Republic shares its profits....for life 😮

Welcome to this week’s edition of CROWDSCALE, where we discuss startup investing with rich people behind closed doors with everyone. In today’s newsletter, we’re doing a deep-dive on Republic’s revenue-sharing token: Republic Note

• Bucking the Trend: Competitors have offered equity, Republic offers rev-share

• Blockchain Builders: Why Republic is building its offering on the blockchain

• Worth it or Worthless? What can investors expect to make back?

Crowdfunding is booming. While VC funding in Q1 dropped 54% compared to last year, equity crowdfunding shook off macro forces to rise 14.3% in the same period.

Building the infrastructure to meet this voracious demand requires money, and crowdfunding portals like StartEngine and Wefunder have sold chunks of equity to its community of retail investors to fund growth.

Last week, Republic announced that it too would be raising money to fund growth on its portal. However, it plans to retain its equity and is instead offering shareholders a digital token called Republic Note. Owners of the Republic Note are privy to community perks (happy hours, early access on deals, etc), as well as monetary rewards whenever a Republic-funded company has a successful exit.

Republic’s competitors have seen great success in fundraising by offering equity, so I talked to Republic’s founder + CEO, Kendrick Nguyen, to understand why they decided to go a different direction from their peers. Nguyen pointed to two main factors that drove their decision:

1. Faster Liquidity - It’s not uncommon for startups to take 7-10 years to exit via an IPO or acquisition. Republic is no different. With Republic Note, investors will theoretically get paid out more frequently and begin to see a return much sooner than they would in a pure equity deal

2. Calculated Growth - Giving away equity would incentivize Republic to go public as soon as possible, so that hundreds of investors could see a return. Nguyen wants to build a sustainable business that can grow & exit at its own pace. (I should note that Republic has raised millions from VC firms, so they do have some parties that are more interested in a quick exit)

The Republic Note isn’t as straightforward as a pure equity deal, so let’s break down how it works. Republic has two main entities; Republic Crowdfunding (where us commoners can invest in startups) and Republic Capital (their venture arm that invests in startups on behalf of wealthy individuals & institutions). Both of these entities will contribute to the overall dividend pool for Note investors.

Republic Crowdfunding: Republic takes 2% of all money raised for startups on its platform. It takes this amount in the form of equity. So for example, StartupX raises $100,000 on Republic at a $10M valuation. Republic would take 2% of the amount raised ($2,000), and receive that in StartupX equity. If StartupX IPOs or gets acquired, any proceeds from their $2,000 stake would be put into the dividend pool.

Republic Capital: For any profitable exits seen through Republic Capital, 90% goes back to the wealthy individuals that are funding Republic Capital. Of the remaining 10%, Republic will allocate 25% of these funds to the Republic note dividend pool.

If the dividend pool hits $2M in funds, it triggers a payout to investors. The amount of money in the pool will be evenly distributed across its 800M Republic Notes. The Notes are set to last in perpetuity, and Republic is working on building out a secondary market to eventually buy/sell Notes.

I wanted to ask Nguyen why Republic chose to build their offering on top of a crypto application. He was quick to point out that they were more focused on blockchain technology, and that each Note is backed with actual value (through the revenue-share).

Nguyen elaborated, claiming that this offering isn’t even possible without blockchain. To replicate a revenue-sharing entity with hundreds of people through ACH isn’t economically feasible.

There will only ever be 800 million Notes in circulation, and the dividend is paid out any time the pool collects $2M in profits. That means that some payouts will be as small as $0.0025 per note. Someone who owns 300 notes would receive $0.75 in this hypothetical distribution, but it would cost ~$0.25 via ACH to send it to them. In this example, the juice isn’t worth the squeeze.

Republic Note operates on the Algorand blockchain, where money transfers cost as little as a few cents. And since this technology is fairly new, costs are expected to decline as the system matures.

Utilizing blockchain comes with some disadvantages as well, mainly in convenience. According to the FAQ section, Republic Note holders will need to ‘create a Republic Wallet in order to receive the Republic Notes. Failures to create a Republic Wallet on a timely basis may result in ineligibility for a dividend distribution event.’

With that said, there’s going to be some extra steps involved to get any proceeds from this investment into your bank account. Algorand’s blockchain only supports the Algorand coin, so investors will need to convert any proceeds from Algorand to USD before transferring to their bank. This will also incur some transaction/exchange fees, so investors should be aware of how this may impact their potential ROI.

As with everything Crowdscale, the question we’re driven by one underlying question: will this make me money? This is a bit of a complicated one, but we’ll try our best:

The breakeven point for Republic Note (at its $0.36 price) is $130M. That’s the number that needs to go into the dividend pool for investors to get back what they paid per note. Let’s see how they would get there.

• Republic Crowdfunding has seen roughly $299M dollars invested on its platform (via Kingscrowd).

• 2% of this (the amount put towards Note) would be roughly $6M.

• Based on their current rate, Republic is probably adding around $2-4M to this pool each year.

• In 5 years, the amount of equity in Republic Note will likely be around $19M. This figure will either move up or down based on successful exits & bankruptcies of its startups.

Republic Capital’s contribution is even more difficult to determine, as many of its details are not publicly available. Based on what little details I could find, let’s optimistically assume that Republic Capital has deployed $1B.

• Let’s say they see a 5-year return of 60%, which translates to a profit of $600M.

• 10% of that profit is for Republic to keep (=$60M).

• 25% of that, or $15M, would then be allocated to the Note dividend pool.

Combining these two sources, we have a *highly estimated* amount of $34M - far short of the $130M breakeven figure.

Now it’s important to consider that if Republic is able to build out their promised secondary market, Note holders can potentially see a profit in this scenario if they combine their dividend payments over 5 years + sell their Notes at $0.36 or higher. However, these are quite a few ‘what-ifs’ to represent a solid investment thesis in my opinion.

Given the complexity of this arrangement, I would recommend that most retail investors should probably stay away from this one. The profit-share is set to last in perpetuity, so (really) long-term investors could see financial gains through Republic Note if they wait long enough. But then again, you could park your money in stocks and net a safer ~7% annual return, all while retaining liquidity.

A better option than Note in my opinion, is Republic’s auto-invest feature. This provides the same level of diversification as Note, but without the complicated blockchain elements. I also am more bullish on the financial return of this offering.

Please note that this is not financial advice, nor a recommendation to invest in Republic Note. Please conduct your own due diligence and understand that investing in startups is extremely risky. The author of this article owns a small amount of Republic Note (as a reporter I need access to community events in this industry!) I should also disclose that I own equity in both StartEngine + Wefunder, two Republic competitors. However, I did my best to approach this one impartially.