Stock brokerage app Robinhood is one of the hottest startups in the fintech world. And yes, the company has had little trouble raising a substantial amount of capital. For its latest funding, Robinhood stock fetched a valuation of $8.6 billion. The company also recently landed on CNBC’s Disruptor 50 list, with a rank of 46.
I actually talked to the co-founders of the company — Vladimir Tenev and Baiju Bhatt – when the app was launched in April 2013. I thought the Apple (NASDAQ:AAPL) iOS app was intuitive and even fun.
Tenev and Bhatt met while they were at Stanford, where they would earn degrees in mathematics. After this, they would go on to start Celeris (a high-frequency trading firm) and then Chronos Research (which sold software to Wall Street). These efforts would certainly prove helpful when they created Robinhood.
Interestingly, one of the inspirations for Robinhood was the Occupy Wall Street protest. For the most part, Tenev and Bhatt had the vision to democratize investing.
How It Works
Robinhood allows you to trade in stocks, options, exchange-traded funds and even cryptocurrencies. But of course, the key feature is that the platform charges no commissions on these trades.
This business model has certainly been disruptive to the traditional brokerage industry. As a result, the major firms — Charles Schwab (NYSE:SCHW), E*Trade Financial (NASDAQ:ETFC) and TD Ameritrade (NASDAQ:AMTD) — have implemented $0 commission policies.
Because of this, there was buzz that Robinhood could be in jeopardy. Was the company’s business model the only real differentiator? Might there be more pressure on the bottom line?
Not necessarily. The fact is that Robinhood has made it extremely easy for customers to get started, as there are no minimum investments required. As a note, because of industry regulations, there is a $2,000 minimum for margin accounts. The onboarding also is usually under an hour.
And the novel coronavirus has been another growth catalyst. With millions of people at home, there has been more time to devote to trading. In fact, there has been the emergence of a large number of day-traders — similar to what happened during the dot-com boom of the late 1990s.
However, this has raised concerns. Many of Robinhood’s investors are young and new to the financial world. In other words, they could be taking on inordinate risks with their trading activities.
One tragic example of this is Alex Kearns, who was a Robinhood customer. He racked up losses of $700,000 with options trading and then died by suicide. He was only 20 years old.
According to a blog post from Tenev and Bhatt: “We quickly reached out to Alex’s family to share our condolences and offer to speak. We are personally devastated by this tragedy. Over the past week, our team at Robinhood has been focused on identifying how we can improve Robinhood’s customer experience, specifically around our option flows involving multi-leg exercise and assignment.”
The hyper growth has also put strains on Robinhood’s infrastructure. During March, there were several prolonged outages, which angered many of the company’s customers.
Might There Be an IPO for Robinhood Stock?
In the private investing world, there is an enormous amount of money sloshing around. Venture capitalists and other institutional investors are chasing hot deals in order to find standout returns. As for Robinhood, the company has raised $600 million for its latest round as of mid-July. Thus, the company has enough resources for its growth.
Yet there may still be an IPO in the near future. Let’s face it, the brokerage industry is highly cyclical and can turn downward quickly. In light of this, it probably would not be a bad idea to give serious consideration to a public offering.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks
