Originally inspired by the Occupy Wall Street movement in 2011 (doesn’t that seem like forever ago?), Vladimir Tenev and Baiju Bhatt set out to create a no-fee trading to “democratize access to the financial markets.” A generation of new millennial investors have been lured in by the ease of access and ability to trade for free and quickly by the Robinhood app. For years, the primary options for trading were through outlets like E*trade where it is $6.95 per trade. So, it begs the question, how on earth does Robinhood make money?
Robinhood’s business model
Robinhood, now valued at nearly $7 billion dollars, was started in 2012. The site boasts over 4 million users and has brought in a new generation of once Wall Street weary millennials into the investment fold.
Robinhood’s revenue stems mainly from a brokerage industry practice known as payment for order flow. According to Investopedia, payment for order flow is “…the compensation and benefit a brokerage firm receives for directing orders to different parties for trade execution. The brokerage firm receives a small payment, usually a penny per share, as compensation for directing the order to different third parties.”
Essentially, when the investor places an order, it is routed by the retail broker, Robinhood, to a high frequency market maker and pays a small fee back to the broker. The market maker executes the order via buying the shares for slightly less than the price they sell them for, a difference known as the “bid-ask spread”.
Other ways Robinhood makes money
Robinhood also makes money, much like a bank, via interest payments through your uninvested balances parked in the accounts of users. While most customers obviously transfer money to their Robinhood to invest right away, with over 4 million users leaving small balances in their account, it’s an amount of interest that likely adds up.
Also, Robinhood offers premium accounts. Robinhood offers their Gold service at $5 per month. Gold offers perks such as bigger instant deposits, access to professional research, level II Nasdaq market data and ability to invest on margin. If a user uses more than $1000 of margin, they are also charged 5% on any amounts above $1,000, adding another revenue driver for Robinhood.
Robinhood Venture Capital – A timeline
A lot of Robinhood’s money comes from venture capital. Robinhood was just valued at $8.3 billion in early May 2020. This impressive high dollar valuation comes at the backing of many major venture capitalist firms. Let’s look at a timeline of their fundraising.
December 2013: Robinhood announces $3 million in seed funding from a fundraising round that closed in October. The investments were led by Index Ventures with participation from Rothenberg Ventures, Howard Lindzon’s Social Leverage, and Tim Draper’s Draper Associates. The announcement was made along with their product for a revolutionary trading app with $0 brokerage fees.
September 2014: On September 23, 2014 a Series A round joined by financial tech fund Ribbit Capital, StockTwits’ Howard Lindzon, Path founder Dave Morin’s Slow Ventures, Box’s Aaron Levie, Snoop Dogg, Jared Leto, and Nas of Queensbridge Venture Partners was announced with another $13 million in funding, bringing the total to $16 million. At the time, the app was still in friends and family beta.
May 2015: On May 2015, the app has been launched since December 2014 by his point and a Series B fundraising round has been announced with another $50 million in money raised led by NEA along with Vaizra Investments, and the already vested Index Ventures, Social Leverage, and Ribbit Capital. This round brought their total to $66 million.
April 2017: By this time, the app has over 2 million users and the Robinhood Gold subscription product is faring well. On April 26, 2017 Robinhood announced that it raised another $110 million in Series C funding led by DST Global and participation by existing investors NEA, Index Ventures and Ribbit Capital along with newcomers Thrive and Greenoaks. The company is valued at $1.3 billion.
May 2018: On May 10, 2018, Robinhood announces another $363 million in Series D funding led by DST Global. The funding round included participation from new investors Iconiq, Capital G, Sequoia Capital, and Kleiner Perkins. Existing investors included NEA and Thrive Capital. In the announcement, they tease the coming availability of Robinhood Crypto to a wider group of users.
July 2019: On July 21, 2019, Robinhood announces a Series E financing round of $323 million, valuing the company at $7.6 billion. They announce their acquisition of MarketSnacks (which was then rebranded as “Robinhood Snacks”). They also announce that the crypto trading is available in over 30 states. The round was led by DST Global, with participation from existing investors such as Ribbit Capital, NEA, Sequoia, and Thrive Capital.
May 2020: Robinhood announces on May 4, 2020 another $280 million in Series F funding at an $8.3 billion valuation. The funding round was led by existing investor Sequoia Capital, with participation from existing and new investors including NEA, Ribbit Capital, 9Yards Capital, and Unusual Ventures. The company reaffirms their commitment to hiring top talent and announces their newest office in Denver, Colorado.
July 2020: Robinhood announced they raised an additional $320 million bringing the total round previously announced in May to $600 million and announcing a post-money valuation of $8.6 billion.
February 2021: Due to the unprecedented growth during the historic Reddit led Game Stop short squeeze, Robinhood announced on their blog another $3.4 billion funding round led by Ribbit Capital with participation from existing investors including ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA.
Why doesn’t everyone just switch to Robinhood?
There’s a reason Charles Schwab, E*trade and TD Ameritrade are all still in business and thriving even with a service offering easy free trades like Robinhood. They say there’s no such thing as a free lunch. Robinhood’s features are limited compared to more premium services. That said, it still offers quite a lot for a new investor. The company draws revenue in an innovative and unique way that has allowed a new generation of traders to get into the game.
This piece was updated February 13, 2020 to reflect new fundraising.