This Week in Startups - Emergency Pod! Robinhood files to go public: S-1 breakdown | E1240

Episode Date: July 2, 2021

Robinhood is going public! Jason breaks down their recently filed S-1 and covers the most important metrics (1:56), comparisons against other major brokerages (8:45) and more!

It's an emergency podcast. Robin Hood is going public and they filed their S-1. Yes, that's right. Robin Hood, Yum, Yum for J-Cal has filed its S-1 to go public and they are allocating between 20% and 35% of their IPO shares for you, the retail investor, the Robin Hood app user. Oh my God, we're going to break it all down right after this quick message. We all know that marketing budgets don't grow on trees. The good news is right now, LinkedIn, is going to give you a $100 credit towards your first ad campaign. Over 78% of B2B marketers rate LinkedIn as the most effective social media platform for reaching objectives. That's so obvious.

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week in startups and you get a hundy. $100 for free terms and conditions. Of course, apply because you get in a hundy. All right, thanks LinkedIn. You did a great job this year supporting independent media like this week in startups and I truly appreciate it. Okay, this is a classic yum yum yum for JCal and a yum yum for you, the listener. Perhaps you have a Robin Hood account and you'll be included in this groundbreaking revolutionary IPO. Earlier today, Robin Hood filed their S-1. That's a document you file when you're going public with the SEC. This means they're going public soon.

They didn't indicate the target valuations, but plan is to raise 100 milly in the IPO. And as I said in the opening, they're going to give or planning to give 20 to 35% of those shares to retail investors. this is an extraordinary event in the history of companies going public. They're going to trade under the ticker hood, which is super cute. Dollar sign H-O-O-D is going to be pretty popular on Twitter going forward. Some highlights, they've got 2,100 full-time employees and their 2020 full-year revenue, $959 million, almost a billy, up 3.5x from 278 million in 2019.

obviously the pandemic, very good for Robin Hood. They broke even in 2020, even recording a $7 million profit, losing a meager $106 million in 2019 compared to other startups on this scale. Usually people are burning through money. 2020's Q1 revenue, $522 million, that's 4x from the time period last year. Q1 of 2020, revenue was just $127.5 million. And if you were to times that number by four and assume no. growth puts them at over $2 million in revenue. Obviously, they hope to grow quarter after quarter. 331 million of 2020's Q1 revenue was payment for order flow. About 63% of their total revenue.

If you don't know what payment for order flow is, a little bit controversial where different brokerage firms pay a fraction. I think it's like a very small fraction of a penny or maybe even a penny for your deal flow. And that's why they can afford. to give you free trading. That's the concept. And Robin Hood lost 1.4 billion in Q1 of 2021, which according to the S-1 included a $1.5 billion fare value adjustment to their convertible notes and warrant liabilities. That's mechanics around shares that were given. Most of the losses are going to be attributed to that game stock fiasco in January, where everybody started buying and shorting stocks, and it was just chaos and they had to halt trading. And they had to halt trading. And they

had to raise that billion dollars in a cash crunch. So Robin Hood reported this is the most important number for me as an investor in high growth startups, 18 million funded accounts with 17.7 million monthly active users. Wow. Funded accounts means they have a bank account linked to them. And if you look at the year by year funded accounts chart, all the way from 2013, which I invested shortly before that to 2021, it is unbelievable. The slope is what all startups dream of. This is an Airbnb, Uber, Facebook, Google-like slope. It is just up and to the right. And you see these inflection points happen as the company becomes more and more popular. This is one of the things about startups. If you survive, you can then hit a tipping point, whether it's something that is bittersweet,

like this game stock, you know, fiasco where people are shorting stocks and buying them because they're part of meme culture and on a Reddit thread and people go to war over shorting. It's crazy. Over 50% of the users are first-time investors. That is amazing. This means Robin Hood is the future of finance. They're getting the new investors. This bodes really well for them. Over 80% of these users were acquired organically or through referral. This is one of the most brilliant things that they've ever done. They told me about this in the early days, Vlad,

that they would give a free stock to people who signed up or if you refer somebody. In fact, I referred so many people by tweeting, they capped me at some number. It might have been $500 in stock or maybe 500 people. I can't remember.

So they've had unbelievable growth. And as I said, during that time period, when they were having problems, I said, you know, it reminds me a lot of the days of Uber when they had surge pricing and there was big controversies around it. Sometimes a company hits an inflection point and they're just unprepared for that amount of activity.

