Why Robinhood became the Robinhood of early stage investors.
The proliferation of mobile, internet, cloud, social media, big data, low code and brilliant UI is enabling D2C companies achieve Unicorn status.
Over the past decade, with the constant evolution and adoption of mobile technology (e.g. iOS, Android), internet penetration (e.g. country specific and global ISP / Telecommunication companies), cloud computing (e.g. Amazon Web Services), plug & play e-commerce solutions (e.g. Shoppify), GPS (e.g. Google Maps), Low-code (e.g. Mendix) and Programmatic Marketing (e.g. Google, Facebook), the way businesses operate and serve their customers has been radically redefined.
To help fathom the disruption, consider how your day to day tasks have been fulfilled by the apps on the home screen of your mobile phone:
Groceries shopping: from heading to a Walmart or Target store, to ordering the same via BigBasket
Watching movies: from heading to the cinema to watching the same via Netflix
Eating out: is gradually transitioning to eating in as more an more restaurants on-boarding on to Swiggy
Travel planning: from visiting your agent to planning via TripAdvisor
Shopping across categories: from heading to the mall to ordering via Flipkart
Creative production: from heading to the agency to DIY design and print via Canva
And the list goes on…
As per Luma, an investment bank focused on digital media and marketing, this new phenomenon that is radically disrupting the way businesses operate is known as Direct to Consumer (D2C). The aforementioned ecosystem has reduced time to build D2C products so rapidly that over 400 brands and counting have already evolved in this space, disrupting the way traditional companies operate.
The impact of D2C can be substantiated by the fact that over 50% of Fortune 500 companies declined in revenue, while revenues of D2C focussed leaders have been rapidly on the rise. Despite market headwinds in the last quarter of 2018, FinTech companies outperformed the S&P 500 consistently.
In 2019, per a recent article by Dana Stalder and Jake Jolis on TechCrunch, On a return basis, the public Matrix FinTech Index continued to crush every major equity index as well as the financial services incumbents. Nicely matching our forecasts, our Index delivered 213% returns over the last three years. The Index outperformed the financial services incumbents by 151 percentage points and the S&P 500 by 170 percentage points.
It’s also no surprise that D2C companies commanded the lion’s share of venture capital funding and exit valuations given the superior cost efficiencies, global reach, and fast track adoption that D2C firms operate with. While venture capital firms are buying into the D2C story rapidly, it’s worth noting that exit valuations have been significantly driven by traditional brands looking to expand their market share e.g. Walmart acquisition of Flipkart or looking to fundamentally reshape their business models to keep current with the times e.g. Unilever acquisition of Dollar shave club.
With it’s IPO expected soon, and with a customer base larger than E-Trade, Robinhood an online commission free trading platform, could set new records on it’s listing day. Robinhood raised raised a $323 million Series E round, moving the startup’s valuation to $7.6 billion. Before this round, Robinhood had been valued at $5.6 billion, after a $363 million raise in May 2018. With ~4 million customers as of 2019, Robinhood saw it’s valuation quadruple within a year owing to the friction-less D2C approach the platform provided — individuals / millennials could now trade and build portfolios that were otherwise not accessible to anyone but the rich. Conceptualised during the recent financial recession of our times, the product was formally launched in 2014, with a “waitlist” of ~1 million users. So what really made Robinhood click? Let’s briefly see how the company stacks up against Luma’s critical success factors for D2C companies:
Digital native; mobile centric: Robinhood has heavily utilised technology for trading, rather than investing in physical offices and people to execute trades. This has ensured that costs are efficient and non linear when scaled.
Focus on product design / UX: The app is so simple and easy to use that it enabled frictionless journeys — reducing time to onboard and further transact / execute a trade from 2–3 weeks end to end (E2E) to ~15 mins E2E.
Disintermediation (agencies / retailers etc): Robinhood has significantly democratised stock trading and portfolio building by enabling direct access to trading via its app, and enabling investors build bespoke stock portfolios with the minutest of transaction value denominations that were earlier only restricted to the HNI club. Additionally the company is looking to evolve into an end to end digital bank.
Identity focused customer relationship and Performance oriented media spend: With all of it’s customer journey being online, Robinhood is able to track the behaviour of each and every customer via digital footprints and transactions (right from intent, to search to actual transaction). This enables the company to build unique service offerings that are based on identity focused customer needs.
Content Marketing for Brand storytelling: Robinhood’s content marketing strategy and brand storytelling has always been primed around “commission-free trading, stop paying up to $10 per trade”. Says Investor Jan Hammer, a partner at Index Ventures who led Robinhood’s 2013 seed round and has participated in every round since “Robinhood did a great job building a trusted relationship with the millennial demographic.” By eliminating commissions, the company gave users license to experiment without being penalised for their mistakes. Additionally, says Bhatt (a co-founder at Robinhood) with regards to millennial mindset “The bigger problem is that people don’t have savings. Robinhood inspires people to save money that they would otherwise have spent — and that, in the co-founders’ view, is more important than the particulars of any investment strategy.”
Growth Focused Marketing Talent: Robinhood’s marketing strategy is being led by Matthew Kellie, who was earlier head of Growth & User Acquisition at Supercell, one of the leading case studies for success in the digital marketing and D2C era.
Given the above characteristics its no surprise that Robinhood has achieved the valuation it recently commanded; while similar companies such as Zerodha have also commanded massive valuations in India. That said, further deep dive into profitability will define how the company will be viewed by investors should it decide to go public. Companies such as Uber and FarFetch which are D2C unicorns as well, have seen their share prices plummet over the last couple of quarters owing to poor performance on profitability. More on that in a coming article.