Going for Broke

If there is one thing that the list of investors in Palo Alto-based start-up Robinhood doesn’t lack, it is star power. Snoop Dogg, Jared Leto, Nas, Linkin Park, Aaron Levie along with institutional investors such as CapitalG, Andreessen Horowitz and NEA among others are some of the coolest names in Hollywood and Silicon Valley that are backing the company. So, what does Robinhood do that got them all excited? It has built an app that makes the stock market more accessible to everyone in the US by making investing easy and commission-free. A year and a half into its launch, it has over a million users and has handled more than $12 billion in transactions. Not only that, anyone around the world will be able to trade in US stocks as and when Robinhood hits their shores. For now, the three-year-old startup’s first stop outside the US is China. 

Humble beginnings
Robinhood’s founders, Vladimir Tenev and Baiju Bhatt, met in Stanford University in 2005, where they both studied physics and mathematics. “We were both nerds, but cooler ones with a Mick Jagger kind of a look. We instantly became good friends,” smiles Bhatt. They started out their careers in New York, building trading platforms for financial institutions on Wall Street. “We were building technology for large financial institutions so we understood how the financial system worked and the nuts and bolts of how a technology-driven brokerage operates. We realised that post 2008, brokerages have become much more optimised and the cost of transaction has gone down to zero as a by-product of computerised trading. This had created an industry which allowed people to trade million times in a day for small profit margins,” says Bhatt, co-founder, Robinhood. “We saw that institutional investors were paying next to nothing while retail investors typically pay $10 per transaction.” He says that Robinhood was inspired by the Occupy Wall Street Movement, a movement that saw people protesting against social and economic inequality. “We could see that people were disillusioned with the financial system in the US. They wanted more transparency. So, we knew that if we could make stock market investing-free, easy to use and a delightful experience for the customer, we would unlock a market that doesn’t exist, which is young people investing in the stock market,” says Baiju. The duo decided to move back to California to take the technology that only few had an access to and give it to everyone. So, they set about building a product that made investing easy, was mobile-first and free. “The mobile-first design focused on zero commission strategy to grab these users and this has been an amazing strategy. The growth has been viral thus far. Robinhood will continue to grow among the millennial audience as we have just scratched the surface. Tenev and Bhatt want to build the next great financial institution and they created Robinhood, focusing on transparency,” says Scott Sandell, managing general partner, New Enterprise Associates. 

As easy as it comes
The ease of use works to Robinhood’s advantage. You can download the app and start trading in the next five minutes. When you sign up, Robinhood does a quick check to see if you have sufficient money and then extends you a credit up to $1,000 while the money is being transferred from your account. If you sell, you can reinvest the proceeds immediately without having to wait for the funds to come into your account. In the rare case that the customer defaults, Robinhood puts it down to customer acquisition costs. Though Bhatt says the company has strong risk controls and relies on its strong data science team who has done a lot on identity verification to weed out fraudsters.

Once clients have signed up, they can add stocks to their homepage and a quick glance will tell them if the stocks are up or down and more details can be accessed by tapping on the stock name. Buying or selling stocks is as simple as hitting the buy or sell button and a swipe up to confirm. They use colours to convey basic details like a white background when the markets are open, black when they are closed, green when stocks are gaining and red if they end up in losses. 

Since its launch in March 2015, Robinhood saved its users $200 million in commission, cumulatively. Bhatt points out that while less than 10% of the people trading with traditional brokerages are under 40, almost 90% of the people using Robinhood are under the age of 35. “We opened up a whole demographic,” he says.  Robinhood is registered with the US Securities and Exchange Commission (SEC) and is a member of Financial Industry Regulatory Authority (FINRA), which is the self-regulatory organisation for brokerages. “It took us almost a year and a half to comply with all regulations, but after having done that, we can onboard  millions of customers across the world at almost negligible costs,” says Bhatt.