And that is ultimately a good thing because you wind up having a whole bunch of people find out about your service, embrace it, use it, et cetera. Now, it's painful in the process to not have enough cars on the road, not have enough Airbnb's for people to stay in. There are bumps in the road. When you make an omelet, you got to crack some eggs. It is difficult to be a founder of a high-growth startup. And what matters is not that you have these moments where you trip, you fall, you stumble, you're misunderstood, things break. It's that you get back up and you fight and you fight and you fight to learn from your mistakes and to build a better service. Okay, so some more highlights of the insane growth

from the first quarter of 2020 to the first quarter of 2021, monthly active users doubled from 8.6 million to 17.7 million. Just let that sink in. In a year, they doubled the number of monthly active users. The chart is bonkers looking.

We'll put that if you're watching on YouTube, you'll see it. And to look at the amount of assets under management, again, from Q1 2020 to Q1 2021, one year, assets under custody went from 19 billion to 81 billion, 4x. Revenue went up 300%. Tripled. And the average revenue per user, you might hear that referred to as ARPOO in the industry, increased 60% from $82.90 to $137 per user.

In other words, they're making serious money off of users already, and that will keep going up. What if they introduce Robin Hood mortgages or think about all the different financial services they could add now as a trusted partner on your phone already, they're making $137 per user. What if they had mortgages and car loans and any number of other devices, savings account, checking accounts? You get the idea. There's so much you can do in finance. And so their user base is huge.

How does it compare to other folks in the industry? Well, Charles Schwab has 32 million accounts that includes TD Ameritrade. They were founded in 1971. They have a 42-year head start. I've seen this movie before. People talked about MySpace and Facebook and oh my God, Facebook would never catch up to MySpace. I think we know how that story went. And Q1 trading revenue for Charles Schwab, $1.2 billion, their market cap $138 billion.

If you look at Fidelity, 26 million accounts, they've been around for 35 years. And then if you look at E-Trade, 5.2 million accounts plus Morgan Stanley's $3 million. In other words, and E-Trade was launched in 1982 in Palo Alto, 31-year-year. head start there. So this is amazing to see anybody crack into, you know, the likes of Charles Schwab TD Ameritrade, Fidelity, and E-Trade. People didn't think this could be done. And I, when I heard their crazy idea to compete here, I was like, hmm, that's the kind of crazy I like to invest in. What if it does work? And, you know, I got lucky again, but it is one of the great lessons of my career is that the crazy founders who have audacious goals and who execute at a very high

level and a consumer focused, they tend to win. So in October of 2019, the major brokerages followed Robin Hood into the zero commission model. That's when you know you've really made an impact is when everybody else changes their behavior. You saw this with Airbnb. The hotel chains, Bonvoy, I noticed when I was on their website was offering me kind of Airbnb type options with my Bonvoy points from Marriott. And Charles Schwab went first, then TD Ameritrate, E-Trade Fidelity and others follow later. You saw the similar trend when Tesla launched electric cars, now Ford, Volvo, everybody is revolved and pivoted their businesses from ice engines, internal combustion engines, the ice engine,

to being EVs. So this is when you've had a big, big, big impact. And of course, you know, you have the trend. You have some disruptor come in, creates a new business model, creates consolidation. because of this crazy consolidation, things like e-trade into TD Ameritrade, who were relying on fees, they were just in a very weak or financial position and were acquired. This is the nature of our industry. Your margin is my opportunity.

Your margin, my opportunity. Somebody is making money from smartphones. Android makes it free. Microsoft is making money from office. Google makes it free or low cost. You get the idea. So lots of interesting takes out there. John Street Capital, a Twitter handle, pointed out that the potential impact of the stimulus checks on Robin Hood's net deposits, which increase for all cohorts by the largest amount ever in 2020 was a thing. I think that's a good observation. You know, you have crazy moments in history and sometimes companies benefit from them and other times companies get crushed by them. And here is the cumulative chart of net deposits by annual cohort. It is extraordinary to look at this bright,

green 2020 chart where just boom, a bunch of money was put into accounts. And their cohort revenue, incredible. When you look at cohort data, what it means is how is this group of users behaving in their second year, third year, and fourth year on the service, right? So if you signed up in 2017, you can look at how much more people spent in year two, three, and four. And when you look at that cohort data, the average revenue per user, cumulative net deposits, all this stuff is growing wildly. So if you look at this per user cohort data, it is really incredible to look at. In other words, people signed up in year one, we're spending 3.6 times as much in year 2, 3.3 times as much in year 3 and 7.6 times as much in year 4.4. Now you look at 2018. In their second

year, they're spending 2x in their third year, 4.2. People signed up in 2019 in their second year doing 3.9x. This cohort analysis is, you know, something that every founder does when they are locking in users and trying to understand their product. Your product could be tapping into different user groups. So you can even do cohort analysis by people who signed up from an advertisement on TV versus an ad on Instagram or from a referral versus people who signed up organically or from an unknown source, all different types of cohort analysis. is really a game changer for founders. So it's something you should learn how to do.

