How the GameStop stonkathon helped Robinhood raise $3.4B last week


Image Credits: Nigel Sussman (opens in a new window)

Robinhood has shown an impressive ability to raise enormous amounts of capital in the past few weeks to ensure it has the funds needed to allow users to trade and, presumably, provide it with enough cash until it goes public. Raising $3.4 billion so quickly is an extraordinary feat.

But how the company managed to get investors to wire money with such alacrity has been a curiosity; what about Robinhood was so compelling that giving it a multibillion dollar injection was such an obvious decision?

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We got a whiff of it when we parsed Robinhood’s Q4 2020 payment for order flow (PFOF) data, which showed the discount trading service growing nicely from its Q3 results. Robinhood’s PFOF revenue growth had slowed in sequential terms in the third quarter of 2020, but the final quarter iced near-term concerns that the unicorn’s growth days were behind it.

But then the company gave us a little more, a few charts that I think better explain why Robinhood was able to raise so much money so quickly.

Equities and options volumes go up

The reason why Robinhood was able to raise lots more cash very quickly was because the company’s PFOF revenue driver likely went into overdrive during the mess that was the GameStop period, This is somewhat obvious, as many people were trading.

But thanks to a new chart from the company posted on its own blog, we now know that Robinhood’s PFOF incomes were likely spiking to all-time highs.

Here’s the chart the company published, which I have loosely marked with quarterly intervals. Per Robinhood, the green line is “Robinhood equities and options trading volumes over a longer time horizon, through last week:”

Image Credits: Robinhood

As you can see during 2019, Robinhood’s growth was perhaps linear, if modest. It appears that 2020 really was the period in which Robinhood began to grow at a far quicker clip; this explains how the company managed to raise so much money last year.

And then there’s the start — roughly, mind, I was my own graphics editor this morning and it shows — of 2021 where we can see what happened to Robinhood trading volumes. They went vertical.

So, precisely when it was collecting legion one-star reviews, as the company scrambled to get the capital it needed to open and then loosen trading restrictions on the most volatile stocks, Robinhood was kicking ass. Like, lots of ass.

More trades means more PFOF revenue. And Robinhood effectively doubled in size. Which after a Q4 in which its revenues shot to more than $200 million, means a big run rate.

This is why, returning to our main question, I think Robinhood was able to raise more money than all startups in Spain, Italy, Ireland, Poland, Austria, Hungary and Russia combined last year. In a single week! Because it showed an entirely new plane of growth.

Simply, Robinhood raised more than ever in 2020 when it was rocketing toward new records. But 2021 brought another type of growth, so when it hit the skids, investors paid up. In convertible notes. At a discount, we presume to its IPO price. So its investors have some built-in protections in the round. That doesn’t diminish the scale and speed of the funds, however.

Anyhoo, let’s close the book on Robinhood for a bit if we can. I am now content that we know enough to understand where the company stands. Now the question becomes whether it can continue to grow, or if the unicorn merely raised on the back of a short-term boom in demand. We shall see!

The somewhat boring reason it appears that Robinhood yanked trading on some securities

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