Investing in Pre-IPO Startups
Private market investing has often been a driver of outsized returns, and one strategy in particular has seen a lot of success - investing in startups before they go public. Examples abound of early investors in companies like Uber (where a $5,000 seed stake turned into $25 million) or AirBnB (where a $1,000 stake turned into $5 million) generating outsized returns. However, this asset class has long been the domain of private equity and venture capital firms. High minimum investments and the need to be an accredited investor has made it difficult for retail investors to participate in the asset class.
Beyond accessibility issues, isn’t pre-IPO investing also risky? Everyone knows that startups fail, the success stories are outliers, and it takes a tremendous amount of research and expertise to pick winners. That’s where diversification comes in, not only within your own portfolio, but also within your portfolio of startups. It is unrealistic to only invest in one or two companies and expect to build a successful portfolio, because most startups fail, and the top investments are what drive the bulk of positive returns. A recent study by AngelList found that almost all of the gains come from the top 1% of investments.
So, rather than investing in a couple of startups, investing in a venture capital or private equity index could be an option that could offer strong returns with reduced risk. For example, the Cambridge Associates Venture Capital and Private Equity indices, based on data from over 2,300 firms and 9,800 funds, have both significantly outperformed the equities market in the past 25 years.
However, it isn’t easy to simply invest into a venture capital or private equity index, as most of these types of opportunities require the investor to be accredited. If you were to try to mimic an index by investing independently, you would need access to deals, a high level of capital, the ability to tie up that capital for 5-10 years, and a lot of time to do due diligence.
This is precisely why a number of platforms are starting to offer options for everyday investors to get exposure to entire venture portfolios. Here is a look at how some of the most notable compare:
For illustrative purposes only
Republic Note was created by Republic, an established investment platform and investment infrastructure provider. It is designed to give everyone access to the upside of a vetted, diversified portfolio of startups, with a low minimum and 24/7 liquidity. It is not a direct investment into a fund or startups, but a unique opportunity to participate in the potential financial upside of Republic's curated private equity portfolio. Let's dig deeper.
What is Republic Note?
Republic was founded in 2016, and since its inception, it has helped companies raise $2.5 billion in funding, created a community of over 3 million members, and expanded worldwide, with its acquisition of Europe’s largest investment platform Seedrs. In addition to its long and successful history of raising funds for early-stage startups, Republic has built an entire ecosystem of businesses with one central goal - opening up venture investing to everyone.
It was this ethos of inclusivity that led Republic to create Republic Note, an evergreen, profit-sharing asset that was engineered to empower the Republic community to share in the financial upside of its expansive venture portfolio. This portfolio includes equity stakes of over 600 private companies like SpaceX, Carta, and Alto, with successful exits already from Dapper Labs and Robinhood’s IPO. More companies are being added regularly, with more than 150 investments in 2023. Every deal goes through Republic’s diligence process, which examines a company’s founders, team, business model, product, financials and many other factors. As a result, Republic is one of the most highly-selective platforms on the market.
Essentially, Republic Note is a revenue-sharing instrument that receives a portion of the cash proceeds from securities or carried interests generated by Republic’s portfolio in relation to Republic Retail and Republic Capital. Note is issued by Republic Core LLC, a subsidiary of Republic and its technology hub, powering the operations of other business entities within the Republic ecosystem.
Vincent co-founder Slava Rubin recently had Republic CEO Kendrick Nguyen on our podcast, Smart Humans. Here, he talks about the Republic Note:
How Does Republic Note Work?
Republic Note gives investors the ability to participate in the upside of companies from Republic Retail (Republic’s crowdfunding platform) and Republic Capital (Republic’s registered investment advisor). When a startup raises money through Republic Retail, Republic receives securities in that company, and the eventual investment proceeds, if any, are sent to Republic Core and set aside into the Note dividend pool.
Republic Capital, Republic’s investment arm with over $650 million of assets under management, makes its own investments into startups, and has co-invested with notable venture funds such as a16z, Y Combinator and Lightspeed Ventures. For those investments, 25% of any future proceeds goes into the Note pool. When the dividend pool reaches $2 million, a distribution is sent to all holders of Republic Note.
It is important to point out the risks and other important details. Republic Note is not a fund or an investment company, and it is not directly backed by assets, as it’s a profit-sharing security. The payments to Republic Note holders may occur in the future based on the performance of the portfolio assets, but such payments are not guaranteed. Read the entire disclaimer here.
Who Can Buy Republic Note?
In a word, everyone. There is no need for accreditation, no need to be a U.S. resident, no need to have tens of thousands of dollars to invest. Republic Note is available globally (with only local regulatory limitations) with a low, $50 minimum investment.
How Can You Buy Republic Note?
Republic Note is a digital asset, a security token traded on the INX trading platform. It can be bought or sold 24/7, all around the world. This structure also allows dividends to be distributed seamlessly and ensures the supply will never grow above 800M tokens, so shares can never be diluted after all tokens are circulating. It is self-custodied, movable between wallets and as a token, it has utility features with more promised in the future. It is important to consider that while the Note concept and program were built over the past several years, the token only went live and became tradable in December 2023, meaning that the market is still in the very early phase with relatively low volume. There will be volatility as price discovery occurs, but in an ecosystem poised for growth, this is a long term investment.
What are the Benefits of Republic Note?
It cannot be overstated how difficult it would be for most investors to get access to a diversified portfolio of startups on their own. Not only does Republic Note offer that opportunity to anyone, the associated portfolio has already been established and is already generating revenues, as opposed to a new VC fund that could take a decade to see any results.
It is also “evergreen,” with new investments being added all the time, so an investor can buy the Note once and gain exposure to a potentially perpetually growing portfolio. And, with the ability to buy and sell at any time, it offers the type of liquidity that you would never see in a traditional venture fund.
Essentially, Republic Note allows individual investors to get exposure to Republic’s diversified venture portfolio, and as such, it allows them to share in the financial upside of Republic as a company, and aligns their interests with Republic’s.
Beyond that, Republic Note will give investors access to all aspects of the global Republic ecosystem. Holders may get invited to exclusive, holder-only virtual and IRL events featuring industry insiders, and receive priority access to future offerings, as well as other loyalty perks. Republic also sends out regular investor updates, to ensure that you are always up-to-date with the latest news on portfolio companies, new investments and where the dividend pool stands.
As always, we recommend you do your own research before investing, by visiting the Republic Note site, and reading the full whitepaper. As private markets recover from a multi-year slump, innovative products like Republic Note can provide individual investors with exposure to potential upside from assets they could never invest in before.
