Otis: A Fun Way To Invest In Cultural Assets And Collectibles

This is a detailed review of Otis, a collectibles investing platform.

Ever since I was young, I've been a collector with the little money I had. As an adult, it's so fun to be able to buy things I couldn't afford as a kid. Some of my favorite memorabilia include retro-Jordans and He-man figures from the 1980s.

I still remember paying a couple bucks in high school to buy a pack of Topps baseball cards. My hope was to land a Ken Griffey Jr. rookie card.

Although I never got one, it was always such a fun moment of anticipation before tearing open the pack. Today, a PSA-10-graded version of Ken Griffey Jr.’s 1989 Upper Deck rookie card now routinely sells on eBay for about $1,500. That's roughly 20 times what it would have fetched 25 years ago.

One day in 1993, I found a treasure in my grandparent's garage in Honolulu, Hawaii. I stumbled upon half of my father's 1956 and 1957 Topps and Bowman baseball card collection. It was just sitting in an old cupboard in the garage. There were silverfish and cockroaches everywhere when I found the boxes.

Luckily, almost all the cards were in good condition. I made sure they stayed in good condition by outfitting each one with plastic sleeves and protective plastic shields.

Unfortunately, we couldn't find many of my father's American league baseball cards, which included several Ted Williams cards based on his recollection. Sadly, my grandparents must have thrown them away.

After a slow period in the mid-1990s and early-2000s, it appears that the sports card market is now booming. As a result, I was excited to be approached by Otis to sponsor a guest post on Financial Samurai and share its value proposition.

What Is Otis?

Otis is an alternative investment startup that lets people invest in shares of “cultural assets,” including contemporary art, sports memorabilia, rare comics, sneakers, and other collectibles–all through a mobile app. 

The company was founded in 2018 by Michael Karnjanaprakorn. He previously founded the online education platform, Skillshare. Michael's goal is to democratize access to investing.

The basic idea is that by fractionalizing these assets into shares, these assets’ high price tags become much more palatable to the everyday investor.

How Otis Works

1. Otis acquires cultural assets from prominent galleries, auction houses, collectors, and artists.
2. The assets are securitized with the SEC and broken into fractional shares.
3. Each week, new assets are “dropped” on the app for users to buy shares. Users can also buy shares from other Otis members.
4. Users can earn a potential return either by selling their shares on the Otis trading platform or if Otis sells the underlying asset outright for a profit.

Benefits Of Investing With Otis

1) Wide Breadth of Assets

The assets available on Otis span a wide range of categories. A few of the recent drops include paintings by Banksy and KAWS, a highly graded copy of X-Men #1, a Lebron James rookie card, and a collection of original 1985 Nike Air Jordans.

2) Portfolio Diversification

Given all the recent volatility in the markets, many people have been increasingly looking for ways to diversify their portfolios. Art and collectibles have historically been strong stores of values and have been relatively uncorrelated with the S&P when compared to other asset classes.

3) Trading Platform

One of the downsides of investing in art and collectibles, however, is the assets’ lack of liquidity. Otis has tried to solve this problem by launching a trading platform where users can buy and sell shares with each other.

The way the trading platform works currently is that users can input buy or sell orders 24/7. Those orders are then executed weekly against a clearing price that maximizes the number of shares that change hands. Buyers whose bids are at or above the clearing price (and sellers whose asks are at or below) will have their trades executed.

The trading platform is new and currently, only a selection of assets are eligible for trading. However, additional assets are being made eligible for trading each week.

4) Fully Managed

If you’ve ever considered investing in art or collectibles directly, you’ve probably realized that between vetting and acquiring the assets, storing them, and insuring them, you can quickly find yourself spending a lot of time and resources.

One of the benefits of Otis is that it takes care of all that administrative work. Before dropping each asset on the platform, it's put through a rigorous vetting process using a mix of quantitative analysis and category expertise.

5) Low Minimums

Otis is available to both accredited and non-accredited investors. The minimum for each investment is a single share, usually priced somewhere between $10 and $100. As a result, this allows investors to start slowly and gain comfort with the platform before investing a more significant amount.

6) It's Fun

While the main purpose of investing is usually to earn a return, a nice added bonus of Otis is how it allows people to engage with categories/ areas/ fields they’re passionate about. Admittedly, owning shares through Otis is a different experience than owning the item outright–but it also comes with a substantially lower price tag.

Challenges Of Investing With Otis

1) Potential Asset Volatility

As mentioned above, Otis offers a wide range of cultural assets. Some of these asset types are rather new (sneakers) or have a history of volatility (sports cards). Therefore, buyers should be aware of the risks associated with each specific asset before making an investment.

2) New Trading Platform

While Otis’s trading platform does offer increased prospects for liquidity, the platform only launched in 2018. The amount of liquidity will ultimately depend on the size (and quality) of Otis’s user base. 

