Robinhood Valuation Surges to $11.2 billion, Fueled by Millennial Investors
Robinhood is a popular financial services app that offers commission-free trading. The company boosted its value to $11.2 billion after raising $200 million in its latest Series G round. This represents a $320 million upsize from its last funding round, and took place just over a month ago on July 13, 2020, when Robinhood carried a value of $8.6 billion. The company’s rapid growth is partly attributable to millions of retail investors flocking to the app since the start of the pandemic.
“Amid challenging times and market volatility, we’re humbled that people are turning to Robinhood to participate in the markets and build their financial future,” Vlad Tenev, the co-founder and co-CEO of Robinhood, commented in regards to the increased app usage. Robinhood released numbers in May showing. The numbers showed more than 3 million new accounts in the first half of the year, with first-time investors opening over half of the new accounts. Furthermore, the company reported that the daily average revenue trades, so-called DARTs, reached 4.31 million in June. This value far surpassed the DARTs for rival electronic brokerage platforms including TD Ameritrade, Charles Schwab and Interactive Brokers.
In tandem with the increases in its userbase and daily trading volumes, Robinhood saw its educational materials more frequently accessed. Average daily visitors have increased over 250% since January on Robinhood’s Learn page, which provides beginner investment guides and articles on finance topics.
The Robinhood Series G Round
The Series G round funding came from D1 Capital Partners. It is the company’s third round of funding this year. On May 4, 2020, Robinhood raised a Series F round led by Sequoia Capital that put the company’s valuation at $8.3 billion. On July 13, 2020, it upsized this round by $320 million to bump the company’s valuation up to $8.6 billion. This latest Series G round just a month later thus marks a dramatic valuation spike.
The influx of new retail traders has had a significant impact on markets. Casual day-traders taking advantage of their extra time at home and stimulus checks have contributed to the coronavirus-influenced market volatility. Retail investor activity accounted for 15% of all trading activity at the beginning of the year; now it accounts for 25% of all trading activity.
Robinhood to Hire More Employees, Improve Tech, Expand Tools
The wildly popular financial services app plans to use its newly raised funds to hire more employees. It will also improve its technology and expand its educational tools and resources. Robinhood intends to increase hiring of staff across all its office locations. Those locations include Denver, Colorado, Southlake, Texas, Lake Mary, Florida, Tempe, Arizona and its headquarters in Menlo Park, California. The company currently employees over 1,200 employees.
Robinhood was founded in 2013 by Vlad Tenev and Baiju Bhatt as a trading app meant to be broadly accessible. It drew inspiration after observing the Occupy Wall Street movement in 2012 to “democratize access to the markets.” The app launched in 2014 and has had particular success with the millennial demographic. Based in Menlo Park, California, the startup has scaled rapidly. The founders, both Stanford University graduates, vowed never to charge commission for trades or to require minimum account sizes. Robinhood achieved unicorn status in 2017 after a Series C funding round. The round featured investors such as Russian billionaire Yuri Milner of DST Global, Greenoaks Capital and Thrive Capital who brought the valuation up to $1.3 billion. Robinhood announced plans to expand to the United Kingdom in November 2019.
Commission Free Trading
Robinhood’s brokerage platform offers commission-free trading of stocks, options and exchange-traded funds (ETFs). Recently, it introduced Robinhood Crypto, which supports trading of certain cryptocurrencies including Bitcoin, Ethereum and Dogecoin. While still maintaining its commitment to democratizing finance, it also offers a premium subscription service called Robinhood Gold for $5 per month. Robinhood Gold provides extra features such as access to professional research reports from Morningstar and more extensive bid-ask market data directly from NASDAQ.
Robinhood offers commission-free trading to give it a competitive edge over other online brokerage platforms. However, in order to make money, Robinhood sells customer orders to high-frequency trading firms. These professional trading firms, referred to as market makers, purchase retail-investor orders from Robinhood and then proceed to execute the trades on their behalf. The market makers executing the trades derive profits from the bid-ask spread. Robinhood gets some of the profit for providing the market makers with the orders, known as rebates. This practice, known as payment for order flow, has drawn controversy. While it is not illegal, firms must rigorously review orders to ensure customers are getting access to the best prices. Other brokerage platforms like Charles Schwab similarly make money from payment for order flow.
Not All Has Been Roses
In 2019, Robinhood was fined $1.25 million to settle a complaint from the Financial Industry Regulatory Authority (FINRA), the regulator of broker-dealer firms in the United States. FINRA fined Robinhood for failing to provide customers with the best prices on their trading orders. FINRA stated that Robinhood was directing retail orders to four broker-dealer firms in exchange for rebates, but failed to consider other firms that would offer better prices for its customers. This oversight was attributed to deficiencies in Robinhood’s supervisory procedures. As part of the settlement, Robinhood retained an independent consultant to review its supervisory practices relating to best execution compliance.