Studies linked to Cassava Sciences, once a stock market favorite, have been retracted or challenged by medical journals.
In the 19th century, small investors played a big role in finance. Wall Street took it away. Redditors are trying to get it back.
A government investigation and proposed rules aim to rein in investors who talk down stocks. But some argue abuse by activist short sellers isn’t as common as believed.
One year in the trenches of the meme stock revolution.
A jury will soon decide whether former Theranos CEO Elizabeth Holmes is guilty of a federal crime. But the deeper public policy questions that Theranos raised remain unanswered. How did a startup built on a technology that never worked grow to a valuation of $9 billion? How was the company able to conceal its fraud for so long? And what, if anything, can be done to prevent the next Theranos before it grows large enough to cause real harm—and burns capital that could have been invested in genuine innovations? I explore these questions in a forthcoming paper in the Indiana Law Journal titled Taming Unicorns.
While Theranos was publicly exposed in October 2015 by Wall Street Journal investigative reporter John Carreyrou, insiders knew that it was committing fraud many years earlier. For example, in 2006, Holmes gave a demo of an early prototype blood test to Novartis executives and faked the results when the device malfunctioned. When Theranos’ CFO confronted Holmes about the incident, she fired him. In 2008—roughly seven years before Carreyrou’s exposé—Theranos board members learned that Holmes had misled them about the company’s finances and the state of its technology.
Over time, a remarkable number of people, both inside and outside the company, began to suspect that Theranos was a fraud. An employee at Walgreens tasked with vetting Theranos for a potential partnership wrote in a report that the company was overselling its technology. Physicians in Arizona grew skeptical of the results their patients were receiving, and a pathologist in Missouri wrote a blog post questioning Theranos’ claims about how accurate its devices were. Stanford Professor John Ioannidis published an article in JAMA raising more doubts.
Meanwhile, rumors had spread in the VC community. Bill Maris of Google Ventures (since rebranded as GV) claimed that his fund passed on investing in Theranos in 2013. According to Maris, the firm had sent an employee to take a Theranos blood test at Walgreens. The employee was asked to give more than the single drop of blood that Theranos claimed its devices needed. After he refused a conventional venous blood draw, he was told to come back to give more blood.
So why did none of these doubts slow Theranos’ fundraising? Part of the answer is that it was a private company, and it’s nearly impossible to bet against private companies.
Until the last decade, most startups that grew to become valuable businesses chose to become public companies. Late-stage startups with reported valuations over $1 billion used to be so rare that VC Aileen Lee dubbed them “unicorns” in a 2013 article in TechCrunch. Back then, there were only 39 startups claiming billion-dollar valuations. By 2021, despite the surge in companies going public through SPACs, the number of unicorns had passed 800.
The rise of unicorns has been accompanied by corporate misconduct scandals. Of course, public companies commit misconduct too. Research hasn’t yet established whether unicorns are systematically more prone to commit misconduct than comparable public companies. However, we do know that the opportunity to profit from information about a company by trading its securities creates incentives to uncover misconduct. Since the securities of private companies aren’t widely traded, it’s easier for private company executives to conceal misconduct.
Consider the electric truck company Nikola, formerly a unicorn. In 2020, Nikola went public through a SPAC. Once it was public, short seller Nathan Anderson decided to investigate and ultimately issued a report alleging a pattern of corporate misconduct. He showed that a video Nikola had produced with its prototype truck traveling at high speed was staged—Nikola had towed the truck to the top of a hill and filmed it rolling downhill in neutral. After Anderson released his report, the SEC and federal prosecutors launched investigations into whether the Nikola misled investors. Its stock price lost more than half of its value. In 2021, Nikola’s CEO Trevor Milton was charged by the SEC and indicted by a federal grand jury. Nikola wouldn’t have been exposed so soon if it had stayed private.
Securities regulation restricts both the sale and resale of private company stock in the name of investor protection. Startups usually attach a contractual right of first refusal to their shares, which effectively requires employees to get the company’s permission to sell. Many late-stage startups practice “selective liquidity”: allowing key employees to cash out in private placements, while preventing a robust market from emerging. Consequently, those who have information about private company misconduct have little incentive to publicize it—even though the Supreme Court has held that an investor who trades on information shared for the purpose of exposing fraud can’t be convicted of insider trading.
VCs might seem well-positioned to police unicorn misconduct. But their asymmetric risk preferences undermine their incentive to expose wrongdoing. VCs invest their funds in a portfolio of startups and expect that most bets will generate modest or negative returns, and only a small number will grow exponentially. The outsize growth of the few successful startups will offset the losses of the balance of the portfolio. For VCs, the difference between a startup that implodes in scandal and the many startups that fail to develop a product or find a market is insignificant.
Venture investing is an auction with a winner’s curse problem. Startups pitch to many VC firms in each fundraising round, but they only need to accept funding from one bidder. In public capital markets, if most investors decide that a company is fraudulent or excessively risky, its stock price will decline. In VC markets however, if most investors decide that a startup is fraudulent, the startup can still raise funds from a credulous contrarian. VCs who pass won’t share their negative assessment with the public because they want to maintain a founder-friendly reputation. Maris only told the press that GV had passed on Theranos after Carreyrou’s article.
