.

There’s a good lesson here for all startup entrepreneurs: business models matter — even after you’ve been acquired. Resources are always finite, and if the resources you have are being invested in developing things that don’t support a viable business model, there’s simply no way to last. Such a misallocation of resources appears to have taken place at Reddit.

Photo credit: Teuobk via Flickr.