Robinhood fights the monster that made it

If Robinhood has done anything right, it’s the free sale.

Before investors at Menlo Park, California-based trading platform Robinhood, unleashed a firestorm in the stock market last week, they were excited to continue growing. Now they have no other choice.

Robinhood has faced crushing lawsuits for money by a Reddit subgroup called WallStreetBets, which has driven up the stock prices of well-known short sellers targeting companies like GameStop and AMC. The stated objective: to press the shorts. The resulting order volume put Robinhood in a difficult position with its cash position when the clearinghouse, which helps the company execute and close deals, asked the company to raise more capital to meet the demands. margin requirements. Robinhood responded by restricting trading in 13 stocks on Thursday, which angered WallStreetBets investors and lowered the prices of those stocks.

To stabilize itself, Robinhood, founded in 2013 by Vlad Tenev and Baiju Bhatt with the aim of “democratizing finance”, turned to early investors to raise more than a billion dollars in just a few hours. The New York Times

The bailouts reported on Friday were coming from former venture capitalists like Sequoia Capital and Ribbit Capital. Meanwhile, after the platform reopened to full trading on Friday, under criticism and a class action lawsuit, with high-end clients trumping retail investors, those stock prices have resumed their rise. As of Friday’s close, shares of GameStop and AMC were up 400 and 278 percent at $ 325 and $ 13.26 for the week, respectively.

However, the biggest stock market hit by this S&P loses nearly 2% in part because the hedge funds that bypassed these companies had to sell other stocks to cover their losses.

Before the $ 1 billion infusion last week, Robinhood had $ 1.7 billion from large Silicon Valley companies like New Enterprise Associates, Kleiner Perkins Caufield & Byers, and Andreessen Horowitz, as well as prominent investors like Ashton Kutcher, Jared Taken.Leto and Snoop. Dogg. and John Legend. With additional funding rounds, its valuation rose to $ 11.2 billion.

in August 2020 against 8.3 billion dollars in May. The company posted revenue of around $ 60 million in March, which tripled the year before, reports Bloomberg In April. Robinhood did not respond From Inc. Interview request.

Still, investors have limits, says David Yermack, professor of finance at the Stern School of Business at New York University. He points out that when GameStop’s price drops, and it almost certainly will, you’ll face margin calls and won’t be able to pay Robinhood because they bought too aggressively. “Robinhood is at risk of bankruptcy because they focused too much on this high-flying action,” he says. “That’s why they raised $ 1 billion from big investors.” He adds that these existing investors will provide support, but maybe not forever.

Experience can also drive a nail into the coffin of the Business Model “Freemium”. As a commission-free broker, Robinhood waives the industry standard, charging $ 6 to $ 10 for each trade. Yermack points out that he makes money indirectly by potentially charging higher prices compared to other brokers. There are also order flow charges. Robinhood’s operations, which can include stocks, ETFs, cryptocurrencies and options, are sold to large companies such as Citadel Securities and Virtu Financial, known in the parlance as “market makers”. These market makers run Robinhood’s operations, sometimes at discounted prices

and give Robinhood a little setback. The process is controversial, but so far it is not illegal.

The company also takes advantage of its high-end services. Robinhood Gold was introduced in 2016 to offer features like the ability to trade before and after business hours for a monthly fee.

The freemium model has been an integral part of the digital market for years. After building a customer base by offering a basic product or service, it is assumed that a certain percentage of those users will purchase premium versions or upgrades. Other businesses never expect consumers to pay. Like Facebook, Robinhood generates most of its income from customers willing to pay to access its users. And that’s the problem, says Jason Nazar, tech entrepreneur and investor in Facebook and other companies. “I think there is room for conflict when you have a business that takes care of two teachers. Your end users provide you with data and information, and then your customers pay your bills. Which side do you fall on? “, He asks. “I think you’ll find that more companies are likely to be wrong on the end user side than their data partner.”

In fact, if Robinhood is to blame for something, it’s not perfectly transparent about its revenue model, says Ethan Kurzweil, partner at Bessemer Venture Partners in San Francisco, where he focuses on development platforms and technology. digital consumer. “I don’t know how much Robinhood was making money until this last press round on it was figured out.” This opacity became evident when users themselves pointed out Robinhood’s irony on social media, which restricted their access on Thursday, while the company’s Big Fish clients were reportedly allowed to close their positions. The company denies this claim.

Either way, Robinhood clearly needs to fix her image. And Kurzweil suggests that other startups entering the freemium space may be subject to a higher level of information and disclosure due to this calamity. To be clear, he says, freemium will not go away. “People like it for free … but maybe only a few companies have a cost cut that people believe, and maybe Robinhood is an extreme example,” he says. “I think people will certainly be more skeptical if monetization is not clear and misunderstood.”

Entrepreneurs themselves are likely to remain more cautious in the future, says Nazar. “You will find that companies with such business models need to think much more carefully about when these conflicts can arise and how to handle them,” he says. “I suspect Robinhood is already engaged in the way they communicated.”