The Republic Note, which will launch on Algorand, pays holders when startups and private equities funded through certain Republic investment platforms get acquired or go public. We intend to make payment in stablecoin proportional to how many tokens a holder owns. Beyond payouts, holding the Republic Note will offer investor perks including investment vouchers, waitlist priorities, and other platform benefits across the Republic Ecosystem. What is The Republic Note (NOTE) | What is NOTE token
On July 16, 2020, Republic officially launched its sale of the Republic Note profit-sharing token at a price of $0.12 per Note token. Accredited investors can purchase the tokens under Reg D as of July 16, while non-accredited investors have to reserve their allocation of tokens and wait until the approval of the Reg A offering later this year.
While there is no arguing that Republic’s Note token is innovative and pushing the industry forward, everyone has been asking me one question over the past few weeks. *Is the Republic Note token a good investment? *
While this article is not investment advice and investors have different goals and risk tolerances, we will attempt to provide an independent analysis of whether the $0.12 per Note price is fairly valued or not for investors. We will perform a Discounted Cash Flow (DCF) analysis for optimistic, typical, and pessimistic scenarios to arrive at a rough valuation range for the Republic Note token.
To download a copy of the financial modeling spreadsheet and be able to tweak all the numbers and assumptions yourself, log in (or create) a free Crowdwise account and then click the link below (only visible to logged-in members).
Also, here is a 30-minute video overview of the Republic Note valuation spreadsheet and assumptions:
At a high-level, the Republic Note is a profit-sharing token that is intended to share profits from successful portfolio companies on Republic’s public and private crowdfunding platforms. While the value of the Republic Note token will be volatile and traded on secondary exchanges such as Binance in the future, each Note token entitles the holder to dividend payouts (in stablecoin) whenever Republic’s profits from successful companies exceed $2 million.
Below is an overview of the profit-sharing model. It is a very intriguing structure because it will essentially allow non-accredited investors to share in profits from Republic’s Private platform companies, which are usually restricted to only accredited investors.
Since we will solely focus on valuing the Republic Note token and not on all its other details and risks, we strongly recommend that potential investors sign up to be notified on July 16, read the whitepaper and FAQs, and check out some of our AMA questions and answers from Republic’s CEO, Kendrick Nguyen.
“It’s not what you buy that determines your results, it’s what you pay for it.” – Howard Marks
I’ve heard many investors exclaim their enthusiasm about the Republic Note and their eagerness to invest in it because it is so innovative and promising.
While I do not disagree with their enthusiasm and optimism, one of my favorite quotes from Howard Marks reminds us that it isn’t only the financial security that you buy that determines your investment results; it’s the price that you pay for that financial security, whether that be stocks, bonds, real estate, or other alternatives such as crypto or startups.
The Republic Note is being offered at $0.12 per Note. According to the whitepaper, investors in Q3 2018 and 2019 invested at Note prices ranging from $0.06 to $0.10 per Note.
So, is $0.12 per Note fairly valued? What if it was $12 or $0.01 per Note? Would it be a good investment then? This is why we will perform an independent, bottoms-up valuation of the Note token to see if it is reasonably priced for investors.
During the AMA with Republic’s CEO Kendrick Nguyen, I was able to ask him how Republic arrived at $0.12 per Note. Kendrick’s response was:
Kendrick: “We took a look at how other major projects value their total network and apply a significant discount. Afaik, Republic Note is the first project with this large of a community with network value under $100M”…”As with all projects, today’s valuation takes into account future growth, and future growth projection takes into account past growth. We subjectively believe that our network value is priced well below market – loosely defined by comparing against other major networks.”
Thus, while there were no concrete valuation methods provided, it sounds like Republic may have used a combination of some lower-level growth assumptions with some higher-level, subjective network value assumptions to arrive at what they believe is a fair price of $0.12 per Note.
In setting up our DCF analysis of the Republic Note, we had to make numerous assumptions about early-stage investment returns. This is because the distributions to Note token holders is 100% dependent on profits from Republic’s public crowdfunding business (based on the 2% equity stake Republic gets) and 25% of profits from Republic’s private platform.
In other words, the primary drivers of the financial model are:
While we can make educated guesses in terms of #1 and #2 above, it’s highly unlikely that even Republic can know with 100% accuracy how many companies per year they will have on their platform in a few years from now. Republic’s portfolio currently consists of 29 and 133 companies on their private and public platforms, respectively.
For #3 – the potential returns – we used a range of average portfolio IRRs from angel investing and early-stage VC data and assumed an average five-year exit timeline. These overall portfolio IRRs account for failure rates of early-stage companies, so we did not have to assume a certain failure rate for this analysis.
Specifically, our model assumed the following for returns:
Secondary assumptions to our financial model that we included were:
In addition to the range of potential returns mentioned above, we also varied the potential growth rate of the number of companies on Republic’s platforms. We assumed the starting number of companies on Republic were 29 private companies and 124 public companies and that the annual growth rates of number of companies on each would be:
In reality, it is likely that Republic could grow the number of companies much quicker in the near-term and then slow down in the long-term (e.g. at 30% growth, it’s much easier to go from 100 to 130 companies rather than from 1,000 to 1,300 companies).
