Robinhood needs a new business model

Robinhood needs a new business model

Originally published Feb 1, 2021

“People will forget what you said, and even what you did… but they’ll never forget how you made them feel.”

If you don’t know what’s been happening with WallStreetBets, $GME stock, the NSCC, and Robinhood + other e-trading platforms, listen to Chamath Palihapitiya explain starting at 2:14:

Now Robinhood has raised a shit ton of money:

They’re also going to need to change their business model and rebuild the trust they are losing from their user base.

Because their real problem isn’t the mistakes, it’s the business model.

Robinhood makes money by telling Wall Street what you’re about to buy, milliseconds before you do it.

In the video, Chamath explains that Robinhood’s real customers are the prime brokerage institutions—the “apex predators” of Wall Street, as Sacks eloquently describes them. Specifically, RH sells your data to them. What kind of data, you ask? It’s called payment for order flow. (Chamath explains in above video, 13:45)

This gives the Apex Predators the chance to buy before everyone else, if the little guys, the retail investors—us!—notice a big opportunity and start buying a stock or option. It allows them to make money of their own, which keeps them fat & happy… and is perhaps the reason they haven’t tried to squash Robinhood out of existence (yet).

If this existed just a couple years ago, it wasn’t public yet. But now it’s out, and we’re once again feeling what it’s like to be the product, as we’ve learned we are for Facebook & other “free” B2C platforms with a B2B business model.*

*See The Social Dilemma on Netflix if you’re not familiar with this.

Now Robinhood has its own dilemma:

Caught red-handed, do they… 

A. Align with their massive user base?

(The recent fundraise seems to indicate this.)

B. Pivot to enterprise SaaS and serve the Apex Predators?

(This isn’t why the founders got into the business, as Jason explains in the video.)

If Robinhood wants to remain the market leader in retail investing, it needs a new business model.

While it’s possible for companies like Facebook and Robinhood to maintain a strong market share, I predict that the long-term winners of consumer loyalty will be not the incumbents. They’ll be the companies that align their incentives with consumers’—in this case, retail investors.

As a budding investor, and as a user who’s felt frustrated by their slow—and sometimes radio silent—customer support, I really do hope they’re in it for the little guys.

The question is: what will the winning business model be?

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