Congress and the SEC could strengthen deterrence of unicorn misconduct by creating a market for trading private company securities, in three steps.
First, the regulations constraining the secondary trading of private company securities should be liberalized. The SEC should eliminate Rule 144’s holding period for resales as to accredited investors—the individual and institutional investors that the SEC deems sophisticated and most able to bear risk. Congress should eliminate section 12(g)’s requirement that effectively forces companies to go public if they acquire 2,000 record shareholders who are accredited investors—a rule that leads private companies to limit trading.
Second, the SEC should attach a regulatory most favored nation (MFN) clause to all securities sold through the safe harbors commonly used for private placements. An MFN clause would require that, if a company allows any of its securities to be resold, it must allow all its securities to be resold, as long as the resale is otherwise legal. A regulatory MFN clause would ban the practice of selective liquidity and nudge companies to allow their shares to be traded.
Third, the SEC should require that all private companies that let their securities be widely traded make limited public disclosures about their operations and finances. A limited disclosure mandate would protect investors by ensuring they had basic information about the companies in which they could invest, without saddling unicorns with the costly disclosure obligations placed on public companies.
The net effect of these reforms would be to create a robust market for trading unicorn stock among accredited investors. Most large, private companies would likely decide to allow their shares to be traded. Short sellers, analysts, and financial journalists would be attracted to the markets. Their investigations would strengthen deterrence of unicorn misconduct. The limited disclosure mandate, combined with the requirement that investors be accredited, would protect investors.
When large, private companies commit misconduct, the natural response is to increase the penalty for the underlying misconduct, not to interfere with the tradability of the company’s securities. But the problem isn’t lax penalties. Holmes is facing 20 years in prison—a punishment more brutal than anyone deserves. The problem is that penalties only work when wrongdoers expect to be caught. Trading creates incentives to expose misconduct faster.
With “The Antisocial Network,” Ben Mezrich does for January’s infamous short squeeze what he did for Facebook with “The Accidental Billionaires.”
Melvin, a hedge fund that had bet that GameStop’s share price would fall, received a $2 billion infusion from Citadel after the stock skyrocketed.
The activist short-seller behind Hindenburg Research has become known for research that sends companies’ stock sinking. He says he’s not in it just to move share prices.
This afternoon Robinhood filed to go public. TechCrunch’s first look at its results can be found here. Now that we’ve done a first dig, we can take the time to dive into the company’s filing more deeply.
Robinhood’s IPO has long been anticipated not only because there are billions of dollars in capital riding on its impending liquidity, but also because the company became something of a poster child for the savings and investing boom that 2020 saw and the COVID-19 pandemic helped engender.
The consumer trading service’s products became so popular and enmeshed in popular culture thanks to both the “stonks” movement and the larger GameStop brouhaha, that the company’s public offering carries much more weight than that of a more regular venture-backed entity. Robinhood has fans, haters, and many an observer in Congress.
Regardless of all that, today we are digging into the company’s business and financial results. So, if you want to better understand how Robinhood makes money, and how profitable or not it really is, this is for you.
We will start with a more in-depth look at growth and profitability, pivot to learning about the company’s revenue makeup, discuss a risk factor or two, and close on its decision to offer some of its own shares to its users. Let’s go!
Inside Robinhood’s growth engine
Before we get into the how of Robinhood’s growth, let’s discuss how big the company has become.
The fintech unicorn’s revenue grew from $277.5 million in 2019 to $958.8 million in 2020, which works out to growth of around 245%. Robinhood expanded even more quickly in the first quarter of 2021, scaling from year-ago revenue of $127.6 million to $522.2 million, a gain of around 309%.
Those are numbers that we frankly do not see often amongst companies going public; 300% growth is a pre-Series A metric, usually.
This afternoon Robinhood, the popular investing app for consumers filed to go public. The company intends to list on the NASDAQ under the symbol “HOOD.”
That Robinhood released an S-1 filing today is not a surprise. The company privately filed to go public back in March, leaving the startup-watching world waiting for the eventual filing drop. Robinhood’s public offering document includes a placeholder $100 million raise figure, though that will change the closer we get to its debut.
The company is pursuing a public listing after a period of rapid growth. Robinhood saw its revenues soar from $277.5 million in 2019 to $985.8 million in 2020.
The company’s first-quarter numbers are even more impressive. During the first three months of 2021, Robinhood generated revenues of $522.2 million, up around four times from its Q1 2020 result of $127.6 million. TechCrunch expected Robinhood to post a strong first quarter based on previous filings relating to its payment-for-order-flow (PFOF) business.
Notably, Robinhood was profitable in 2020, generating net income of around $7.4 million during the one-year period. However, the company’s most recent period includes an epic $1.49 billion cost relating to “change[s] in fair value of convertible notes and warrant liability,” leading the company to post an astronomical net loss of $1.44 billion in the first quarter of the year. That compares with a net loss of $107 million for 2019.
