Robinhood co-founder Baiju Bhatt worth $3 billion as USA brokerage goes public
Robinhood raised $1.9 billion in a public offering this week, at a valuation of $32 billion. The valuation is nearly triple that of its last funding round in September 2020, when it raised $660 million from Andreessen Horowitz, Sequoia and other major venture capitalists.
The digital stock brokerage platform, based in Menlo Park, California, has 20 million customer accounts, up from five million in 2019. Customer assets total over $100 billion. The company says it will use the funds from the stock sales to offer new financial products and improve its technology and customer service.
Robinhood’s stock dropped 8% on its first day of trading to $35. This poor reception generated criticism from analysts and the media, who point out that DoorDash gained 83% and Airbnb 115% on the day they listed on the stock market. Some blamed this on Robinhood allotting up to 35% to retail investors and others say the stock was priced at a very high valuation.
Robinhood was founded by Baiju Bhatt, 37-years-old, and Vladimir (Vlad) Tenev, 35-years-old, in 2013. They say the company is on a “mission to democratize finance.”
“The U.S. stock market is one of the world’s greatest sources of wealth creation. But for generations, it was out of reach for most people…Through Robinhood, millions of everyday people have started investing in the stock market for the first time. They’re nurses, Army veterans, teachers, students, and small business owners,” founders Baiju Bhatt and Vlad Tenev said in a statement.
Other brokerage firms made similar claims of helping common folk when they started operating: for instance, Charles Schwab, founded in 1971, says it democratized investment by “offering a combination of low prices and fast, efficient order executions”; and E*Trade, founded in 1982 in the Silicon Valley, offered online trading which enabled small “investors to control their own investments.”
In 2020, Robinhood had pre-tax income of $14 million on revenues of $959 million. About three quarters of the revenues came from transactions, mainly fees it got for order flows. This is one of the controversies surrounding the company.
Robinhood, E*Trade and other U.S. retail trading platforms are legally allowed to collect a “payment for order flow” they send to Wall Street firms. This payment is a portion of the profit the firms make on the price at which they buy or sell stocks for Robinhood clients.
The more a client trades the bigger the overall payment Wall Street firms make to Robinhood and other brokerage firms. Payment for order flow is banned in the United Kingdom.
Robinhood, as both an app and as an investment, “makes more sense in the context of gambling than investing. Its business model depends on active traders, but research shows the more active traders are, the more money they lose…(Robinhood) wants you to believe you can get rich quick by day trading.,“ Scott Galloway, professor at New York University’s Stern Business School, notes in a blog post.
“The public deserves a clear accounting of Robinhood’s relationships with large financial firms and the extent to which those relationships may be undermining its obligations to its customers,” Elizabeth Warren, Democratic Senator, wrote in a letter to Vlad Tenev, Robinhood’s chief executive officer, in February this year.
Bhatt, who stepped down as Robinhood’s co-CEO in November last year, is the chief creative officer.
Baiju Prafulkumar Bhatt grew up in Poquoson, a small town in Virginia. His parents migrated from Gujarat, India. While in high school, he wanted to be a physicist. He was influenced by Surely You’re Joking, Mr Feynman! by Richard Feynman and Brighter Than a Thousand Suns by Robert Jungk. These books, about science and creative scientists, were birthday gifts from his dad, who worked at NASA, Bhatt told Entrepreneur.
Bhatt earned a B.S. in physics and, in 2008, an M.S. in mathematics from Stanford University. He and Vlad Tenev, who migrated with his family to the U.S. from Bulgaria, were classmates and roommates.
After graduation, they built two finance companies in New York which sold trading software to hedge funds.
The experience made them realize that big Wall Street firms pay effectively nothing to trade stocks, while most Americans were charged $10 or more in commission for every trade. They decided to build products that would provide everyone with access to the financial markets, not just the wealthy.
“We had this crazy idea: If we make (stock trading) free and make it really easy to use on mobile [devices], we would see a new generation of customers,” Bhatt told the TechCrunch Disrupt conference in San Francisco in 2018.
In 2020, Bhatt received $896,000 in total compensation. He and Tenev each sold stock worth $48 million in this week’s offering. Bhatt continues to own Robinhood shares worth about $3 billion, while Tenev’s stake is worth around $2 billion. By owning a separate class of stock, which carries more votes, they control two thirds of the shareholder votes and hence a majority on the company’s board of directors.
Robinhood appears to be named after the English outlaw Robin Hood who stole from the rich to help the poor. In fact, the images, green color and terms used by Robinhood in its branding, marketing and other material, evident also in in today’s stock market listing event, are similar to that in the Robin Hood tale.
Last year, a New York Times investigation found that “part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading.”
In June 2020, Axel Kearns, a 20-year-old college student trading options, committed suicide after seeing a negative $730,000 balance in his Robinhood account, according to Forbes.
Following this news, Bhatt and Tenev announced changes on how option and other account information are displayed on Robinhood’s platform, more education tools and other measures.
In June 2020, they also announced a donation of $250,000 to the American Foundation for Suicide Prevention.
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