The other day I got an email from the equity crowdfunding portal, Republic. The email introduced me to its new Autopilot service that makes it easy to build a diversified startup portfolio of private investments. At first blush, it seemed like a brilliant idea. But then my cynical side kicked in and I started thinking about the downside of such a service.
Like every app, platform, bank account, discount broker and generally most else in life, there are pros and cons involved. Things are never a slam dunk.
While I’m a big believer in everything “Equity Crowdfunding,” I’m going to try to be as objective as possible with Autopilot and consider both the pros and the cons of this service.
The Pros of Using Autopilot to Build Your Startup Portfolio
Diversification: Until you gain enough experience evaluating private companies, diversification makes sense for most investors. With Autopilot, you tell them the total amount of money you want to invest and also the amount per startup. So, for example, you decide you’re willing to invest $1,000 in total and $100 per startup. Autopilot ensures you get the next 10 deals where the minimum is $100 and the deal meets three criteria set by Republic.
The type of deals you’ll be investing typically will have raised at least $150,000 from 100 or more investors, they will have raised at least twice the minimum goal set, and they’re using a Crowd SAFE (Simple Agreement for Future Equity) security instrument. The Crowd SAFE security instrument gives you the right to equity in the company at some point in the future when a triggering event occurs. An initial public offering (IPO), or the sale of the company, are the most common examples.
In the case of the IPO, you would get stock in the public company. In the case of a sale, you could get stock in the acquiring company or a cash payout. Every situation is different.
Currently, there are 34 companies raising funds on the Republic platform. A total of eight have met the three requirements and another three are close. Assuming all of them are appealing, your $1,000 investment would be punched out fairly quickly.
You can opt-out of deals: Republic will send you an email notifying you every time you’ve invested in a deal. Investors can opt-out of any deal any time up to 48 hours before the equity crowdfunding campaign is scheduled to end.
Monthly, Yearly and Per Deal Amounts: The smart thing about Autopilot is that in addition to yearly and per deal settings, it also has a monthly setting. This setting acts like a 401k, company stock purchase plan, etc. Let’s say you earn $45,000 in annual income and have a net worth of $100,000. Based on the investment limits in any 12-month period set by the Securities and Exchange Commission, you would be able to invest $2,250 per year. That amount is the greater of $2,200, or 5% of the lesser of your annual income or net worth (5% of $45,000).
Considering how $2,250 can be an awkward amount, Autopilot turns off when you’ve hit your limit until the next month. It also turns off until the thirteenth month when you’ve hit your annual limit. Let’s say you decide to set a limit of $150 per deal and $300 per month. In this scenario, your Autopilot would shut off after two deals in each of the first seven months; you would do one deal in the eighth month for a total of 15 (15 multiplied by $150 equals $2,250), and then Autopilot would shut off until the thirteenth month when you’d be ready for another 12 months.
You can turn off Autopilot at any time: We all run into unexpected financial challenges from time to time. That’s why Autopilot can be stopped and started at any time. Further, you can make changes to your monthly, per deal, and yearly amounts at any time. The only caveat is that the annual 12-month limit is still determined by the SEC crowdfunding dollar amount rules based on annual income and net worth.
The Cons of Autopilot
Very few deals less than $100 minimum: On the one hand, you probably shouldn’t be investing in private companies if you can’t afford $100 per deal. On the other, it would be nice to invest in all the deals that successfully reach the criteria needed to be included in Autopilot. Currently, only two deals out of the 34 have a $50 minimum, the rest are all $100.
Republic’s commission: This isn’t so much a negative related to Autopilot as it is a reminder for investors. We all have to eat. Republic receives 6% of all the funds raised and an additional 2% in the form of securities. In a successful raise of $1 million, Republic gets $80,000 in fees for its troubles. It’s like underwriting fees in an IPO.
Will It Help You Build a Startup Portfolio?
Just as you would do in constructing a stock portfolio, to build a startup portfolio of equity crowdfunding investments requires a methodology. Autopilot is an excellent example of a passive strategy.
What’s really nice about Autopilot, is its flexibility. You can set up a monthly contribution plan that automates your equity crowdfunding investments while not boxing you in. It would be nice if there was something like this for IPOs.
If you’re looking for a way to get involved with some of America’s most interesting private companies, but don’t want to spend all day researching each of the investments, Republic’s Autopilot is an excellent way to passively do so. It’s important to remember the number one rule of investing, however. That is, you must be prepared to lose 100% of your investment or you shouldn’t play the game.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.