Fireside Chat with Baiju Bhatt (Robinhood) | Disrupt SF (Day 2)
9:22PM Sep 6, 2018
Please welcome to the stage from Robinhood Baiju Bhatt and our moderator Josh Constine.
So stock trading has always required a lot of money. You either needed to be trading a ton of it with a human broker or you were getting charged $7 per trade. You came in, you came in and replace those physical branches and brokers with software and suddenly the portrayed cost went to zero. That's let Robinhood to raise over $500 million dollars at a jaw dropping $5.6 billion valuation just five years after it was founded. But you weren't always so well capitalized. So how did you convince somebody to fund the crazy idea of giving away stock trading for free?
It was a crazy one when we get started. We had the idea a few years ago. Vlad is my co founder and I are good friends in college and when we were sort of entering the working world we saw what was happening with Occupy Wall Street in New York and had been working in finance for a few years and had the realization that capital markets were ones that were really not letting a lot of people to be a part of them and that these $10 trade commissions were one of the major things and we also had the crazy idea that if we made it free, if we made it really easy to use on mobile, that we'd see a new generation of customers joining this platform.
So we took, you know, our rounds up and down Silicon Valley pitched the venture capitalists, they said it was crazy. They said young people would never invest they said that this is something that you should have, you know, a certain amount of money before you got started doing and yeah, there were some tough times in the beginning but we pushed through.
So what was it like getting like that first check in especially before you were fully like allowed to do this kind of trading through the SEC.
Yeah, that was one of the hardest parts. When we were getting started, we were in the process of becoming a broker dealer, which is what we are today to facilitate investing in the stock market. But the way that the financial system works is that without the regulations and the licenses in place, you can't talk about it. And so we would talk to the VCs and be like, I've got this great idea. And they'd be like, Well, you know, show us the, the customer validation that people actually want this and be like, well, we can't because we have this regulatory thing. And they're like this is a crazy idea. It's never going to work.
So at some point, you were like walking around Palo Alto barefoot, just like trying to save as much money as you could, biding your time until you could actually get this broker dealer license. What was that experience like? Because I think when people hear $5.6 billion valuation, they just immediately assume you've been like high flying in mansions this whole time and buying fancy sneakers but at one point you had no sneakers at all.
No no shoes at all. Yeah, so we had a we had this time when we're getting started. It's a little bit of a history lesson of Robinhood. In order to get approved by the regulators to do this business we had to first have a full year's operating capital on hand. And we found out about this like right at the end of our application to become a broker dealer and we had this we had this meeting with Tim Draper who who said he would invest and he was kind of on the fence and he's like it seems like a good idea. This is going to be pretty difficult hurdle for you guys to get over getting this this approval. And we we made this crazy proposition to him which is that if you would give us that first wave of money we needed to get our application approved, we would forego our salaries until we got the approval. And Vlad and I are both immigrants and children of immigrants, didn't grow up with a ton of money had never really had a real job after college. And we're basically out of money at the point. And so yeah, there was a period of time where I started biking into work every day some shoes with holes in them walk around barefoot a lot back then. It was a tough time.
So that's pretty impressive to go to where you guys are now. But that said, you know, when some people might say that a company going from a sub billion valuation to over $5 billion in a year and a half means that there could be a fin tech bubble or a crypto bubble and that you can be overvalued. I mean, let's look back at what happened with Jawbone, you know, there's a big fitness tracker boom and 2014 Jawbone raised at a $3 billion valuation. Everything's going great. They're killing it right? By 2016 there enduring a brutal down round cutting the valuation in half. A year later business ceases to exist. So how do you avoid that same fate with Robinhood?
