When Jon Gosier joined Goldman Sachs' 10,000 Small Businesses program to help boost his Philadelphia software development firm D8A Group, he didn't know he'd come out with eight new business partners.
Eight new business partners and a whole new venture, that is.
Jon Gosier and eight people he met in Goldman Sachs’ 10,000 Small Businesses program in Philadelphia started a new venture capital fund.
Jon Gosier and eight people he met in Goldman Sachs’ 10,000 Small Businesses program in… more
They created new venture capital fund Third Cohort, made official in June. So far, it has invested up to $30,000 in five early-stage companies, including one in Philadelphia.
The venture capital fund's general partners are made up of nine people, including Gosier, that were part of Goldman Sachs' program's third cohort in Philadelphia (hence the name). They wanted to start a fund to invest in technology companies — those with rapid growth prospects and potential for return. The idea stemmed after a class on business valuations.
Gosier's familiar with the investment model. He runs a tech company, which is typically the kind of business that seeks outside funding. Plus, he's been angel investing since 2009.
The others weren't as experienced. The majority of entrepreneurs enrolled in the Goldman program run brick-and-mortar businesses, and aren't investable by regular venture capitalists, Gosier said. None had been angel investors in the past, either, but the interest was bubbling.
The interest is a good thing, Gosier said. It's important for "middle class people of all types to look at business asset investing," he said.
Hit a wall
As Gosier began to build the fund's foundation, he and the general partners ran into some regulation issues regarding investing in exchange for equity.
"The biggest problem is that idea of who's accredited and who isn't," Gosier explained. "Four out of nine of us are accredited [investors]."
To be accredited, the Securities and Exchange Commission requires an individual to have an annual income of at least $200,000, $300,000 in annual income as a household, a net worth exceeding $1 million or $5 million in assets under management.
Drawing on a recent census report, Gosier pointed out that only about 2.8 percent of American households are accredited.
"The problem is … if you create an investment club and not everyone is accredited, it makes the entire investment fund not accredited," Gosier said. "That creates a major problem for middle-class investors. Not only can they not invest in securities as non-accredited, but they can't even partner with people who are, to become accredited. It's a huge problem that exists and remains unsolved."
But Gosier and his team figured out a number of workarounds to comply.
"I think there is a huge opportunity in creating funds like this that allow more people to participate," Gosier said, adding that he wants to talk with other groups interested in following the same model.
How it works
When asked if he followed any other venture fund models when building Third Cohort, Gosier said, "yes and no."
"The main thing we learned from other funds was what we didn't want to do," he explained.
The main difference? Contrary to a normal operating angel group, individual investors don't get the opportunity to invest on a case-by-case basis.
But that doesn't make the process any less democratic. Gosier said the nine people vote in "almost like a virtual ballot" on every investment opportunity.
Last year, each of the nine investors contributed $10,000, making the fund's total $90,000. Gosier said they are gearing up for another meeting — a "capital call," where the general partners could invest more than $10,000 each, although that is still to be determined. If others want to join the fund, they must be accredited investors, Gosier said.
There have been a number of accredited investors express interest in working with the fund, where they would act as limited partners, Gosier said. It's still undetermined whether Third Cohort will take its model that route, though.
The fund's interest
Ninety percent of the fund is focused on tech investing, with the remaining 10 percent putting out low-interest loans to 10,000 Small Businesses graduates.
"The 90 percent is about becoming profitable, the 10 percent is about supporting the network where we all met."
Third Cohort is looking at all types of early-stage technology companies to invest in. It wants companies with a good team and network, past successes, place in the specific tech market and growth opportunity.
Two of the companies invested in by Third Cohort were part of Gosier's TED.com network (he often gives TED talks). They include EpiBone and RentCheck. Other companies that received investments include Shadow, Market Atlas and Philadelphia's ArtHawk.
"We're always looking for new companies," Gosier said. "And we are looking most heavily in Philadelphia. It just so happens that the majority so far have been outside of Philadelphia; they were great opportunities that came to us at the right time."
Gosier recently detailed how and why he started the new fund in a Huffington Post blog. Read it here.