Banking & Finance

Is Robinhood Wasting Its Investors' Money?

Robinhood, a brokerage firm that allows people to trade without commissions, is another unicorn likely to take a large fall. Its management seems so lax that the company has run into serious trouble. This started with a major fault when it introduced a free checking account product. In a move that had more troubling consequences, some of its members had access to what was dubbed as “infinite margin,” a way for people to inflate the money in their accounts, sums that they could borrow against to make more investments.

Neither of these issues was likely to have affected Robinhood’s financials. However, they are an example of the carelessness that should concern its venture investors. Robinhood was recently valued at $7.6 billion, based on $322 million it raised earlier this year. Among the hurdles Robinhood faces is skepticism about what rapidly growing companies are worth. Among primary recent examples are Uber and WeWork.

Robinhood is also up against a wave of competition. The company describes its goal as “pursuing our mission of democratizing finance for all.” Charles Schwab, TD Ameritrade and E*Trade have each announced commission-free trading, a move meant, among other things, to chip away at Robinhood’s over 6 million users. When Fidelity launched its program, Kathleen Murphy, president of Fidelity Investments’ personal investing business, said, “With this decision, Fidelity is taking a different path from the industry. We are providing customers unmatched value while challenging industry practices that appear to give value in one place when they are actually having customers pay in other ways.” Her comments were partially a reaction to what the Wall Street Journal wrote about Robinhood in “Why ‘Free Trading’ on Robinhood Isn’t Really Free.”

A $7.6 billion valuation of Robinhood may be too high because of the new industry competition. In addition to that, however, careless management does not do its VC investors any favors. This is particularly true in an environment in which investor concern about inflated valuations has dragged down unicorns.