Hortz: What is your investment strategy as to the type and size parameters of early-stage startup companies will you be investing in?
Zell: For Seed financing rounds we will invest between $250,000 and $1,000,000. For Series A rounds we will invest up to $2,000,000. We expect that our initial offering of $50 million will create a portfolio of roughly 25 startup companies that we invest for equity and additional startup companies where we invest in debt or debt-like structures.
We will opportunistically invest in startup companies across the United States. The fund will invest through our thesis based on the First Principle of Value, which is to be applied as a filter to vet startup companies across a variety of industries as we go through our due diligence process.
Hortz: What is your due diligence and investment selection process for these companies? How do you determine positive risk/reward opportunities in the disruption these companies represent?
Zell: Startups are fundamentally a game of displacement. Every startup company has speculative claims about their ability to enter a market and deliver a new offering that is so much better than what exists, that current buyers in the market will leave the existing offering and adopt the new offering provided by the startup. Using our investment thesis of the First Principle of Value, which refers to the general goal of venture stage companies to create a new space in a developing market by creating a new value transaction that displaces the status quo with a novel solution. This goal is often difficult to accomplish, which is why investments in such venture stage companies often involve high levels of risk. During our due diligence process, we seek to first understand the status quo and then assess the startup’s solution based on a cost vs. experience analysis, factoring all of the pain related to a buyer leaving the status quo and choosing the startup’s solution.
Hortz: Are there different aspects to purchasing this fund?
Zell: Yes. Shares of Zell Capital are not traded on an exchange. The investment process is fully digital, and our investor portal is managed by US Bank’s Global Fund Services. During the Initial Offering Period, which is the first 18 months or when we achieve $25 million in assets under management, shares will be sold at a fixed price of $20. After that, shares will be sold at NAV, which will be calculated monthly. We will close the offering at $50 million in order to focus on deploying capital into startup companies.
Hortz: How would you recommend advisors work with and allocate this fund to client portfolios?
Zell: Generally, accredited investors and institutions active in private markets will allocate a small percentage of their portfolio into these asset classes, say 2%-10%. It is reasonable to assume that a similar allocation strategy would make sense for non-accredited investors. It is important for advisors to understand risks related to private markets, such as the lack of liquidity and long investment horizons. Advisors should consult with their clients to determine the most appropriate strategy.
Hortz: Any other thoughts or recommendations you would like to share with our readers?
Zell: I believe private market funds will be a new frontier for advisors and their clients. Our goal is to build long term relationships with the advisor community where we can be an ongoing resource for them with risk-appropriate access to this new world.
We are readily available to meet with advisors and share more about Zell Capital, the private investment markets, and the Access Fund structure. To understand startup investing more, here is an infographic created about the asset class—Why Startups?
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