Rally, an app that enables individuals to buy into—and trade their stakes in—rare collectibles (think: cards, sports memorabilia), recently raised $17 million dollars in new funding. Upfront Ventures, Raptor Group, Porsche Ventures and Global Brain all participated in the Series B round. The democratization of access to unique asset classes through fractional ownership has opened up to the masses “opportunities that for so long were only available to a select few” (like the chance to own a piece of Clint Frank’s 1937 Heisman Memorial Trophy), Rally co-founder and chief product officer Rob Petrozzo said.
But Terrance Odean (Rudd Family Foundation professor of finance, Haas School of Business) says these aren’t opportunities—fractional or otherwise—that non-accredited investors should be pursuing “unless the [individual] were getting entertainment value from investing in addition to the possibility of a profit or loss, and were spending entirely discretionary funds.” That’s because “’Investing’” in collectibles is speculation about the future taste and wealth of people who will buy collectibles in the future. There is a lot of uncertainty,” he said.
Our Take: Vasu Kulkarni (partner, Courtside Ventures) agreed there are more stable investment vehicles and ones likely to generate a greater ROI than sports cards and memorabilia. No item on Rally is “going to be [a] better [investment] than putting money into Amazon stock,” he said.
While collectibles may not deliver the greatest ROI, Kulkarni believes tying up money in physical assets is a smart way to “diversify away from basic U.S. currency, public stocks and bonds” during a particularly uncertain time. “There’s no way [an investor on Rally is] going to make less money than if [he or she] invested in bonds or just held their cash in the bank,” he said. The venture capitalist expects “most of the items [on Rally] will continue to beat inflation—and some may beat the S&P.”
Whether or not items on Rally outpace the public markets is likely to be determined by the buyer and eventual seller of the collectibles. Both Kulkarni and Brandon Steiner (founder/president, CollectibleXchange) expressed doubts the company has the expertise—or data—necessary to ensure consistent returns. Kulkarni warned, “With trading cards and some of these other alternative asset classes, it’s complete information asymmetry. Very few people actually know what is going on, and those who do make a lot of money at the expense of all the other speculators.” Steiner agreed and added that having “an inside buyer who can get items at incredible prices and [perhaps more importantly] someone with the vision and intel to sell the items down the road” is the difference between the platform’s investors making and losing money. Remember, “it’s one thing to buy something and another to sell it. A lot of this stuff is just worth what someone will pay for it. Prices are very subjective. They aren’t based on sales, CAPEX or a multiple of topline revenue [and it’s not as if there is huge market for these items],” he said.
It’s unclear if Rally employs such a specialist (or group of specialists)—no names were given. But Petrozzo said the company has a “network including full-time staff who have worked with some of the biggest auction houses in the world, advisors who we’ve developed long-standing relationships with, and well-known collectors who present us with deals that meet our internal checklist and strict underwriting standards.”
Rally has a secondary market (unique for the space), so in theory there is an opportunity to generate shorter-term returns. But with just 200,000 users, material events are unlikely to move the markets much. Kulkarni said the hope is that “eventually institutional money will start to flow into these items.” Should that occur, “the platform will go from having the purchasing power of the consumer collector to the purchasing power of institutional funds, and that is where the value of these items can start to go even higher [without a sale].”
Traders may be able to liquidate their investments—perhaps even for a profit—prior to a sale. But the greatest price appreciation on a fractional share of a collectible will come if/when an investor buys the asset from the Rally portfolio. “[The company] is betting that at some point, somebody is going to buy every one of these items and they’ll be able to return the money [invested] plus a [significant] yield to the investors. Will that actually happen? Who knows,” Kulkarni said. To date, Rally has sold six items generating an average return of +32% for shareholders. It’s worth mentioning that all six items received in-bound bids. Petrozzo said the company has yet to be in a situation where it felt “the marketplace dictated the need [to sell an item].”
While the rise of platforms like Rally and competitor Otis have democratized access to rare collectibles (changes in the JOBS act of 2012 made it possible for non-accredited investors to participate), there is an educational element to the increased interest within the investment class. Petrozzo explained how platforms like Twitter and Instagram made it easy to disseminate information about the price appreciation among sports collectibles and have helped to grow the pool of prospective investors (users are up +200% YoY). The renewed interest in retail stock trading would seemingly be another tailwind working in the platforms’ favor.