Robinhood IPO Misses Mark But Strikes Gold For Founders And VCs

Robinhood, the popular stock trading app, is now a publicly traded stock itself, even if Wall Street investors weren’t exactly falling all over themselves to buy a share at their first opportunity.

Shares of the commission-free stock and crypto trading platform closed down 8.4 percent in their first day of trading on the Nasdaq on Thursday. Robinhood had priced shares at $38 each — the low end of its proposed range — setting an initial valuation of around $32 billion.

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Shares fell as much as 11 percent during the day before rebounding somewhat. Even with its lackluster first day trading under the ticker symbol HOOD, Robinhood had a market cap of around $29 billion at the closing bell — more than double its private-company valuation less than a year ago.  

Multibillion-dollar returns

The IPO made multibillionaires of Robinhood’s young co-founders, ​​Vlad Tenev and Baiju Bhatt, and minted hefty returns for its venture backers.

Tenev, Robinhood’s CEO, is worth $2.4 billion after the company sold shares to investors on Wednesday at $38 each, per Bloomberg data. Bhatt, who was co-CEO until he stepped aside last year, is reportedly worth $2.8 billion.

The IPO also represents outsized returns for the many venture investors who placed big bets on Robinhood over the past eight years. The Menlo Park, California-based company had raised a total of $5.6 billion from private investors, per Crunchbase data, and was most recently valued at $20 billion as a private company in January 2021.

Crunchbase data shows Robinhood’s earliest venture investors include:

• Index Ventures, which led both the seed and Series A rounds in 2013 and 2014;
• New Enterprise Associates, which led its Series B in 2015; and
• DST Global, which led the Series C and Series D rounds in 2017 and 2018.

A recent analysis by The Information of those firms’ expected returns found that Index’s stake in the company is worth roughly $3.4 billion at the IPO price. 

Later rounds were led by Sequoia Capital, IVP, TSG Consumer Partners and D1 Capital Partners. 

Ribbit Capital alone has a stake estimated to be worth as much as $3 billion, per Bloomberg. The firm had invested in every round since Robinhood’s Series A, according to The Information. And earlier this year it led a rescue package for Robinhood as the trading platform found itself strapped for cash amid the “meme stock” trading frenzy. 

Profits increase — along with scrutiny

Robinhood turned a small profit last year of $7 million, compared to a net loss of $107 million in 2019. Its revenue in 2020 was $959 million — up 245 percent year over year.

Even as it became profitable, the company faces stiff regulatory headwinds, including scrutiny of how it makes money. 

The vast majority — 81 percent in the first quarter — of Robinhood’s revenue comes from payment for order flow, or PFOF, a controversial practice in which large investors pay for access to information about Robinhood’s customers’ trades to influence their own high-speed trading decisions. PFOF is reportedly under review by securities regulators who are considering curtailing the practice, which arguably poses a conflict of interest.

Financial regulators have already slapped Robinhood with hefty fines for some of its business practices. Last month, the Financial Industry Regulatory Authority ordered the company to pay $70 million for what it called “systemic supervisory failures” and “significant harm” caused to consumers related to a variety of issues dating back to 2016. That follows a separate $65 million payment to the U.S. Securities and Exchange Commission late last year to settle charges that Robinhood had misled users about its sources of revenue.

Retail investors got to buy in

When Tenev and Bhatt co-founded Robinhood in 2013, they took the name for their company from a folkloric hero who takes from the rich and gives to the poor. 

Since then, the commission-free app has coaxed more than 22 million users — many of them young, nonprofessional investors — to buy and sell stock and cryptocurrencies via its game-like investing interface and commission-free trades.

In keeping with that spirit of opening up access to the public markets, Robinhood set aside 35 percent of its IPO shares for retail investors. The decision marked a highly unusual move that contrasts with the more standard 10 percent to 20 percent allocation most companies make for individual investors (even then, those shares are typically snatched up by wealthy, well-connected clients of the investment banks running the offering).

That decision also may have contributed to the tepid reception on Wall Street for Robinhood’s shares.

“With this novel allocation to retail investors, the IPO is a black box in terms of how they’re going to allocate and who they’re going to allocate to, versus the investment banks, where you know what is going to happen in the after-market,” David Erickson, a lecturer at the University of Pennsylvania’s Wharton business school and former IPO banker, told the Financial Times earlier this week ahead of the offering. 

“Most serious investors will wait and see what happens,” he added. “Maybe Robinhood will become the next meme stock.”

Illustration: Li-Anne Dias