The Trading Floor in Your Smartphone
To Our Valued Investors:
On May 17, 1792, a group of twenty-four stockbrokers gathered underneath a buttonwood tree outside of 68 Wall Street to sign their names to a special pact. The Buttonwood Agreement, as it is known, is recognized as the founding document for the New York Stock Exchange. The text was characterized by a distinct exclusionary tone: “We the Subscribers, Brokers for the Purchase and Sale of the Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever, any kind of Public Stock, at a less rate than one quarter percent Commission on the Specie value and that we will give preference to each other in our Negotiations. In Testimony whereof we have set our hands this 17th day of May at New York, 1792”. After the signing, the men presumably adjusted their long-tailed coats and their ruffled shirts with upward-pointing collars and harumphed their way over to Fraunce’s Tavern for a warm one.
Although its provisions are not in effect today in any meaningful form, the Buttonwood Agreement is recognized as the birth of the NYSE and the initiation, or at least a precursor, of equities trading as we now know it. In the 18th Century, though, the notion of an ordinary citizen buying stock wasn’t on anybody’s radar. The thought of investing through an app on one’s iPhone was even more unheard of due to the remarkable scarcity of Apple products seventy years before the start of the American Civil War. Times have changed, though. Nowadays, just about anybody can buy a piece of IBM, Nike, or Peloton with a few clicks on their Robinhood application. You really like Tesla but you don’t have the approximately $40,000 sitting around to buy a hundred shares? No problem: Robinhood’s fractional share feature will let you buy a half of a share for around $200.
Robinhood didn’t invent day trading or, for that matter, the dramatic democratization of stock investing. Abundant are the sources through which the average Joe can place financial bets. E*TRADE, Charles Schwab, and countless other platforms have been making the activity available for years. The 1975 abolition of fixed commission rates for stock transactions had really started to lay the foundation by opening the door for discount brokers, and advancements in technology in the 21st Century made it easy. Now, commission-free trading is commonplace. We are at the point at which people from all walks of life may envision themselves as a smaller-scale Gordon Gekko, doing research and buying shares on a whim. Countless are the Blue Horseshoes who might love Anacott Steel or Teldar Paper. If you don’t get these references, do yourself a favor and watch the 1987 film Wall Street. We’ll wait.
You’re back? Good.
One distinction of Robinhood participants is that they are far from passive: recent data show that Robinhood users typically trade nine times as many shares as E*TRADE customers, and 40 times as many shares as Charles Schwab customers. These are people who take their financial health seriously, too: average daily visits to Robinhood’s “Learn” web page, designed to keep novice traders out of trouble, have increased more than 250% so far this year. Robinhood’s informational podcast has nearly two million monthly active listeners, and more than 20 million people subscribe to its weekly newsletter.
At present, stock ownership is not as common for nonprofessional Americans as one might believe. Only about 55% of our compatriots personally own equity shares. The ease of commission-free trading at Robinhood is part of a push to raise this number, thereby evening the playing field with broader access to once-exclusive growth opportunities. With its modern appeal and somewhat trendy nature, the app has seized the attention of the all-important “millennial” demographic.
It is a lucrative industry. Although Robinhood doesn’t charge a commission fee toward individual trades, it has found other ways to bring home the bacon. One such method is the practice of lending out the cash that’s sitting around uninvested in customer accounts and collecting the interest, much like how a bank functions. They offer margin trading — allowing investors to buy beyond their cash balances — and charge interest on the amount of the margin loan. Robinhood also provides upgrades for which customers pay a flat fee in order to gain access to such margin trading. On top of these, Robinhood derives revenue from directing business to market venues that pay to see order flow. Now, consider all of these money streams and that Robinhood passed the 10-million-user mark a few months ago (a tenfold increase in four years). Also remember that Robinhood users are considerably more engaged and active than those who use most other platforms. We’re talking big bucks here, and it’s safe to assume that the figures will multiply as the user base continues to expand.
The large-scale institutional investors have taken note as well, and they are throwing the smart money into Robinhood. The Series G funding round, announced last month, is backed by heavy hitters D1 Capital Partners, Andreessen Horowitz, Sequoia, and others. A spokesperson announced yesterday that this funding effort has been extended to $660 million from $200 million. The cash infusion endows Robinhood with an impressive $11.7 billion valuation, according to the spokesperson. Those guys standing beneath the buttonwood tree would likely have been blown away if they could have been told about these numbers. Apart from the vote of extreme confidence implied by the plunking down of so much money, the prospect of an eventual public offering seems like it could well be looming in the near future. After all, those deep-pocketed angel investors will want a return on their money at some point.
Robinhood joins companies like Zoom, Amazon, and Palantir in the ranks of companies that have been thriving amidst a global pandemic that has severely rattled economies. The app’s quality of getting things done from the privacy of one’s own home basically makes it immune from reservations about going out in public. Robinhood shares, though, are not yet available to the investing public. It is a private company, not for sale at the stock exchange. Still, your friends at Iron Edge VC can deliver your piece of this promising enterprise before a public listing creates the opportunity to move prices higher, through Robinhood’s app and otherwise. Demand for pre-IPO ownership has been rising steadily, but it is still early enough in the game to beat the rush. If you would like to learn more, or if you know of anybody else who would, do not hesitate to contact us by clicking “Get in Touch” below.
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As always, shares are available on a first come, first served basis.
All Our Best,
Paul Maguire, Managing Partner and The Iron Edge Team