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:

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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.

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.

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.

Upcoming Event

Venture capital investment products accessible to the everyday investor are top of mind for many lately. That’s why we’re convening a virtual event next week with guests including Republic’s Kendrick Nguyen, to outline the opportunities and pitfalls, review some leading products, including the Republic Note, and field investor questions. Free for investors, but spots are limited. Register today.