Last year, the Securities and Exchange Commission expanded the definition of who may invest in venture capital funds and most technology startups, adding some forms of expertise besides wealth. By the agency's own estimates, that means at most 13.5% – a whopping increase from 13% – of U.S. households qualify as "accredited."
Zell Capital, a Columbus VC firm that opened its online investment portal on Tuesday, eliminates the distinction.
Retail investors can now own a sliver of early-stage tech startups through a minimum $1,000 buy-in to the fund, which has a goal of $50 million. Federal law changes allow the new structure.
"With every fiber of my being, I believe private markets should be available to all investors," founder and CEO Will Zell said.
"A great vehicle for wealth creation is gaining equity ownership in an asset (like a company) at founding or shortly thereafter," he said. "Look at all the wealthiest people in the United States and trace back, why are they wealthy today?"
Nearly 500 people signed up for notice of the debut. In the first few hours of going live, seven investors put in nearly $300,000.
"Fundraising is never an easy thing," Zell said. "I do believe there is a demand. If it’s a dud over six to 12 months, it’s bad execution on my part."
The firm has a pipeline of startups in due diligence for when there's enough in the fund to start writing checks. Every investment will be publicly disclosed. While the firm will invest across the country, Zell hopes to build up a core in Central Ohio and the Midwest.
"We need more entrepreneurs; we need more venture capital," he said. "That’s how we build the ecosystem: You go through cycles."
Until now VC investing has been limited to large institutions such as banks, or SEC-accredited individuals with at least $200,000 annual income or $1 million net worth. Last year's changes allow more family investment funds, "knowledgeable" employees and people with certain professional certifications.
"Think of the number of people involved in startups and technology that love it: How many can actually be accredited?" Zell said.
It's not that they couldn't be sophisticated investors if the risks inherent to VC bets are disclosed, he said. Also, technology has caught up that enables handling a large group of small-dollar limited partners more efficiently.
Zell Capital is marketing to tech startup employees and customers as well as wealth managers and advisers. U.S. Bank manages the investment platform.
Disclaimers on the site warn of the risks and recommend keeping alternative investments like VC to a single-digit percentage of an overall portfolio.
"Investing in startups is risky," Zell said. "It’s an illiquid investment; there are a number of startup companies you invest in that are just not going to make it."
Shares aren't traded in the open market – the price is a flat $20 until the fund reaches $25 million or 18 months, whichever comes first. After that, share price adjusts according to the net asset value of the fund. As of Tuesday, that's $6.70 per share and updated daily – at first any firm accrues operating costs before gaining assets in the form of startup equity.
"I’m running this like we would any other startup," Zell said. "We’re running very lean and mean."
This month's investors will get an email in early July listing the fund’s most recent asset value. Funds will not be withdrawn from their accounts until they confirm the decision then.
"This creates a bit of time for buyer’s remorse," Zell said. "I want people to really understand and have conviction for this investment before they make it."
Pride in ownership
Zell started in real estate and owns a coffee shop with his wife in his hometown of Bellefontaine. He founded two tech startups in 2012, including a before-its-time app similar to Cameo, and funded tech incubators in Bellefontaine and Marysville.
In 2015 he spun wireless power startup Nikola Labs Inc. out of Ohio State University; over several iterations it found product-market fit with a system of sensors to prevent equipment downtime in manufacturing. Nikola is emerging stronger after the disruption of the coronavirus pandemic. Zell stepped away from operations to concentrate on the VC fund, and Battelle veteran Brian Graham stepped up to CEO from COO late last year.
When Zell visited his grandfather as a child, they'd watch stock ticker symbols slowly crawl alphabetically across the bottom of the screen on cable news. The World War II veteran was part of the first generation who took investing in stocks mainstream.
"I remember how he spoke with pride about the companies he invested in," he said. "If he invested in Coca-Cola, we drank Coke at his house."
That pride of ownership can be "game-changing" for a startup, he said, if shareholders start referring customers.
"Being a customer in a startup moves the needle way more than it does being a customer of Coca-Cola," he said.
