An IPO provides 1) a fundraising opportunity 2) a liquidity event 3) an opportunity to fulfill contractual obligations
One of the conditions of their recent debt financing was that they IPO within a certain time frame. If they believe that they don't need additional funding at the moment or can get better terms then they are simply fulfilling criteria #2 and #3 with their unique IPO. I imagine Spotify can get decent debt financing terms b/c they have such a steady and predictable source of revenue (though not necessarily profit).
> One of the conditions of their recent debt financing was that they IPO within a certain time frame
Spotify is not IPO’ing. They are direct listing their stock. Because of a simple drafting error on part of TPG et al Spotify is side-stepping the bulk of the delayed IPO penalties.
This is exactly why they are direct listing. TPG is screaming bloody murder but then again they claim to be the masters of structuring complex deals so they can’t claim that a startup snuck in a loophole under them.
>" I imagine Spotify can get decent debt financing terms b/c they have such a steady and predictable source of revenue (though not necessarily profit)."
Again if this true, why would they raise a billion dollars in convertible debt?
Since Dropbox is making a big push into enterprise, they are hiring a ton of high touch enterprise sales people - who can't scale in the same way an engineer can.
All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).
What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.
The long play is that it actually doesn't cost significant money per trade at an institutional level. The only reason the other major brokers charge you money is because it covers their brick and mortar retail costs (e.g. Scottrade) and it adds to the bottomline (e.g. Etrade). So Robin Hood is actually just giving this surplus to the consumer instead of keeping it for themselves, and building a user base / brand in the process. Eventually once they have enough users, they will start to up sell you for other services (e.g. checking/savings, margin trading, options trading, check writing etc).
So majority of the brokers have brick and mortar operations that can't afford to compete on price. That leaves only the online brokers. Then the next step is to build a brand that attracts customer trust/loyalty, which is what Robinhood seems to be doing and to build a really nice experience which they do with their slick apps. Once customers (generally young ppl who are first time investors) are invested in the Robinhood platform, then Robinhood can up sell them on additional features/services (margin, options, API access etc). So sure Etrade could compete on price (I doubt they would want to since it would immediately hit the bottom line vs a new company not depending on broker fees), but if you look at it from a long term perspective eliminating broker fees is just step 1.
The long play seems to be deliver retail stock trading at the lowest possible price. There's a lot of money to be made even if they don't try to maximize profits.
Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.
There aren't actually any transactions fees to absorb. Wholesale brokers (think Citadel) pay retail brokers (think Robin Hood) for the privilege of executing their orders.
Because, for the most part, retail investors are not well-informed investors and are willing to cross the bid-ask spread. To simplify dramatically, suppose Citadel thinks the fair value of a stock is 25.185, the market is 25.18-25.19, and a Robin Hood customer wants to pay 25.19 to buy 1 share of the stock. If they buy from Citadel, Citadel makes $0.0050 on average. Given those basic economics, it makes sense for Citadel to pay, say $0.0018, to make sure that the Robin Hood customer buys from them instead of from Knight.
Oh damn, then it's just opening short/long term trading to a new segment of people that wouldn't otherwise do it. That's like 100% casino/poker bonuses during the poker boom.
That was actually Apple's summation when it came to issues like "why not support metered connections and data use limiting?" - that they didn't feel that is a compromise they should have to make.
Since you buy the house upfront for cash and hold 10% on the corporate balance sheet, isn't that a significant price & liquidity risk taken (in addition to the usual startup risks)? Because the time at which that house is eventually sold and at what price is somewhat unknowable, how do you mitigate that risk? Overall, I think what you guys are doing is very cool - wish you the best of luck.
Even when this is true, it doesn't necessarily solve the problem. Say you're 28 years old and you're running your first fund. You have a net worth of $500k (because you worked 100-hour weeks as a banker for a few years, paid your student loans, and saved up). You put $400k into your fund and raise $50M. You charge a 25% performance fee.
If you get 10% returns, that's $1.25M for you (at a possibly low tax rate, too) plus $40k on your own investment. If you lose 20%, you're out $80k. What's your incentive here?
One of the conditions of their recent debt financing was that they IPO within a certain time frame. If they believe that they don't need additional funding at the moment or can get better terms then they are simply fulfilling criteria #2 and #3 with their unique IPO. I imagine Spotify can get decent debt financing terms b/c they have such a steady and predictable source of revenue (though not necessarily profit).