The Note white paper is here – I suggest everyone reads it. That being said, it’s 48 pages so I know not everyone will, so maybe I’ll do a brief summary in a blog post.
Regarding Note token valuation: I plan to do a deep dive blog post and a video about estimating the current value of the Note token based on the current portfolio of Republic.
Based on some quick back of the envelope calculations, the $0.12/Note is a little on the high side of valuation in my opinion based on the current number of companies on the platform; however, it all depends on your assumptions and growth projections in terms of what it could become.
Let’s do a quick and dirty calculation to see if the $0.12/Note is fairly valued
To begin, assume we just consider the 100% profit share from Republic’s public crowdfunding business. Republic Core (the company that issues the Notes) plans to pay out dividends to Note holders in $2 million increments, and will issue a max of 800,000,000 Notes. That means each dividend payout is effectively $0.0025 per Note at maximum issuance (not at launch, since there will be ~1/2 as many Notes in circulation). So you’d need 48 dividend payouts to break even for your $0.12/Note if we’re being conservative and assuming all 800,000,000 Notes are in play.
The question then becomes – how fast do you assume dividends will pay out?
Next, let’s calculate the break-even number of companies that Republic would need on their platform in order to have the Note pay back the $0.12 cost.
Since Republic gets 2% of securities sold on the public side, assuming an average campaign raise of $300k (the actual average based on their 124 public companies has been $267k each), that would mean Republic gets a $6,000 stake in each company. To get to each $2M dividend threshold, that’s a 333X total return. Assuming an 80% startup failure rate, 15% target IRR, and 5 year time frame, that’s an average 10.1X return required for each non-failed company. That means ~33 companies need to succeed for each $2M payout, and from before, we know we need 48 payouts to break even. At a failure rate of 80%, that means Republic needs 7,913 companies on their platform in order to break even at $0.12/Note.
So, the question remains. Is that good value? At first glance, ~7,900+ companies is a long way away from the 124 public companies they currently have.
However, we were very conservative in our assumptions and neglected a lot of factors.
First off, we’re completely ignoring the profit-sharing from the private side. For simplicity, let’s just assume those returns will be 1/4 the public side, since 25% of carry is shared with Republic Core (and those deals may be later stage, but also have lower failure rates).
Also, at initial issuance, Republic plans to have a maximum of 370 million Notes in circulation. That cuts the number of required companies above in half.
You also need to consider the growth rate of the number of companies on Republic. While Republic has had 124 startups successfully raise on their public platform since they started, they could easily double (or more) than that number in the next year alone. The industry continues to grow, and Republic mentions in their white paper that they may choose to include new lines of business in Note profit distributions (e.g. their recent real estate acquisition Compound) – “…part of the proceeds from one or more of any such new businesses
may be attributed to and become Core Proceeds in exchange for services
rendered by Republic Core.”Furthermore, all the growth assumptions are likely conservative for the industry (80% failure rate, 15% IRR, 5 year investment time, which results in a 10X return multiple on non-failed companies). Many studies show average angel investor and VC returns may be more in the range of 20-25% IRR. And perhaps the due diligence and deal curation on Republic means that the failure rate will be lower than 80%.
So perhaps ~500-1,000 companies is a more realistic “break-even” number for the current value of the Note.
Am I missing any other factors?
What do people think of my assumptions and math?
I’ll do a deeper dive on this in the next week or two.