How a New App Takes On Traditional Stock Brokerages
NEW YORK—People love stories about Robin Hood, a legendary outlaw who took from the corrupt clergy and ruling class in the England of the Middle Ages and gave to the poor. Today, Robin Hood doesn’t dwell in Sherwood Forest anymore, but in the application store of your smartphone as a stock trading app.
“My wife initially came up with the name. She was trying to figure out how to describe my business when introducing me to people. She was saying I am in finance, but that was not quite accurate. Then she called us Robin Hood of finance, fighting for the little guys,” says 29-year-old Vlad Tenev, co-founder of Robinhood.
Robinhood is a smartphone app allowing people to trade U.S.-listed stocks and exchange-traded funds (ETFs). It offers commission-free trading while other online trading platforms charge up to $10 per trade.
It was founded with a mission to make stock trading accessible to everyone, including the young, less wealthy, and first-time investors.
Vlad Tenev and Baiju Bhatt, classmates from Stanford University, founded Robinhood in Palo Alto, California. Before founding the startup, they gained experience in building trading platforms for financial institutions in New York City.
“If you look at the products that existed prior to Robinhood, none of them had fundamentally changed in decades, so we saw an opportunity to bring investing to the next generation where it would be smartphone-focused,” Tenev said.
Robinhood was named one of the most innovative companies in 2016 for removing all the barriers to stock trading, according to Fast Company. It has one million users and handled $12 billion in transactions since its launch in March 2015.
The company claims that its customers saved $200 million in commissions by using the platform. The company makes money through interest income from margin accounts in its premium service Rohinhood Gold and customers’ cash balances. As a tech startup, it also has much less overhead than even electronic brokerages like E-Trade.
Road to Success
“I’ve loved the stock market from a very young age. I had the opportunity to buy my first stock as a teenager,” Tenev said.
He also got exposed to taking risks at a pretty early age because his parents decided to move from Bulgaria to the United States. He was 5 years old, then.
“That was one of the biggest risks that certainly my parents had ever taken because they actually had a good life in Bulgaria. It was a big unknown,” he said.
And while growing up, Tenev and his parents moved every few years because of his father’s graduate degree and job.
Tenev was the only child, so he learned to be self-reliant and adapt to changes. Surprisingly enough, his business partner Bhatt too was the only child and a first-generation immigrant from India.
“There’s something about the experience that prepares you for uncertainty and makes you embrace that. I think most people are much more scared than I am of uncertainty or lack of stability. And I kind of thrive in that in a lot of ways,” Tenev said.
When Tenev and his partner first got the idea for Robinhood, they released many products that weren’t great. They had too many features and weren’t user-friendly.
“But looking back, I don’t think there’s a better way to learn what makes a good product than releasing some clunkers on the market and seeing all the ways in which they fail,” he said.
“I am the sum total of all my experiences, so it’s hard to imagine doing things differently and still being in the same place now.”
Robinhood is not an ordinary application. It is regulated and monitored by the Securities and Exchange Commission (SEC). It is also a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Complying with these regulations is challenging, and Tenev himself puts a lot of time and focus on this issue.
“It’s not easy to toe the line between being a fast-moving technology company and a regulated entity, but that’s something we had to master pretty early,” he said.
Pitching the business idea to investors and getting the initial financing were the most difficult parts of the entrepreneurial journey, according to Tenev.
It took many months and dozens of meetings, he said.
Robinhood raised a total of $66 million in venture capital funding. Its notable investors include NEA, Index Ventures, Google Ventures, and Andreessen Horowitz.
“Many people give up at the first sign of difficulty or of uncertainty,” he said.
“I think the people who actually have done well and have created big companies have this belief that things will work out no matter what, and even if they face multiple near-death experiences they will figure out a way of pushing through.”