In addition, we imposed a cap on the maximum number of new companies per year that we thought would be sustainable by the Republic team. Again, this will be very dependent on the growth of the Reg CF industry overall, the success of Republic as a funding portal vs. their competition, and the size of the team that Republic decides to hire to sustain that growth (or not).
We chose 200 companies per year as the upper limit for the public platform and 100 companies per year as the limit for the private platform. Thus, it is likely that Republic could see an even larger potential upside in the future if they build a team and system capable of on-boarding more than 200 companies per year.
After tweaking our assumptions and constructing the DCF analysis, here are the upper, middle, and lower-bound estimates of the present value of the Republic Note token’s future cash flows based on our analysis. We put the results in buckets of 5-year returns, 10-year returns, and 15-year returns since the potential payouts will be depending on the growth of the number of companies on Republic’s platforms.
__Present Value of Republic Note profit-sharing token future cash flows. Based on a DCF analysis using a 10% discount rate. Returns bucketed based on 5-year, 10-year, and 15-year total returns.
Here are a few takeaways from the above results:
Based on these assumptions, one could estimate that each Republic Note could take between 10-15 years to break even (i.e. to pay out $0.12+ in dividends), and maybe a little sooner than 10 years under the optimistic case.
However, if you held a bond that paid 3% interest, that would take 23.4 years before breaking even (ignoring redemption value), and yet many investors invest in such instruments. So, based on the above numbers, does that mean the Republic Note is reasonably valued at $0.12 per Note?
Update as of 7/21/2020:
Republic has announced that as of the first five days of the offering, over $10 million Notes have been reserved. As such, they increased the cap to the maximum allowed of $16 million in Notes. This shows that there has been extremely high demand for the Republic Note.
Also, after talking more with various sources, Republic may actually be looking to onboard 200 (or more) companies next year, as they have been experiencing 2x to 8x year over year growth.
What would the valuation numbers look like if we made the following model updates?
Here are the results of having a higher number of companies on the Republic platform, which paints a more optimistic picture for the 10 year and 15 year potential returns, even for the pessimistic case:
Assuming Republic can bring on 200 companies per year and 50 companies per year for the public and private platforms, respectively, and maintain the level of quality that is typical in angel investing, then the Note could indeed be quite lucrative when those companies begin to exit in roughly five years.
That all depends on your investment goals and projections in terms of how successful Republic will be, as well as how much the Reg CF and Reg D industries grow in the coming years.
It’s worth noting a few things that the above analysis leaves out:
Because of the unique risks of the Republic Note token, you should remember to treat this as any other startup investment and only invest money that you can afford to lose. Even if Republic doesn’t fail, if Reg CF companies fail to perform as well as traditional angel and VC investments, then profits could be much lower than the typical case.
Personally, I have allocated some capital to invest in the Republic Note (about 10X of my standard startup investment check size for now). I think it is innovative and interesting and I would like to see where it leads in the future. My guess is that since the bulk of the value of profit-sharing will come in later years, there may be an initial up-tick in Note price due to interest and supply/demand in the first year or two, but then it may be a few years before people start realizing the potential value of the Note. It will depend supply and demand, so if the initial Notes sell out faster than anticipated (which they are as of 7/21/2020), it could result in the value of the Note going up more in the short-term once it is listed on an exchange.
Unfortunately, the Republic Note is not yet at the level of being on par with a “passive index fund for startups” – but it is a step in the right direction.
To achieve that, it would have to be something that I could confidently allocate a large chunk of capital towards (say, 5% of my entire investment portfolio), and then I could expect to get returns on par with the early-stage asset class.
The reason that the Note isn’t yet at that level of maturity is because there is still a non-trivial amount of risk that Republic as a company could end up being worthless, shut-down, or reach a dead end due to regulations, in which case the entire portfolio of Notes would become virtually worthless. That is the risk that one takes when investing in startups, but that’s the reason why diversification among many different startups is the key to success. And investing all my startup capital in the Note would be the rough equivalent to betting it all on Republic.
While I’d love something like a passive index fund to allow me to allocate a large chunk of capital and get steady returns and diversification, and while this is a step in the right direction, my personal opinion is that the Republic Note is still part of a nascent company in an evolving industry, so there is a non-zero chance that the entire investment could become worthless.
On the flip side, I do see an asymmetric risk profile by investing in the Republic Note. It has a limited downside (my investment can only go to zero, not below) and an unlimited potential upside subject to the power law; especially if Republic continues to grow and potentially even add other businesses like Fig and Compound to the mix. If you’re optimistic about the future of Republic and the crowdfunding industry in general, it may be worth taking a deeper look at the Republic Note token when it launches on July 16.
Leave your thoughts in the comments section below. What do you think of the Republic Note? As always, I welcome all feedback to help improve and correct my assumptions and financial modeling for the Republic Note, and I may update this page over time as more information becomes available.
To learn more and to pre-register your interest prior to the July 16 launch or purchase Note tokens after that date, head over to Republic.co/note.
The initial offering will be capped for both accredited and non-accredited investors, so if you think you might be interested, don’t wait too long to reserve your shares (which will then be available to non-accredited investors later in 2020 after Republic receives SEC approval of their Reg A offering; see the Note whitepaper for more details).
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