There's a couple of things. The first one is our businesses extraordinarily lean and it has been extraordinarily lean from the beginning. So today we have nearly twice as many customers as E-Trade which has about 4000 employees. We operate Robin with Robinhood with about 250 people. So the unit economics of the business are really strong. Our overhead is very low and we've always been a very good cash conscious company. So that's how we give ourselves a really, really long runway. So that sort of stuff doesn't happen. Beyond that, our customers love our products, our engagement extraordinarily high. We have our customers use our product, on average 10 times a day. Like with that sort of utility and retention for customers, you know, we think we're pretty well set up and over the last three a half, four years that we've been in market, we've transacted over 150 billion dollars through our platform, saving over 5 million customers well over a billion dollars in commissions. So like we're, we're adding real value to customers lives every single day. And that's me feel really strong about
So does suddenly going from a small startup to being a multi corn feel like success, or does it feel like pressure?
Feels exhausting. Yeah, yeah, I would say it doesn't really feel like much of either. I think it's an interesting time for our company because we're regrowing from no, a smallish company, in terms of headcount to one that has, as I mentioned, about 250 employees today on two coasts, and looking to substantially grow that number over the next year and the year following that. So those are some of the challenges that we face thing. Obviously, making sure that our services rock solid works every single day, and that we're continuing to build new stuff at the same pace that we did. It's a fun challenge. But it's a lot of work.
It's it's pretty even keeled. And you know, they say that founders don't judge themselves by the company's absolute value, but behind by, but just relative to yesterday, you know, one last executive or partner or a new competitor clone or one security breach or bug and it can feel like the whole world's going falling down on you and you can feel like shit. Yeah, I mean, mental health is a huge issue amongst founders. And they often don't really want to talk about it. And this impacts high flying leaders like you as well. And so maybe you could tell us what do you do on those dark days when you don't really want to get out of bed, how do you motivate yourself when things are going to hell?
Yeah. I mean, certainly has happened over over the years.
It just look at the price of bitcoin.
Yeah, I would say a few things. The first one is, is that there's two of us that are co founders, co CEOs of Robinhood myself. And like I said Vlad, and there's, there's something about having a friendship sort of behind the company that's so important to both of us that actually makes every single day that much more exciting. I think it also helps us keep a much more even keel, because we're both people, we both have our idiosyncrasies, and our weird tendencies and like, Oh, we should really do this like really nice idea. But we have a we do a good job of keeping each other sort of tendencies in check. And when we make decisions together, we we feel really confident that we've arrived at the best decision.
Was there ever a time when your investors were like co CEO like, we know that that doesn't always work, you can get a lot of head butting like one or you just like, step up and want to you step down and that ever happened.
That's actually never happened. Actually, we like to make a lot of fun of it. And I think that's maybe it doesn't happen as much. But the interesting thing is, is that with with me on our board, Scott has a co CEO relationship there as well. So he's actually been very supportive of it, and as all of our investors.
So scaling culture is a lot different than just scaling a business. What questions do you ask potential hires to make sure that they hold your standards, dear? And are just chasing the paper money you guys are accumulating?
Yeah that's a good question. So I do I do a couple of different things when interviewing people and I think both of Vlad and I tried to stay very involved in the process of making sure that then you Robinhood is that joiner are aligned with the mission. I'd say the one thing that's very, very important for us and things that we do like employee sentiment studies that come up as the biggest thing that drives happiness and engagement at Robinhood is alignment with our mission.
And that that's something that actually motivates people to work that much harder, which is every single day. It's like we're here. Because our mission is to democratize America's financial system is to make America's financial system one where more people are part of it. One where there aren't financial barriers that make it so that it's cheaper to be wealthy, and it's more expensive to be poor. That's something a lot of people I think view is a real problem in society that needs to be addressed. And I think it's a really strong motivator for people at our company.
So that said, the things that we like to ask for when we have new people joining is one of the time you've overcome adversity ones the time you've been wrong and you've learned from things that you're on, you have honest answers to this stuff. Are you just sort of coming up with things that seem like they're right. Are you a person that raises yourself to a higher standard? Are you introspective, it's like that.
