Robinhood's path to public listing
Vlad Tenev is ready for his close up. Again.
There’s Tenev -- doe eyes staring into the camera, dark hair peeking out from a L.A. Lakers Taco Tuesday hat -- looking as if he’s just been hauled into the principal’s office.
Days after getting grilled by members of Congress, the hero-villain of Robinhood Markets Inc. is now up against Dave Portnoy in a livestream. Tenev is having a tough time convincing “El Presidente” of Barstool Sports about much of anything.
Portnoy has the same question as his day-trading fans on this February night: How could Tenev freeze amateur investors out of meme stocks like GameStop Corp. just when they seemed to be beating the pros?
“I’m proud of the way the team handled the crisis, by and large,” Tenev says, with a slight shrug, of January’s meme-stock imbroglio.
Portnoy is incredulous.
“How can that be possible?” Portnoy exclaims. “You guys are billed as a firm to retail traders!”
“Yeah,” Tenev says softly.
“And you screwed ‘em over!”
Portnoy’s take on Tenev after this virtual sit-down: “He’s a rat and a liar.”
No wonder Tenev has joked privately that he sometimes feels like the most hated person in America.
The confrontation came after one of the more bizarre moments of the pandemic economy, when an army of retail traders revolted after Robinhood shut off purchases of GameStop and other meme stocks, an episode that sowed mistrust. What’s more, Robinhood has just agreed to pay US$70 million to settle sweeping regulatory allegations over misleading statements and failures in technology and options oversight, which the Financial Industry Regulatory Authority says hurt its customers. (As is typical in such cases, Robinhood neither admitted nor denied wrongdoing.)
Tenev has even bigger things to worry about now. After hastily raising an emergency US$3.4 billion in the middle of January’s meme-stock storm, he’s pitching the “stonk” of his life: Robinhood itself.
Now months after the trading freeze prompted howls, Robinhood’s planned initial public offering will either prove that Tenev’s free-trading app is permanently changing the way ordinary people invest -- or that Robinhood is just one more fad for these meme-filled financial times.
Tenev has to pull off three daunting feats at once. He must show skeptical regulators that Robinhood has gotten its act together; convert even more investors to Robinhood-style trading, including with products like cryptocurrencies; and prove to his shareholders that he can make them money in the process. An abrupt reversal on Wall Street -- a full-on collapse of meme stocks, cryptocurrencies or the broader stock market, for instance -- could thwart even the best-laid plans.
And so a dramatic and often painful transformation is under way inside Robinhood, which will trade under the ticker HOOD. People who’ve worked directly with Tenev say he and his company are being forced to grow up -- fast. Robinhood has ditched informal, show-and-tell-style meetings, imposed defined chains of command and brought in a slew of new executives and board members. Half the current leadership was hired in the past year alone.
Tenev, 34, is the youngest by at least a decade, with the exception of Baiju Bhatt, 36, his co-founder.
Interviews with Robinhood insiders underscore one of the strange realities of this moment. The pandemic upended business plans everywhere, but it also made Robinhood the powerhouse it is today. Over the past year, amid lockdowns and work-from-home, the number of its active users more than doubled, to 18 million. What happens when more normal times return is the big question. A representative for Robinhood declined to comment for this story, citing the pending IPO.
The deal could value Robinhood at US$40 billion, close to the current valuation of crypto trading platform Coinbase Global Inc., which debuted earlier this year. It’s also poised to make Tenev rich: his stake is worth at least US$1 billion, according to the Bloomberg Billionaires Index, and he could earn far more from equity awards tied to stock price targets.
If all goes according to plan, other big winners will include its venture backers that doubled down on their support this year, including Ribbit Capital, Andreessen Horowitz, Sequoia, Index Ventures and New Enterprise Associates.
Robinhood has earmarked 20 to 35 per cent of the IPO for its own customers, a maneuver designed to build its fan base. The company needs to keep customers engaged: some who got burned by the GameStop blowout still worry Robinhood is too close to Wall Street.
By now the broad outlines of the Tenev story are well known: he emigrated from Bulgaria with his parents when he was five, earned a mathematics degree from Stanford University, and eventually partnered with Bhatt, his best friend, with whom he founded Robinhood in 2013. Bhatt left his position as co-CEO last November, and became the company’s chief creative officer, leaving Tenev alone at the very top.
