VCs get Jannick Malling’s Public to the tune of US$65.0 million

Social stock trading platform Public has raised new money this week through a Series C round in which it secured $65.0 million of funding.

The commission-free trading app which is based in Ballerup, Copenhagen and New York returned to the market less than 12 months after a successful Series B funding where it raised $15.0 million.

Public has tapped into the positive sentiment among venture capitalists and private equity houses who were largely dormant during the Covid lockdown and who are now keen to fund deals in names and stories they like.

Public is aimed at small social investors who may have felt excluded from stock markets in the past and their website is full of articles with titles such as how to invest with little money, what a stock portfolio is, and when to sell a stock.

Of course, 2020 has been a bumper year for retail brokers, many of whom have enjoyed growth in both client numbers and trading activity following the market volatility seen in February and March.

Public’s Series C fundraising seems to have capitalised on these two trends and the $65 million represents more than 70% of the funding raised by the neo broker to date.

Public claims that its customer base has expanded 10 fold during the year to date and has been growing consistently by some 30% per month. What’s more that the growth has largely been organic rather than marketing lead.

It seems that Public will use the new cash raised to “double down” on its existing business model. This is based on creating communities in which investors discuss stock trading and can execute trades for free. Word of mouth helps to spread the news about Public which in turn creates new users who register with the broker and sign up to the service.

Public can offer commission-free trading thanks to payment for order flow under which a market maker, HFT or hedge fund purchases the firm’s orders and executes them hoping to be able to make a small turn out of the trades. Such payments are legal in America but are very much frowned upon by regulators in the UK and Europe. This was one of the reasons that Public’s competitor Robinhood shuttered its UK operations earlier this year.

PFOF raises questions about conflicts of interest and best execution and the fees that are generated from it individually are very small.

So for a broker to make money from PFOF, it needs to generate high volumes of trades and therefore to grow its active client base.

Comments made by the founders of Public after the fundraising suggest that trading volumes have risen in line with client numbers.

Low margin high volume businesses rely on achieving economies of scale. The emergence of commission-free brokers such as Robinhood caused consternation and consolidation among the first generation of US online brokers. With Charles Schwab buying TD Ameritrade and Morgan Stanley purchasing E*trade in the last 18 months.

Social and commission-free brokerages will no doubt continue to disrupt the online equity trading space. However, the incumbents offer a wider range of services and products than the disruptors and therefore have more diversified income streams.

The disruptors will need to make profits for themselves at some point. Or at least be able to convince IPO investors or trade buyers that this is possible before they burn through their generous venture cap funding.