To date, Otis has raised $13M in venture funding from top VCs including Union Square Ventures and Maveron. Otis had a $3M seed round and most recently completed a $10M Series A.

Due to its regulatory setup, all of the investors buying cultural assets on its platform would be protected should something happen to Otis. Per the operating agreement, there are provisions of how assets would be liquidated and investors given pro-rata proceeds in the event that the company were to cease operations. In other words, investors are not exposed to Otis's business risks just in case!

3) Lockup Period

Shares of assets purchased from Otis through one of its drops are currently subject to an initial lockup period (typically 1-3 months). It begins when the asset sells out. Therefore, if you're looking for instant liquidity, you need to plan accordingly.

4) App-Only Investing Experience

Although Otis’s website contains information about many of the assets on its platform, investing–as well as any information pertaining to one’s Otis portfolio–is currently only available on the Otis mobile app.

This is no problem for those used to transacting on investment apps like Robinhood; however, if you prefer to manage your finances from a desktop/ laptop, then Otis’s app-only experience could be an inconvenience. Otis has stated that they’re working on a desktop experience, though no exact launch date has been announced.

5) No Physical Asset 

When you buy shares of assets from Otis, you don’t actually get to hang the painting in your living room or put the item on display as part of your personal collection.

Before COVID, Otis made a commitment to display the assets publicly in its East Village, NYC space, and elsewhere. However, displays have been temporarily put on hold.

Given that in-person showings are paused during the pandemic, we've moved everything into storage out of an abundance of caution. Otis hopes to once again place the assets on display once the world gets back to normal.

How Does Otis Make Money?

Currently, Otis makes money two ways:

1) A sourcing fee. Because we provide collectors and artists with quick liquidity, we can often get things at below fair market value. We can then take a 0-10% sourcing fee and still bring the item to market at fair market value. The average sourcing fee is around 5%. We are transparent about the sourcing fee for each asset. It can be seen in our offering circular with the SEC.

2) We take a 10% cut of profits (not proceeds) should we liquidate an asset. This way, our incentives are aligned. As our secondary market becomes more mature, we are considering changing our model such that we charge transaction fees for trading in lieu of the cut of profits. Those changes are likely some ways off though and currently, we charge zero trading fees.

How Big Is The Sports Memorabilia Market?

The sports memorability industry is currently part of the collectibles market, which currently has a global value of roughly $370 billion.

There are over 200 million people who are collectors of various types in the world today. About 33% of global collectors have purchased, owned, or previously owned at least one sports memorabilia collectible. (Forbes)

Trading cards are still a dominant force in the sports memorabilia market. Over 98% of sports collectors have spent time collecting trading cards at some point in their lives.

By 2021, sports merchandise and memorabilia are expected to top $15 billion for the first time. As long as there are sports, there will be sports memorabilia generated. The market continues to grow as more teams enter the market.

The PWCC 100 Index, the PWCC 100 has returned 313% since 2008 compared to a return of 135% by the S&P 500. 

How Big Is The Sneaker And Art Market?

By Cowen & Company's estimates, a boutique finance firm, the sneaker market is worth over $2 billion in North America. It is also growing by 20%+ annually.

By 2025, Cowen & Company believes the sneaker market has the potential to reach $6 billion in North America. By 2030, Cowen & Company estimates the sneaker market will grow to $30B globally.

When the S&P 500 declined by 10% between February 2020 and June 2020, sneaker resale prices rose +6% during the same time period according to StockX, an online clothing and sneaker reseller.

Meanwhile, sales in the global art market reached $64.1 billion in 2019. The volume of sales, as measured by the number of transactions, grew by 2% year-on-year since 2009 (Art Basel UBS Art Market Report 2020).

Investing In American Memorabilia Is Fun

I think the reason why the American memorabilia market is booming is partly due to nostalgia. There is this entire generation of people like me who grew up in the 70s and 80s without much money and little technology. We weren't able to capture our youth through mobile phones like we do today. As a result, we long to recreate those fading memories of our childhood.

Every time I put on my pair of black Air Jordan 5s, I get happy. I remember being too poor to own a new pair myself. So my friend gave me his stinky AJ6s that were two sizes too large. I was thrilled!

Every time I look at one of my He-man figures on my desk, I smile. The figures remind me of the time my mother bought me one when I was hospitalized for asthma in Taiwan. The memory of her kindness always gives me a boost.

Today, my generation is old enough to buy almost everything we wanted as kids. So that's exactly what I've done. Maybe I'll do what my father did and keep my collections long enough so that my children can enjoy them in the future as well.

I want to thank Otis for sharing their value proposition. As a collector of all sorts of memorabilia, I'm excited about Otis' mission.

As the world gets wealthier, I believe more money will be invested in more American cultural assets that may be worth a fortune some day in the future.

To get started you can download their mobile app and explore what they have to offer.

Readers, anybody a collector of baseball cards, sneakers, and other fun American memorabilia? Disclaimer: withotis.com/ow-disclaimer

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