For the three-month period ended March 31, Robinhood posted $463.8 million in operating expenses, inclusive of “brokerage and transaction” costs. The company’s business then, apart from its fair-value changes, had a good start to the year in profitability terms.
That Robinhood closed the first quarter of 2021 on a more than $2 billion annual run rate is notable; the firm has quickly scaled to mammoth size on the back of rising consumer interest in investing in both stocks and cryptocurrencies.
Robinhood has proved to be a lightning rod for oversight, fines, mass usage and culture in the last year. And it raised billions this year after running into operational issues regarding trading of certain stocks that retail investors found particularly appealing.
Turning to investor results, DST Global, Index Ventures, New Enterprise Associates and Ribbit capital are listed as shareholders with more than 5% of the company apiece, though certain information in the S-1 filing is yet to be included, including share counts for most of those groups. DST’s 58,102,765 Class A shares, however, are listed.
Robinhood has three classes of shares, including Class A shares with one vote, Class B shares with 10, and Class C shares with none.
TechCrunch is parsing the S-1 and will have more in a following piece.
The congressional hearing about the “meme stock” frenzy shows it was definitely bizarre, but maybe not as meaningful as we desire.
Citadel and its sister business, Citadel Securities, were all over the GameStop debacle. Its founder will face sharp questions on Thursday.
The trader who pumped up the stock on the internet will appear next week with the leaders of the Robinhood app and hedge funds that lost big during the frenzy.
Reddit has raised a new funding round, totalling $250 million. This is the company’s Series E round of financing, and it comes hot on the heels of renewed public attention on the site that has dubbed itself ‘the front page of the Internet,’ owing to the role the subreddit r/WallStreetBets played in the recent meteoric rise (and subsequent steep fall) of the value of GameStop stock. Reddit also ran a 5-second Super Bowl ad on Sunday, consisting of. a single static image that looked like a standard post on the network itself.
This is Reddit’s 16th year of operation, and the company has raised around $800 million to date, including a Tencent-led $300 million Series D in February, 2019. Today’s round including financing from “existing and new investors,” Reddit noted in a blog post in which it announced the funding. In the post, Reddit notes that the company felt “now was the right opportunity to make strategic investments in Reddit including video, advertising, consumer products and expanding into international markets.”
It’s unclear how the round came together exactly, but given the network’s time in the spotlight over the past few weeks, culminating in yesterday’s very brief, but also very memorable and high-profile ad, it seems likely it was at least finalized fast in order to help the company make the most of its time in the spotlight. In terms of what kind of specific moves Reddit could make with its new cash on hand, the blog post also namecheck its acquisition late last year of short video sharing platform Dubsmash, and announced plans to double its team over the course of this year with new hires.
Reddit’s long history has also included some significant tumult, and efforts to clean up its act in order to present a better face to advertisers, and to potential new community members. The network still struggles with balancing its commitments to fostering a home for a range of communities with the potential for hate speech and discrimination to take root within some of these, and it was also in the news earlier this year for finally banning controversial subreddit r/donaldtrump following “repeat´d policy violations” surrounding the attempted insurrection a the U.S. Capitol by a mob of domestic terrorists.
Short sellers — self-described financial detectives who make money when companies fail — were already worried about their success and safety. Then GameStop happened.
Please, stop falling for fake populism.
The frenzy for the troubled retailer’s stock has been a headscratcher for the analysts who try to determine a company’s value.
Melvin Capital, the hedge fund that was wrongfooted by retail traders who drove up shares in GameStop and other companies it had bet against, lost 53 percent in January, according to people familiar with the firm’s results.
The New York-based hedge fund sustained a $4.5 billion fall in its assets from the end of last year to $8 billion, even after a $2.75 billion cash injection from Steve Cohen’s Point72 Asset Management and Ken Griffin’s Citadel.
Melvin became the target of retail traders who coordinated to drive up the share price of GameStop on online message boards such as Reddit, after the firm disclosed its bet against the company in regulatory filings.
The billionaire Mr. Musk has inserted himself into the confounding stock market drama and solidified his role as the ultimate insider outsider.
A Massachusetts man who goes by “Roaring Kitty” on social media helped fuel the frenzy around GameStop. His $53,000 investment in the company briefly reached $48 million in value.
GameStop shares have soared 1,700 percent as millions of small investors, egged on by social media, employ a classic Wall Street tactic to put the squeeze — on Wall Street.
Last week, an epic short squeeze had driven GameStop stock up to $40 a share, a roughly 1,500 percent increase from its low point nine months ago. Little did anyone know at the time that this would only be the beginning of the story.
As I write this, GameStop’s stock price is hovering around $350, up another 775 percent or so since I wrote about this situation eight days ago. By the time you read this, that number may be horribly outdated, as the stock continues to bounce up and down with extreme volatility hour by hour (it dipped down as low as $61 and peaked as high as $159 on Friday).
The current stock price now gives the company a market cap of about $26 billion.
Trevor Milton, founder and executive chairman of Nikola, resigned after an investment fund accused him of making false assertions about the company’s technology.