So you've been scaling that culture as well as the business. You guys now have over 5 million users, Robinhood gold, your premium subscriptions growing like 17% a month, you know, you like you said, you now have twice as many customers as E-Trade. You know, that's scaling a lot. Eventually, those investors are going to ask for return, you know, DST global, whose ledger last two rounds, they pumped a lot of money into this. So what's your long term plan? Are you guys gonna consider going public?
Yeah, absolutely. It's something that we're we're thinking about on the, the medium to long term and actually, to that point, one. One thing which we're, we're excited to, to mention in this is that we're, we're actively looking for a CFO right now.
It's something that we think is very much in the future for Robinhood, being a public company, I think, aligns very closely with our mission as well. And it's definitely on the horizon. I think, not in the immediate term, but something we're thinking about.
So I'm gonna be able to trade Robinhood on Robinhood, that'd be crazy. When are you gonna have some extra like fun bells and whistles? So just like encourage me, or is that some kind of, like, manipulation of the market?
I mean, I think there's gotta be something interesting we can do there. But yeah, that would be that is definitely something that we've talked about a lot internally and would love to see that happen.
Do you guys have to go through, like, audits or other stuff to get ready for the IPO? Or what's up with that?
So we, as a financial institution that's regulated by FINRA, the SEC regular dialogue with the Treasury, every financial regulator in the US, you name it, we work with them pretty closely has actually given our business a really strong sort of audit and financial governance sort of set of requirements to meet well before being a public company. And so of course, our financials are hard at every year, of course, are no security practices that are audited every year. All these things we have been taking a really forward stance on so that by the time it makes sense for the business think about a public offering where, you know, years into doing this stuff.
Okay, so let's talk about crypto when you watch Robinhood crypto and on February 22 allowing people to trade things like a theory them in Bitcoin for a very low cost, basically the as well as you can get it.
At that time a theorem was at $849, now it's at $286. So most everyone who bought a theory on your app is down. Do you feel any moral pangs or sense of regret about opening up crypto to mainstream investors?
So on the topic of price, looking at the price of cryptic cryptocurrencies, very candidly, is not something that I do on a day to day basis.
We opened up Robinhood crypto to customers in the us because we thought that this was a big change that is coming to the financial system and we wanted to make sure that if if this was something that customers were going to do that yesterday's business model didn't follow tomorrow's financial system. So we thought that this is something that needs to be accessible to everyone, the cost need to be as low as possible, can't be paying transactional fees on something
that is going to be a motive of sort of moving money going forward. And we wanted to be a company that helps sort of set the stage for that and
whether the price goes up or down. I think we still believe that this is something that's going to matter long term. So we feel strong about about offering it.
Because you could think of it that the barriers whether those are the fees or, you know, the work that it takes to do crypto trading that kind of protects the most un-savvy investors from getting involved. Do you ever worry that people who have no idea what they're doing whether that's like, you know, someone's grandma or somebody who has, you know, only heard about Bitcoin on Mad Money or something like that jumps into it and suddenly loses their shirt. Do you feel any responsibility for that?
I think our mission is very much to make these products accessible to people. We can't control the price of whether these things go up or down. And, you know, taking the example of the equities markets where some of these criticisms have been raised in the past, you know, we feel pretty strongly that more people being a part of the system is better than fewer. And so that's pretty much how we think about it.
So speaking to that idea of like, protecting investors Quinn throw a screenshot up on the screen. I want to ask, do you moderate the chat boxes inside of Robinhood? I know that like on each of your crypto coins. There's basically a chat box with a bunch of people talking about how a crypto coin is doing. Is that something that you guys actually moderate?
We do. Yeah.
And how does that moderation work?
We actually have two forms of moderation we have human moderation where we have a team of people that are going through the the chat and moderating it and pulling out things that we think are poor, poor quality content, and we also have automatic moderation so we have a third party service that we use that looks for either things like terrorist activities or things that people really shouldn't be saying and pull it out and we also have the ability for people that are using it to flag messages to to remove messages from the feed.