Since it is a zero-commission app, Robinhood makes money through interest income from margin accounts and the cash lying unused in customer accounts. The company recently launched Robinhood Gold, which is a premium service for $10 per month which gives you extended trading hours which lets you trade before the opening and closing bell. You can also access proceeds from a stock sale immediately and Robinhood takes away the three-day wait for funds to transfer from your bank. As long as you have at least $2,000 in your account, they can borrow up to twice that amount and trade with it. They are also offering higher subscription that gives clients more buying power: $6,000 for $30 per month, $1,000 for $50 per month and up to $50,000 at 5% interest rate. But the higher subscriptions come with caveats that doesn’t allow users to invest heavily into newly listed companies, leverage ETFs and penny stocks since they are too volatile. “Lending services and interest income from cash securities are the bread and butter of finance. That’s how most brokerages make money,” he says. But Bhatt says the focus should now be on getting more people to use Robinhood. “In order to be successful in the long term, we need to be successful as a consumer tech product as well as a financial services company. As a growing company, we need to have mass-market adoption and have millions and millions of people using our product in the US and, hopefully, in other countries. They need to see Robinhood as a place where they have an actual banking relationship,” he says. 

He is confident that the business will be profitable in the near term. “We have over a million users in a year and we have not spent anything on marketing. It all has been through word of mouth till now. Compare that with the 34-year-old E*Trade, which is valued at $9.5 billion but has just 3 million users. We should be as big as them on most major metrics in the next year or two. Maybe we haven’t collected the commission on the way, but commission doesn’t make up the majority of E*trade’s revenues anyway,” says Bhatt. About 76% percent of E*trade’s net income comes from interest.

The company first raised $2 million in 2013 with seed round. In 2014, it raised $13 million in Series-A, followed by $50 million in Series-B round last year from investors such as NEA, Index Ventures, CapitalG, and Andreessen Horowitz. “We are getting close to break-even, but we are looking to reinvest the money we are making to fuel our growth. A lion’s share of the money which we have raised is still in the bank,” says Bhatt.

Spreading out
While the focus is to consolidate on its position in the US, the company is also looking to take Robinhood to other countries. Since they must complete a rather lengthy regulatory process before they launch, they create a waitlist of people wanting to sign up. 

The idea to have a waitlist was something that they learnt from their launch in the US. In December 2013, the team decided to test the product to see how it works and put up the website for testing. “Someone who came across the link put it out on Reddit, Hacker News and a lot of social media. There was a tremendous interest and people couldn’t believe that we are doing this for free. Once they figured that this was for real, they wanted to get on the list. In the first month, we had 100,000 users on the waitlist,” says Bhatt. Robinhood then introduced a mechanism wherein if someone wanted to move up the list they had to introduce their friends. “So people started introducing their friends and the whole loop went viral and before our launch we had about a million people on our waitlist,” smiles Bhatt. 

More importantly, the waitlist not only allows Robinhood to gauge consumer interest but also manage the demand and customer on-boarding process when they actually launch. Right now, Robinhood is present in China and is in the process of completing the regulatory process in Australia. Robinhood has made its entry into China through an integration with Chinese search giant Baidu’s Stockmaster finance app. So now investors in China can trade in US stocks from their phone without maintaining a minimum amount in their account and zero commission. China, with 90 million brokerage accounts, of which retail investors alone are holding more than 80%, is a potentially larger market for Robinhood. Bhatt, however, also wants to enter India. “I am personally very keen on tapping India but we still have to figure out how to make it work there. It is possible, yet complicated because our technology needs to be compatible with our banking partners in India, plus there is the regulatory process as well. But we want to generate significant revenues in the US before we spread ourselves across markets,” says Bhatt.

But millennials don’t come with big bank balances or trade huge quantities like fat cat customers that traditional brokerages have. So scaling revenues can be an uphill task. But Bhatt differs. “The real challenge is not whether revenues would come, but how do you build a good enough product that people use it lot more and increase the trust around the product,” says Bhatt. “The big prize here if we do continue to soak up with the new people who are going to invest, then we are going to be bigger than E*Trade, Charles Schwab and TD Ameritrade in 10 years, and that is a $150-billion dollar of market cap.” 

According to him, there are 90 million millennials between 18 and 29 in the US, and most of them are yet to invest in the stock markets and Bhatt wants to get them started on Robinhood. “There are a lot of people who don’t invest, not because they don’t know what to do, but because they think it is too complicated. We want to lower the stakes and get them started on Robinhood,” says Bhatt. Though Robinhood has had a promising start  it will need to wait some years before getting the lion’s share of revenues. But Bhatt is not worried. “Robinhood is a financial company — the likes of which hasn’t existed since PayPal. We are up to the challenge,” says Bhatt with much enthusiasm.