Created with Robinhood Struggle in the Monster

If Robinhood finds one thing, it’s a free sell.

Investors in Robinhood, a Menlo Park, California-based trading platform, were only happy to boost their growth, before setting fire to a stock market last week. Now they have no choice.

Robinhood faced cash demands brought by a Reddit subgroup named Walcritbats, raising the stock price of companies including Gamestop and AMC, which were targeted by well-known short sellers. Outlined goal: squeeze shorts. The ensuing volume of orders pushed Robinhood into a difficult area with its cash position when the clearinghouse that helps the firm process and to settle trades asked the company to invest more capital to meet margin requirements . Robinhood responded to the price on Thursday by restricting trading on 13 stocks, infiltrating Walcritbats investors and sending those shares down.

To stabilize itself, Robinhood, founded by Vlad Tenev and Baiju Bhatt in 2013 with a mission to “democratize finance”, then raised more than $ 1 billion in a few hours from early investors Turned to The new York Times The rescue fund came from former venture investors including Sequoia Capital and Ribbit Capital on Friday. Meanwhile, amid criticism, the platform reopened for full trading on Friday, and a class-action lawsuit alleged that retail investors preferred their high-end customers, with those stock prices climbing their way again. Started with GameStop and AMC shares rose 400 percent and 278 percent to $ 325 and $ 13.26, respectively, on Friday at the weekend.

However, the large stock market outperformed, as S&P’s share declined by nearly 2 percent as hedge funds shorted those companies and had to sell other shares to cover their losses.

Prior to last week’s $ 1 billion infusion, Robinhood raised $ 1.7 billion from top Silicon Valley shops including New Silicon Enterprise Associates, Klein Perkins Cuffield & Byers, and Andreessen Horowitz, along with Ashton Kutcher, Jared Leto, Snoop Dogg, Celebrity Investors and John Legend. With additional funding rounds, its valuation reached $ 11.2 billion in August 2020, up from $ 8.3 billion in May. The report said the company’s revenue in March was about $ 60 million, which tripled from a year earlier. Bloomberg In april Robinhood did not respond Of ink Request for an interview.

Even, investors have limitations, says David Yarmack, a finance professor at New York University’s Stern School of Business. He said that when GameStop’s price drops – and it almost certainly will – some customers will face margin calls and won’t be able to repay Robinhood because they bought too aggressively. “There is a risk that Robinhood itself may break down because they have focused too much on this one high-flying stock,” he says. “That’s why they went out and invested $ 1 billion, from big-time investors.” He says those existing investors will be helpful – but probably not forever.

‘Free’ price

Experience can also drive another nail into the coffin of the “freemium” business model. As a commission-free brokerage, Robinhood uses the industry standard, which is a $ 6 to $ 10 fee for each trade. Yermack notes that it makes money indirectly by potentially charging higher prices relative to other brokers. It also charges for order flow. Robinhood’s trades, which may include stocks, ETFs, cryptocurrencies and options, are sold extensively, such as Citadel Securities and Virtu Financial, known in the industry as “market makers”. Those market makers sometimes perform Robinhood’s trades at low rates, and provide a small kickback to Robinhood. The process is controversial, but not yet illegal.

The company also makes money from its premium services. It launched Robinhood Gold in 2016, which offers pre and post-hours business capability in exchange for monthly fees.

The freemium model has been a fixture in the digital marketplace for years. After building a customer base by offering the original product or service, it is estimated that a certain percentage of those users will buy the premium or upgraded version. Still other companies never rely on consumers to pay. Like Facebook, Robinhood makes the bulk of its revenue for its users from customers willing to pay for use. Jason Nazar, a tech entrepreneur and investor from Facebook and other companies, says there is a problem. “Naturally, I think whenever you have a business serving two masters, you have room for conflict. You have your end users who empower you with data and information Are, and then you have your customers who pay your bills. Which side do you fall into.? “He asks. “I think what you will get is that more companies will probably favor their end users rather than their data partners.”

Indeed, if Robinhood is to blame for anything, it is not entirely transparent about its revenue model, says Ethan Kurezwiel, a partner at Bessemer Venture Partners in San Francisco, where he is on developer platforms and digital consumer technology Concentrates. “I don’t know that it was even understood about how Robinhood makes money unless it’s a recent press about them.” This ambiguity became apparent when users reported themselves on social media, with the irony of Robinhood restricting their access on Thursday, while the company’s big-fish customers were allegedly allowed to close their posts . The company denies the allegation.

Either way, Robinhood will obviously need to improve its image. And Kurzveil suggests that other startups entering the freemium space will be held to higher levels of messaging and revelations as a result of this disaster. To be clear, they say, freemium is not going away. He says, “People like freebies … but there may be some companies where people believe there’s a disconnect in what they’re spending and maybe Robinhood is an extreme Example. ” “I think people are definitely going to implement more skepticism when demonetisation is not clear and well understood.”

Enger says that entrepreneurs themselves will also be more careful in the future. “What you’ll see are business models, such as those that have to be much more thoughtful and diligent when conflicts can arise, and how they want to handle them,” he says. “My guess is that Robinhood is already kicking themselves for how they communicated.”

However, this will not be the end of Robinhood. If anything, Kurzveil says, the company could be even stronger, because it would be much better capitalized, and it could easily outpace potentially serious cash demands. The wall Street The journal It was reported on Friday that investors were in high demand in the latest round of Robinhood and the company could raise hundreds of crores more in the coming days or weeks. “My guess is that they are writing down the value of their investment,” Kurzweil says. “In the end all this attention may bring more users to Robinhood.”

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