Do you guys find a lot of like pump and dump scheme is going on in there I mean like just in this you can already you can see people were like buy this coin or buy that coin or like and I think I've heard from sources that especially during some of the runs on different coins it can feel like people are actually using the the Robinhood product to drive those pump and dump schemes.
So I don't I don't think that they drive pump and dump schemes. We actually have a message that's pretty clear when you sign up but says don't promote the price of stocks to go up or down. And that is something we're actively removing people for doing
When you remove them to you remove them from the chat box or from the Robinhood entirely?
They're they're different stages of it and I don't, I'm not exactly sure what the processes but there's a step where will first start, you know, removing your messages from the feed and if we see continue to abuse then we take further action.
But this was something that we launched as an experiment, we had the idea that cryptocurrencies are really unique because they're the first financial fun phenomenon we've ever seen, where there's real network effects. And we wanted to see if we could bring the actual conversation that drives the network effects into the product. And as an experiment, we think it's a really interesting idea and yes, we probably as we go forward will continue to make the moderation stronger and more robust.
so just Robinhood hold the private keys for crypto wallets that people have with the company or those held with a different exchange and who runs the order book or people trusting Robinhood are they actually is that trust being kind of passed on by you guys to a third party?
So we we hold so I need to go back and actually make sure I have the latest information how we're doing this because we've been transitioning between different counter parties that we use to custody the coins and will eventually be covering them ourselves.
But we route the orders to a variety of third parties and we look at the best available price across all the different venues that we connect to and show those customers.
How do you decide new cryptocurrencies to list because I know some exchanges get paid like millions of dollars to take on a new coin.
We do not get paid. We do not get paid. We do not pay anyone to listen to coins. We have a listing committee and the listing procedure which I believe is actually available publicly.
I don't want to miss paraphrase it so I'll probably leave it at that.
So what's your plan for monetizing crypto directly? Is that part of the plan? Are you going to just mostly use it as like a loss leader and driver of your traditional stock trading yeah functionality.
Our goal is to to be able to offer it sustainably, which means we want to be able to break even and cover a cost of running the business. But yeah, we believe that if we build more and more services that are awesome for our customers will be able to continue to make money off of the ways that we do so.
So does that mean like bringing margin trading to crypto even though there's like mass volatility?
I don't think we have any plans to bring margin trading in crypto, but we've seen people that come in because they're interested in crypto substantial number of those people say hey, maybe I'm also interested in investing equity markets. They do that a certain percentage of those people are people that turn into or already more pro Zoomers and then we see those customers adopting things like Robinhood gold.
So you guys are on a bit of a collision course with Coinbase and how are you going to beat them like what's coin basis weakness that you can exploit?
I see I this narrative has been brought up a couple of times and I don't I don't really see it. I think we have pretty different set of things that are businesses trying to do. I think Robin Hood is squarely focused on being a consumer business as he Coinbase is one that's trying to do all things crypto. And I think long term we will see and I could be wrong about this where this is a point in time where our products have had similar trajectories, but they largely have very different missions as companies.
And so finally, what is your advice that you could give to series a stage founders on their funding and personal journey hoping not to go crazy as they join the unicorn ranch?
Yeah, one it takes much longer than you might think it does. And two get ready to be wrong a lot three, make sure you've got a good co founder because otherwise you will absolutely lose your mind the process.
Cool well from from going to barefoot to having 250 employees, yet two times as many customers as each raid building a friendship and a co CEO to keep you saying finding mission driven people who actually want to work there to democratize finance rather than just get rich in now you guys are actually building is getting a CFO trying to make crypto accessible even though there might be a risk to making it accessible to everyone and making sure that you're keeping them safe with moderation and not giving them too much margin trading that could let them lose their shirt.
I'm really excited to see where this goes. But mostly, I just think it's really admirable for you know, the the children of immigrants to go out there and say, Hey, we want to bring financial inclusion to a whole new generation. So thank you for coming and talking with us.