The cofounder of a $1.3 billion startup Robinhood explains a 'logical fallacy' in investing

• Robinhood, the $1.3 billion San Francisco brokerage firm, is known for introducing zero-commission trades.
  
• Cofounder Baiju Bhatt told Business Insider that his company, which is popular with millennials, will never lose sight of the first-time investor.
• The startup recently said its user base surpassed 2 million.

When Baiju Bhatt and Vladimir Tenev founded their online brokerage, Robinhood, in 2013, they did so with the intention to give ordinary people a platform with which they could tap into the wealth of Wall Street.

Hence the company's name, an homage to the English folk hero who stole from the rich to give to the poor.

The San Francisco-based company launched in March 2015 and quickly became a favorite among younger people looking to invest without paying a commission for buying and selling stocks. Many established brokerage firms, including TD Ameritrade and E-Trade, were charging close to $10 on both sides of the trade when Robinhood came onto the scene.

Since its launch, Robinhood has amassed over 2 million users who have bought and sold billions of dollars' worth of stocks. Meanwhile, Charles Schwab, E-Trade, and TD Ameritrade have all brought down their fees.

Robinhood has catching up to do. TD Ameritrade, for instance, has over 10 million users. And Charles Schwab has 10.5 million active brokerage-account clients. But what Robinhood lacks in numbers it makes up for in style.The app itself is sleek and simple, a big part of why it won an Apple Design Award.

Business Insider recently caught up with Bhatt to discuss Robinhood's growth, the brokerage industry, and one fallacy he sees in the world of investing. This interview has been lightly edited for clarity and length.

Frank Chaparro: How is business going?

Baiju Bhatt: Business is going well. Robinhood Gold is doing really well. We recently released metrics around our overall growth. We have done $75 billion in transactions so far. And we recently hit 2 million users. We also have saved customers $500 million in commissions.

Chaparro: You mentioned Robinhood Gold. How has that been going?

Bhatt: It is doing very well. It's serving a need that we saw in a part of our core user base, which includes people using Robinhood for the first time as well as those who have been with us since the beginning. A really large percentage of those users have become more mature investors. The No. 1 thing they kept asking for was the ability to use a margin feature. So that's Robinhood Gold. We announced it at the end of last year. I think it was right around the beginning of 2016 that we had the 100% rollout. And it has been growing pretty consistently every single month. The revenue has been very strong, and it was one of the key drivers of us being in a position to fundraise this year.

Editor's note: Robinhood Gold is growing 20% month over month since its launch, according to Robinhood's Jack Randall.

Chaparro: Are you looking to continue to provide advanced services similar to the ones offered by your more established competitors to attract sophisticated investors to your platform?

Bhatt: I don't think providing the exact same products that incumbent brokerages offer is necessary for our success right now. There is a way to address the needs of all of our users, both new users and sophisticated ones, without alienating the new generation of people who are just starting to invest.

In time, as our users become more and more sophisticated, we will continue to add features that match them. But we hope to never lose sight of those first timers as well. Fundamentally, that should be the most important thing for financial-services companies. Making the entire industry something that serves the broader market, not just the people who make them a lot of money.

Chaparro: So is your focus on the broader market or just those first-timers?

Bhatt: Right now our user base is much more heavily concentrated with younger Americans. If there is a market we are "serving" it is definitely younger Americans. Our users are primarily between the ages of 18 and 34. I think 90% or more are under the age of 40. And that demographic, right, doesn't have that much overlap with the demographic of the people using traditional brokerages.

Within that demographic, however, are many different kinds of investors. We have people who are actually quite sophisticated. People who have been investing for a number of years and who think about what they are doing with their money in a very analytical ways. And we also have people who are just entering the money class. They're, basically, interested in saving some money and making some money off their savings. Those two groups have a different need. But that gives us a cool challenge to make those interests work within an interface the size of a business card and still make sure it is very useful for people.

Chaparro: How does it feel to have over 2 million users?

Bhatt: It is a very difficult number to conceptualize. This is more of a comment on the human mind's ability to understand 2 million people. I think it is pretty difficult. But that question makes me think of when we were much younger.

An interesting anecdote: When we launched, the wait list for Robinhood, on December 14 of 2013 - if you signed up it would show you the number of people in line in front of you, and you could share a referral link. If you got people to sign up with your link you could move up in line.

