Robinhood Investing APP Looks to Mature into its $17B Private Equity Valuation

Bloomberg Businessweek October 26, 2020 pp22-27 |Finance| “Eat. Sleep. Robinhood. Repeat.” “The broker that merged trading and entertainment is banking on its customers growing up and trusting it with their financial lives”. “THE BOTTOMLINE Robinhood’s investors have high expectation that it will grow into its $11.7 billion valuation. But first the company has to nail reliable trading and customer service.”

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2244 hadn’t heard about the trading APP Robinhood until “A tragic incident earlier drew attention to some of the perils of introducing novices to complex markets. Alexander Kerns, 20, committed suicide in June after his Robinhood account showed a negative balance of more than $700,000..” A number of factors have led to the amazing rise of Robinhood including the pandemic-caused decline of online sports betting, gamifying of the APP appealed to the young/naïve investors, being the first to offer no transaction fees for trades and offering the purchase of fractional shares. Robinhood has, in part by design and in part the nature of start-ups, accumulated critics. Frequent failures of the APP, some causing huge losses and poor customer service are the biggest complaints. Experts also point to “Academic Research” highlighting the fact that “the more actively self-guided investors trade, the worse they tend to perform.” The article covers plenty of detailed personal stories and the trading industrie's current reaction fo Robinhood. Read the article to get all that.

Data presented in graphics

Robinhood’s valuation based on private funding rounds

4/2017 ~$1B

2/2018 ~$7B

7/2020 ~8.8B

9/2020 ~$12B

Millennials’ share of Robinhood’s assets under management in 2019, 80%

Retail broker trading volume currently

TD Ameritrade 40B

Robinhood 20B

Etrade 13B

Charles Schwab 10.6B

Interactive Brokers 4.7B

Options Contracts

TD Ameritrade 120K

Robinhood 85K

Etrade 49K

Charles Schwab 35K

Interactive Brokers 17.6

Client Accounts

TD Ameritrade 13M

Robinhood 13M

Etrade 6M

Charles Schwab 14M

Interactive Brokers 1M

Summary of Article

Co-founders Vlad Tenev (33YO) and Baiju Bhatt (35YO) prior experience includes hedge fund for the wealthy known as Celeris using high-frequency trading and a “software company, Chronos Research, that catered to algorithmic traders.” The founders envision Robinhood (RH) as the APP for millennials and Generation Z and sell the idea, that although the accounts are small dollar today, that these customers will eventually yield more prominent portfolios and that they will adopt additional services RH intends to add-on like commercial banking, individual retirement accounts, mortgage lending and insurance-rental, car and life. RH believes that “investing should be accessible and, yes, thrilling with the ultimate mission being “Making finance more accessible to all.” RH, using the online model has only 1,000 employees versus 22,000 at Schwab. Schwab has a network of Bricks & Mortar and phone-based customer service while Robinhood has EMAIL customer service.

March 2, 2020 Robinhood (RH) suffered at systemwide outage that “consigned its customers to the sidelines while more than 14 billion shares of U.S. equities changed hands.” This drew regulators, SEC, to start investigating. Issues like this and the lack of customer service, RH only responds by EMAIL-no phone customer service, has them leading in complaints four-fold higher than Schwab.

As shown above, RH has been incredibly successful in only a few years with nearly as many customers as the leader Schwab, second to TD Ameritrade in trading volume and options contracts leading to the “private” market capitalization of about $12B. RH has in a way catapulted into leading its competitors to make equity markets more accessible to small investors by creating widespread adoptions of free transactions and the availability of fractional shares.

Without the ancillary services it intends to add, RH is benefiting from the huge volume in share orders. RH essentially finds brokers to execute each trade and makes money on the “’spread’ between the price an investor is willing to pay for a stock and the price someone will sell it for.” Having said that, SEC rules were written to ensure the investor receives the best scenario of price, speed and reliability. With the RH business model currently, the potential for “conflict of interest” is obvious and RH has agreed “to pay a$1.25 million fine to settle charges with the Financial Industry Regulatory Authority, which oversees brokerage firms, for not being vigilant enough in ensuring customers were getting the best possible execution of equity orders for about a one-year period through November 2017.”

Hearsay testimonies in the article suggest, as currently configured, RH won’t transition from fun, mostly day-trading activity, to serious long-term investment use by its current customers. Some current users haven’t closed their RH accounts but have also transitioned to the traditional, long-standing, companies that now offer free transactions, fraction shares, and better customer service.