And so while they had incredible growth in 2021, there are still some kinks. They have to work out, which they referenced in their S-1, payment for order flow, which makes up the majority of their revenue, and they rely on, here's from the S-1.

Any new or heightened PFOF payment for order flow, regulation may result the increased compliance costs that otherwise may materially decrease our transaction-based revenue. They can move to things like a $10 a month subscription. They have a pro account. These things are super easy, I think. For me, I think of them is easy because I've seen this before.

You know, just like Uber has to navigate, you know, regulations around are these full-time employees or part-time employees, companies figure it out. Airbnb has to navigate different geolocations where people have different regulations. That's part of growing a large business. When you have a lot of resources, a lot of customers, you can figure it out. So here's another quote, because certain of our competitors either do not engage in payment for order flow or derive a lower percentage of their revenues from PFOF, then we do any such heightened regulation or ban of PFOF could have an outsized impact on our results of operations.

They've had a number of lawsuits, 50 class action lawsuits, penalties from regulators, as many people know FINRA, the Financial Industry Regulation Authority gave Robin Hood a pretty serious fine, $70 million. dollars serious in terms of it was I think the largest FINRAs ever given in their 14 year history. Obviously, it's not a huge fine when looked at the value of Robin overall, but we've seen these kind of things before, whether it's Airbnb, Uber, you know, many different companies have gotten fines and it is sometimes the cost of doing innovation, sometimes they're self-inflicted wounds.

What's important is you take ownership, you learn from them and you build a better company. I would say, in Robin Hood's case, they've done this. The settlement was because of the technical failures they had and a reported lack of due diligence before approving customers to place options trades. Options trading. There's many people who believe anybody should be able to do it and that, you know, it is strange, bizarre, unfair that civilians, new people can't do options trading and powerful rich people do have these. You know, it's a debate. I think everybody need, I don't do options trading. I think it's kind of crazy and dangerous and shorting stuff.

I don't do any of that stuff. I like to buy and hold. But other people like to do these things. Should they be free to do it? One argument is people are free to go to play poker or blackjack or bet on sports or do fantasy sports. And then they should be allowed to do this. You know, it's an important debate, I think. I err on the side of educating people and once educated, letting them do what they want with their money.

Misleading customers about trading on margin is another thing. You know, what came up in this FINRA investigation. So this stuff is important. They've addressed it and they're now providing much more educational services to their customers. And they actually remove the confetti feature when investors made trades, which I find that is kind of silly. I mean, if people make an investment and throw confetti, like we pop champagne quarks when we make an investment in companies, certainly when, you know, Robin Hood goes public, I'll get a bottle of yellow label. I'll pop it open that night. You can be damn sure of that.

I don't know why that's an issue for people. The gamification of everything is upon us. When people bet on sports and they do scratch-off tickets or they do lotteries, they have ping-pong balls, like should we not have the ping-pong balls and people dressed up in evening gowns and tuxedos when they do the lottery? I mean, it just, that was a weird one for me. So anyway, what does it all tell us? Obviously, the ARPOO, the monthly users, the total revenue, the net deposits.

I mean, this is unbelievable. And it's just the start, I believe. Obviously, I'm a fan of the company. Obviously, I'm an interested party. Obviously, I've got a lot of shares. I'm going to be holding my shares, my personal shares, when you have a venture fund. You know, obviously, I'll get 20% the carry of that fund. So 20% of the shares are fund bought are going to go to me.

And I'm not selling those shares are going right into my brokerage account. I'm going to sit on those because I think this company is a company for the ages. I believe in these founders. I believe in the product. The proof is in the pudding. And as we say on the All In podcast with my besties, still my besties. You got to ride your winners. And really, this is about the youth movement in financial services.

Think about this for a second. We saw before in that cohort data that people were spending and investing two, three, four times as much and that they have all these young people getting educated about finance. Somebody who's 25, 30 years old, 35 years old, who has got Robin Hood on their phone and they're figuring it out, or maybe even Coinbase or Wealthfront. What are these consumers going to be like when they're 45, 55, 65, and they're going to live a long time, right? I think we're going to have life extensions. When they're 95 men, they're going to be using Robin Hood for 20, 30, 40 years potentially. What is their activity and what are their portfolio is going to

look like in 2035, 45, and 55? I hope I'm around to see it. We'll see you next time. Bye-bye. Startups is brought to you by LinkedIn Marketing. To redeem a $100 LinkedIn ad credit and launch your first campaign, go to LinkedIn.com slash this week in startups.