Robinhood faces its non-tech identity and regulated future

Every startup founder and investor in Silicon Valley is chasing the coveted "tech multiple" — and Robinhood is no exception.

Why it matters: Technology companies are supposed to scale easily: Once you've built the platform, more users just mean more profit. By that standard, Robinhood just found out the hard way that it really isn't a tech company at all.

How it works: When Robinhood sends its customers' trades to high-frequency trading shops, a lot of those trades cancel each other out at the end of the day. If Customer A buys one share of Apple for $135 in the morning and Customer B sells one share of Apple for $134 in the afternoon, then Robinhood only needs to transfer $1 after the trades have netted out.

• During the GameStop frenzy, Robinhood customers were overwhelmingly on one side of the trade, buying rather than selling. As a result Robinhood was likely to have to end up transferring much larger net sums than normal when the trades ended up settling.
• Robinhood therefore faced large collateral requirements from counterparties who wanted to be absolutely sure that they would end up being paid for all the stocks they sold to Robinhood customers. That's ultimately what caused the brokerage to stop allowing its customers to enter into new positions in meme stocks.

Driving the news: Robinhood CEO Vlad Tenev told Elon Musk this week that he was asked to put up $3 billion in collateral — an amount of money the startup didn't have on hand. In the wake of that request, Tenev went out and raised $3.4 billion in new funds, while also taking to his corporate blog to bemoan "the impact the two-day trade settlement period has on investors and ultimately the entire American financial system."

• It's far from clear, however, that Tenev's preferred T+0 settlement period would have been any better for Robinhood. Tenev says he would like to be able to settle trades "in real time" — but that would require pre-funding all trades, in full, which would almost certainly be even more expensive.

The big picture: In Silicon Valley, everybody wants to be efficient. Robinhood, in its quest for efficiency, still doesn't have a customer service line.

• Settling trades in real time certainly seems more efficient than settling trades the day after tomorrow. But clearing and settlement is never 100% perfect, and there needs to be some kind of mechanism that accommodates mistakes being made in a way that also allows them to be fixed.
• That mechanism is collateral requirements, which means that Robinhood will never be able to become the asset-light technology company of Silicon Valley's dreams.

The bottom line: The $3.4 billion that Robinhood just raised didn't just dilute existing investors. It also clarified that in the best-case scenario, Robinhood will still be a heavily regulated brokerage with a massive balance sheet, rather than a nimble tech stock.