Robinhood - Democracy For Thee, Not For We:


The very popular trading app, Robinhood ($HOOD), finally had its long awaited IPO (initial public offering) last month.

The fintech company is rightly praised for disrupting an elitist and technologically out-of-date industry. What seems to get less publicity is that the firm doesn't necessarily practice what it preaches.

What do we mean?

An IPO is a company's stock market debut and Robinhood's big event was highly publicized for a few reasons. For one, the company really captured a lot of peoples' interest during the pandemic and also the particular zeitgeist of the moment. Rightly or wrongly, it became one of the key activities for a lot of bored and cash-rich people sitting at home with a smartphone.

Another less positive and yet related source of publicity were the many app outages - and notorious lack of customer support - both the results of soaring (and unexpected) popularity. Robinhood may have profited from the pandemic surge but it was not necessarily ready for the pandemic surge.

Third and most recently there was the company's deeply disappointing company's market debut. Robinhood's IPO was actually the worst ever for a company of its size.

Amid all of this coverage there was a steady background emphasis on the disruptive and democratic qualities of the company's approach. It is tiresomely repeated that the fintech's slogan is to: "Democratise finance for all."

In this vein, one of the key - and different - highlights of their IPO was the fact that they reserved a large portion (25-35%) of the shares for their loyal clients: retail investors. It smartly did so by releasing a new feature on their own app, thereby neatly sidestepping the fees of big Wall street banks, further polishing their disruptive reputation and also, of course, raising a lot of much needed capital from a new source - regular investors.

So far, so good. It's an impressive story and while there are plenty in finance saying it was obvious something like this would come along, its impact has been profound and well, it's not so clear that just anyone could have done it. It required impressive vision, guts and perhaps above all, the willingness to continuously take bold and even risky product decisions.

Remember this penchant for risk because it comes up again below.

Now, what is less discussed during this rags to riches tale of American entrepreneurialism is that Robinhood's founders are actually not so keen on following their own marketing when it comes to practicing democracy.

In fact, they are often guilty of acting in an explicitly undemocratic manner. This is most glaring when it comes to the voting weight of the individual shares they issued during their IPO. To paraphrase Orwell, not all of Robinhood's shares are created equal.

The company uses something called a dual class share structure. This structure intentionally gives disproportionate power to one group of shareholders over another.

What this means in principle is that different shares have different weights and this in practical terms it means for every share sold at the IPO, the founders' shares are worth 10 times the weight when it comes to voting power. This ensures that, between the two of them, the founders can maintain control of the company despite it being "public." Investors, large or small, are buying shares that are "impaired" and have little hope of influencing the company via their ownership.

Traditionally, of course, you are voting in favor of a company and its management if you buy in and you hope that the threat of you voting against that vision (and implicitly, the management) will keep everyone marching along.

This is the exact inverse of how public markets should work. It also isn't very democratic. At least in theory, the whole point of owning a publicly traded security is you like how the company is being run and want to have a say if things start to change. This structure is more like having your cake (shareholder money) and eating it too (not having to surrender any control).

Now, Robinhood isn't alone. In fact this approach is nearly de rigeur among a certain class of modern tech companies controlled by a certain type of founder (Facebook, Google, Pinterest, Lyft, the list goes on). However, even by 21st century standards, it is pretty brazen to be shouting "democratize finance" from the rooftops while neatly removing the ability for your shareholders to hold you to account whatsoever at the same time. It is one of those: "wow, you really are just doing that, huh" moments.

But, so what? Plenty of hypocrisy out there and this might not even make Summer 2021's top 10.

Well, there is also the fact that it is very unclear that companies that maintain these types of structures do well as companies or as publicly traded securities. There are some exceptions here - see Google - but the general takeaway is that entrenched and unaccountable leadership is a bad recipe for proper stewardship over a company and implicitly, your valuable funds. Quite a few studies have shown that these companies, as a group, often underperform the broader market over the medium to long term.

Furthermore, it underlines a second truth: This trend is growing in popularity and not just for hip technology companies. So, as always, buyer beware and you might be surprised at the companies that are, without much fanfare, taking shareholders capital and not providing much in return.

Professional investors and big money institutions are no longer so open to this practice. Several big fund managers did not buy any Robinhood stock at their IPO precisely because of concerns around risky behavior and shareholder structure.

Do you want to own a volatile company that promises to democratize finance on its masthead but refuses to do the same in its own corporate structure? That is up to you but it might bear thinking about before buying and at least now you can send a clear message to Robinhood and those like it.

Would you be interested in a curated list of companies that adopt this practice? Let us know. We are working on some prototype functionality to screen for qualities like this -> contact@pebble.finance.

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