News & Analysis

driven by the PitchBook Platform

Robinhood adds $323M to its quiver, soars to $7.6B valuation

Robinhood, a commission-free stock-trading platform provider, has raised a $323 million Series E with a self-reported $7.6 billion valuation.

Robinhood has raised a $323 million Series E at a self-reported $7.6 billion valuation led by DST Global. Ribbit Capital, NEA, Sequoia and Thrive Capital also participated. The commission-free trading platform provider offers self-directed investing and day-trading capabilities for stocks, options and cryptocurrencies. Robinhood declined PitchBook’s request for comment.

Perhaps as a result of Robinhood’s unique focus on offering advanced self-directed trading capabilities at no cost, the company has experienced rapid growth after its $61.5 million valuation following a $13 million Series A in September 2014. Its sharpest growth streak saw the Menlo Park-based company soar from a $1.3 billion valuation after a $110 million Series C in April 2017 to a $5.6 billion valuation after a $362.93 million Series D in May 2018.

By comparison, similar fintech startup Acorns was valued at $247 million after a $40 million Series D extension in July 2017, en route to an $870 million valuation after a $180 million Series E in February. Acorns offers managed retirement planning targeting small amounts, such as customers’ spare change.

Robinhood was founded in 2013 as a way to combine social influence with stock investing. It originally allowed members to provide stock recommendations to others, with reviews determining the trustworthiness of a person’s stock-picking abilities. Such social features have gradually been phased out, with the app now lacking any public social interaction, similar to traditional brokerages.

Moving on after setback

News of the funding round confirms previous reports from May, which forecast the company could clear a $10 billion valuation in the near term should it be successful in rolling out its pipeline of growth initiatives. This includes an expansion into the United Kingdom and potential regulatory approval of its previously botched offering of banking services, such as checking accounts.

Late last year, Robinhood announced it would offer insured checking accounts with a 3% yield, well above the 1% or less range offered by most banks. The company ran into trouble when the Securities Investor Protection Corporation confirmed there was no such insurance in the works and Robinhood admitted the accounts would consistently lose money for the company. Plans were immediately scrapped but are now resurfacing as the company has applied for a bank charter with the US Office of the Comptroller of the Currency. Such an application could take up to a year to be approved.

Raking in order flow payments

Since customers only pay Robinhood if they sign up for its premium membership program, Robinhood Gold, the company instead makes a significant amount of money from its order flow—tiny payments that market makers and exchanges pay to brokerages in exchange for the right to carry out a customer’s order. Such transactions help drive business to market makers and exchanges while earning money for the brokerage firm.

Market makers also stand to gain by hoarding shares of stock that they know are likely to gain in value. For example, if a market maker’s proprietary data suggests that buyers are rapidly outpacing sellers, the market maker may be willing to buy certain customer orders for the sake of retaining such quickly appreciating shares.

Perhaps leading to Robinhood’s sharp valuation increase between 2017 to 2018, order flow payments more than tripled from $21.1 million to $69 million in the same timeframe, according to research firm Alphacution. This parallels the company’s strong growth from 2 million customers in 2017 to over 4 million in 2018, exceeding E-Trade’s 3.7 million brokerage accounts and Acorns’ 3.5 million customers as of March 2018. This also coincided with the company’s addition of self-directed trading capabilities for options and crypto.

While payment for order flow usually goes unnoticed by the average customer, the practice is regularly done by the industry’s biggest names, including Charles Schwab, E-Trade and TD Ameritrade.

Critics argue payments for order flow lack transparency and take advantage of a perceived lack of consumer knowledge of how markets work, since the market maker could selectively choose to be more willing to buy orders and provide liquidity when it stands to profit. SEC regulations simply require that a customer receive the best “execution,” which can be loosely defined. Proponents argue that the practice allows brokerages to keep costs low, without causing any significant changes to a customer’s order.

In an October 2018 company blog post, Robinhood said its market makers do not selectively choose orders and that all orders are executed at the best available share prices. The company also argued such payments and accompanying rebates are essential to offer its free trading scheme, with the company receiving 2.6 cents per $100 traded.

Featured image via zoom-zoom/iStock/Getty Images Plus

  • ian.jpg
    Written by Ian Agar

    Ian Agar was a financial writer at PitchBook covering venture capital.

    A native of Southern California, he joined the US Coast Guard and received his BA in Psychology from American Military University. After leaving the military, he was a writer for SeekingAlpha for over six years covering blue-chip stocks and fast-growing small-cap companies. Although studying charts and financial reports excite him, his wife is his real passion in life—especially when they both spend time studying charts and financial reports together.

Join the more than 1.5 million industry professionals who get our daily newsletter!

I agree to PitchBook’s privacy policy