Robinhood Financial Inc.’s latest cash influx could signal a long-term opportunity for the company to evolve into a full-service financial institution for its millennial and Gen-Z clientele.
The additional cash brings the fintech’s most recent funding round to $600 million, according to a company blog post. The new funding, which closed Monday, comes from new and existing investors, including TSG Consumer Partners and IVP, and props up the app’s valuation to $8.6 billion.
Robinhood intends to leverage the funding to invest in new products and accelerate the build-out of operations, including hiring more employees in its newest office in Denver, a company spokesperson wrote in an email.
The increase in capital is a sign of confidence from investors that they believe in Robinhood long term, according to Capco’s managing principal Robert Norris. “The people who run this company are forward thinking, ambitious and understand the power of technology,” he said. “With those ingredients, you cannot imagine Robinhood just sitting still — there’s a bigger play here.”
The scale could translate into the trading app filling out its services like some of the major brokerage firms, including Fidelity, TD Ameritrade, Charles Schwab and ETrade, according to Aite Group’s head wealth management analyst Greg O’Gara.
Robinhood, currently, has a very “thin” service model, he said. The logical step would be to evolve and engage its young investors more deeply into financial services. The app already has a user count upwards of 10 million.
Robinhood faced criticism, last month, when a 20-year-old user committed suicide after his account temporarily showed a negative balance of more than $700,000. After the man’s death, Robinhood said it would change its options trading platform to offer more education and made a $250,000 donation to the American Foundation for Suicide Prevention.
In addition, Robinhood has included information on early options assignments to its help center and will be hiring an options education specialist to further enhance education related to its options offering, according to the company spokesperson.
Still, lawmakers have pressed the platform to increase its commitment to investor protection. “A number of serious questions remain as to whether these proposed changes will have any meaningful impact on the way your platform enables and encourages inexperienced investors to engage in high-risk trading,” states a letter from Rep. Brad Sherman, D-Calif. and chairman of the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.
As Robinhood continues to scale, experts have voiced concerns about potential future risks involved with the app’s architecture, particularly when it comes to financial literacy of its youngest investors, according to State Street Global Advisors head of independent wealth management Kelly Ryan.
For advisers, starting the dialogue about financial literacy with young investors early is paramount. “I see a trend of advisers bringing in younger business partners to connect with those young investors,” Ryan said.
As Robinhood continues to scale, the potential for an initial public offering is on the horizon, which is something the company has teased in the past. “If [Robinhood] wants to compete against Merrill Lynch, Betterment and Wealthfront, they will definitely need that amount of solid cash to back it up,” said Nikhil Sharma, principal consultant at Capco in an interview.
However, the uncertainty and market volatility surrounding the coronavirus pandemic combined with the upcoming election in November could weigh in the consideration of when a firm executes an IPO, Aite Group’s O’Gara said.
“I could certainly see a company opting to wait-it-out for potentially calmer seas,” he said.
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