It is difficult to get the funding to start business. It is even harder if the product you are going to launch doesn’t exist yet. And if your firm hasn’t got the regulatory permission then it is almost impossible to get the funding. This was the situation of Robinhood few years back and currently Robinhood has built its business model and ranked in unicorn startup list.
Robinhood Success Story
The founders of Robinhood faced rejection from as many as seventy-five venture capitalist before getting the funds. Let’s read the inspirational story of Robinhood along with its business model.
Robinhood is a financial service startup which was founded by Vladimir Tenev and Baiju Bhatt who had previously built high-frequency trading platforms for financial institutions in New York City.
Robinhood was finally launched in December 2013 after operating in stealth mode in its initial years.
The company allows individual to invest in publicly traded companies and exchange-traded funds listed on U.S. stock exchange without paying the commission via the company smartphone mobile app.
The company generates its revenue from interest earned on customer’s cash balances and margin lending, and by selling order flow to high frequency trading firms.
Initially launched on crowdsourced technology news website Hacker News, the company raised $110 million in funding round led by Yuri Milner from DST Global, and Greenoaks Capital and Thrive Capital, the venture capital firm founded by Josh Kushner.
By February 2018, Robinhood had 3 million active users on their platform. At the latest fund raising round held in 2018, Robinhood had raised a total of $176 million in venture capital funding pushing the company valuation to $5.6 billion.
How Does Robinhood make money?
Robinhood, one of the examples of disruption technology in financial tech is only a five-year-old company but the success it has achieved is quite unprecedent to say the least. Many people have question about how this company has manage to give so much free services and still earn money. There is curiosity among people to understand how robinhood makes money?
Robinhood, the new structured app that burst onto the scene five years ago has sky rocketed to be one of Silicon Valley hottest unicorn startups.
The company is famous for disrupting e-trade chuck Schwab model of charging nine bucks a trade. Robinhood offers you the one of the best designed mobile apps that allows you to trade stock you want or option you want for free even for currency such as bitcoin and cryptocurrency.
You can trade crypto currency for free on Robinhood. They don’t charge you extra bucks for trading of coins. So, there lies question for everyone, if they don’t charge to trade coin How does Robinhood makes money?
Let me explain for you the business model of Robinhood through which you will get a fair idea about how robinhood works and generate massive revenues?
Before talking about the how does robinhood make money, let’s talk about its cost saving approach.
Robinhood saves huge amount of money by cutting its operational cost. They are able to control the cost by having far less overhead than traditional brokerages.
Robinhood is a technological driven company, so robinhood employees only 200 employees compared to E-Trade’s 3500.
They control the overhead cost by spending very less on marketing, offices, account managers and customer support.
Robinhood Business Model
Robinhood makes money from various despite technically not charging fee for you, its main source of money is your account. Let me explain it for you:
Source 1: Generation of Revenue from Interest
There is a saying in English that if it’s free, you are the product. That stands true in the case of robinhood also. Robinhood does not charge you fees to trade stock but it earns money from the unused cash deposit in your account.
One source of revenue generation is the interest off the money sitting on your account.
So, let’s say you have $1000 in your Robinhood account and the interest rates are 3%. Robinhood would take $30 off having your money sitting in their account per year.
The amount does not sound much but multiply it with 4 million active users on the app and ever-growing list of waiting line. They are making a fortune as the interest rate is on the rise and so are the accounts on the application.
Source 2: Generation of Revenue from Premium Subscription
Robinhood also offers huge variety of services to its users. The other source of revenue generation for the company is its Premium Gold subscription plan. Under this plan, users can get variety of benefits such as:
- Users can get more buying power with margin trading.
- Under this plan, subscriber get extended trading hours. With Gold, you get to trade 30 minutes before the market opens and 2 hours after the market closes.
- You also get to skip the three-day waiting period for deposits and make trades instantly with this premier plan.
Source 3: Generation Revenue through Margin Interest
The other source through which robinhood makes money is margin interest. Margin interest is the interest that is due on loans made between you and your broker concerning your portfolio assets.
Robinhood offers you to borrow the money to increase the amount of potential earning you can make when a stock goes up. Its no trade secret that, the more the amount of money you invest the more your chances to earn potential income.
Robinhood offers the service of margin interest to its users. You should at least have $2000 in your bank account to be able to buy on margin.
There is high risk in margin buying, as If you make a bad bet and a stock goes down, you can lose more than the amount you invested because you still have to pay back the principle you borrowed. You should be extra careful before investing the money you got from margin buying.