We were spending a lot of time thinking, what if we have less than 5,000 people who sign up? Then maybe we shouldn't show them how many people are ahead of them. We ended up blowing past that number in 45 minutes. And the first weekend we were at 10,000 people. It's kind of interesting. And I think it was after a month that we hit 100,000 people. And that was the point at which I was unable to fully appreciate our reach.

Chaparro: A lot of people, including Betterment's Jon Stein, have said that stock picking is a bad idea since it's so difficult to beat the market. Are Robinhood users playing a losing game? Wouldn't they be better off just putting their money in an index fund that tracks the market?

Bhatt: This is one of the fundamental logical fallacies that have been perpetuated in conversations about finance and consumers. There's this idea that the problem facing finance is that there are too many people not on the efficient frontier of investing. In other words, people are missing out because their portfolio doesn't particularly diversify and match the market, and they are exposed to too much risk. That's not the problem. The real problem is that in 2017, 10 years after the Great Recession, a lot of people don't have savings.

A lot more people are working paycheck to paycheck. We think that is a more important problem to solve. And among young people, the employment rate is pretty high, which is a good thing. So we say to them, there are a lot of parts of investing that may be confusing to you. We say, the best thing we can say to those people is 'just do it.' Build up the necessary confidence to hold an investment for a month or for a year, and over time feel comfortable with the amount of money you are saving and get in the habit of putting a bit of money aside.

This is one of the fundamental logical fallacies that have been perpetuated in conversations about finance.

Chaparro: One criticism made against Robinhood is that it allows young investors, who don't have the expertise, to invest in poorly performing stocks such as Snap, Blue Apron, and other tech startups just because they recognize the name. But isn't that the whole point?

Bhatt: I think it is the whole point. Because, again, it comes back to the way we look at our role in the financial-services marketplace as a whole. We view our role as making the markets more accessible and giving people the full control to invest. The question, however, is what can we do to make better decisions? How can we take the actual things - such as the fundamentals of whether a company is a good investment or not - and communicate that to our users in terms that will make sense to them? These are some of the challenges we are focusing on right now on the product side.

This could be something as simple as a list of companies showing the market cap of companies versus their sales growth. Showing some of those things in a way that is easy to understand. This is something we are excited about doing as we roll out more features.

Chaparro: You mentioned the Great Recession. And that makes me think of this question hanging over the investing space regarding apps like Robinhood and other online investment startups. Without someone to guide them through the bad times, do you think investors are more prone to pull their money out if there's a major correction?

Bhatt: That's an interesting question because we have actually seen a correction since Robinhood launched. Granted, it was not on the same scale as what happened in 2008.

But if you remember, in the beginning of 2016 there was a pretty significant sell-off in Q1. And there were multiple days when the markets witnessed single-digit drops in the S&P, and that was kind of interesting. Because we saw for the first time how people behave when the market is going down. And the behavior we saw was actually pretty interesting. Those were the days we saw the biggest net deposits we had ever seen.

With this younger generation, when the market takes a slide, they see it as an opportunity to buy. They view the market as being on sale. It's kind of interesting, because I remember during Brexit, Betterment decided they wouldn't let their customers withdrawal money. I think that stems from this mindset of not thinking people should be in control of their money. It tends to be better to give people control over their money, rather than restricting their access to money during such times, because they're more likely to wait it out.

Editor's note: Business Insider asked Betterment about Bhatt's remarks; it declined to comment.

With this younger generation, when the market takes a slide, they see it as an opportunity to buy.

Chaparro: There's a lot of talk about how artificial intelligence and other emerging technologies will change the way we interact with our money. What technologies are you guys thinking of integrating into your offerings? For instance, will Robinhood users be able to ask their Alexa how their account is doing?

Bhatt: That's actually interesting. I remember we had a hackathon last year, and my cofounder, Vlad, broke an Alexa integration for that. He's been using it, but we haven't released it to the public.

When we think about new technology, there are a few things we consider. I'll have to pick my words carefully.

We ask ourselves one basic question: What are the things that could have a meaningful impact on the financial lives of our consumers -primarily younger Americans? That is the deciding factor. We fundamentally want to make people's lives simpler. So we will look for technology that works toward that end.

Chaparro: What are those things?

Bhatt: I don't think there's a particular technology that will set the trajectory for us moving forward. We don't want to be one of the companies that say AI is the next big thing, let's go build an AI application for Robinhood. That might not work. It might be awkward.