Tenev has come a long way since he and Bhatt worked out of a house in San Francisco’s South Mission neighborhood, where Tenev fed the landlord’s cats and wrote code. But people who know Tenev still characterize him as an endearing nerd. Pre-pandemic, he was known to play Bananagrams with co-workers. He once let a new employee snap a selfie with him in the company kitchen. In a recent episode of his new podcast, “Under the Hood,” he brought on a Stanford professor to discuss French polymath Rene Girard’s mimetic theory, and how it relates to this year’s zany trading in GameStop.
A few years ago, before Robinhood exploded onto the scene, Tenev told Entrepreneur magazine how much he enjoyed “Antifragile” by Nassim Taleb. That’s the follow-up to the best-seller “The Black Swan,” and it focuses on growing from periods of extreme stress.
Lately, Tenev has been living “Antifragile,” or at least trying to. After complaints about spotty automated customer service, Robinhood has tripled the size of its human team to 2,700. It has also abandoned some of the controversial hallmarks of its early days, like a confetti graphic that appeared when users placed their first trade (Securities and Exchange Commission Chairman Gary Gensler wants to look into the “gamification” of trading in general).
Nowadays, meeting agendas are distributed and deadlines are imposed, something that wasn’t always the case before, one former employee said. Tenev has been spending lots of time hunkered down with his new deputies.
Among them is Dan Gallagher, a former SEC commissioner who was brought in as chief legal officer. One of Gallagher’s top priorities lately, according to a person familiar with the matter, has been to forge relationships with state regulators like those in Massachusetts, who have accused Robinhood of aggressively targeting inexperienced investors and want to revoke its state brokerage license. Another top lieutenant is Christina Smedley, a former executive at Facebook Inc. and PayPal Holdings Inc., who’s been put in charge of marketing and communications.
But Tenev remains the face of Robinhood, in good times and bad. When a customer took his own life last year after mistakenly believing he’d lost more than US$730,000 trading, Tenev apologized to the young man’s family. One Robinhood venture investor, who spoke on the condition of anonymity, cringed when Tenev agreed to appear with Portnoy, a known troll. But then the investor felt a wave of relief and even admiration when Tenev managed to make it through the session with no major embarrassments.
As Tenev tries to ensure that Robinhood is ready for prime time, the reality is that the likes of meme stocks and crypto have been very good to the company. Its business depends on ordinary people who have an appetite for risk. Active trading is vital: about three-quarters of 2020 revenue came from trading activity on its platform.
That’s because Robinhood sends customer orders to be carried out by trading firms like Citadel Securities, which dole out payments to the company in return. While the arrangement is common in the brokerage industry, SEC Chair Gensler has said he could see it posing a conflict of interest. Robinhood paid a US$65 million SEC fine in December to settle allegations that its disclosures on payment for order flow were insufficient. (It again neither admitted nor denied wrongdoing.)
Crypto is also becoming more important. More than 9.5 million customers traded a virtual currency on Robinhood in the three months ended in March. Crypto assets account for about 14 per cent of Robinhood’s US$80.9 billion in total assets under custody.
In 2018, the company had a major internal debate over whether to add Dogecoin to its lineup. The communications and legal teams balked, according to a person familiar with the matter.
But the decision to add Dogecoin has proven to be lucrative. Transactions in the token made up more than one-third of Robinhood’s crypto trading revenue in the first quarter, up from 4 per cent in the fourth quarter of 2020. All told Robinhood took in almost US$30 million from trading in Dogecoin, which was created as a joke.
The Doge meme “was a big part of Robinhood culture,” Tenev told Kayla Kilbride, who goes by @girlstalkstocks on TikTok, in May. His favorite room in the company’s early headquarters, which he said had conference rooms named after memes, was the Doge office.
“We’re big meme lovers,” Tenev told Kilbride.
Still, as Robinhood hurtles toward its IPO, Tenev is trying to drum up new business and investors while placating regulators at the same time. Lately, he’s been peppering his tweets with a hashtag that seems aimed at just about everyone: #SafetyFirst.