David Gardner keeps the door open in N.C. venture investing

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Ninety percent of Cary-based Cofounders Capital’s early-stage investments are in North Carolina-based companies, confirming partner David Gardner’s central role in the state’s venture-capital investing community.

Having started eight companies in his career, he formed Cofounders by raising $12 million in 2015 for a fund that invested as much as $500,000 in 18 businesses. Its success prompted a second fund that collected $31 million in capital last year from N.C. business leaders including Anthony Dilweg, Bob Greczyn, Ven Poole and Scot Wingo. The second fund is making investments in the $1 million range, while setting aside an equal or larger amount as the startup progresses.

Gardner and his partner, Tim McLoughlin, added Tobias Walter as a third principal in January after considering about 100 candidates. Walter was CEO of Durham-based Shoeboxed, which digitizes documents, when it was sold for an undisclosed amount to San Antonio-based Earth Class Mail in 2018.

The author of The StartUp Hats, a book about entrepreneurship, Gardner, 56, has a master’s in divinity from Southeastern Baptist Theological Seminary and a master’s in information science from N.C. State University. He’s a big supporter of Opportunity International, a Chicago-based nonprofit that makes microloans to entrepreneurs in developing nations.

He discussed his work in an interview edited for clarity.

►What does a venture capitalist actually do?

We don’t run the business. Our job is oversight and helping with strategy, approving budgets, and making sure that funds are being spent according to the budget. We also provide free consulting services. Our CEOs have got to make all of the decisions, but if you ask my advice, we will tell you.
We also do a lot of interviewing for senior manager jobs. And then if someone is not working out, we will do a house cleaning if necessary. Investors are also our stakeholders, and sometimes the leadership team is the problem.

►How often do you have to change CEOs?

We’ve never fired a CEO, but 10% to 15% of them haven’t worked out. Sometimes they say, “I’m in over my head.” Other times, they will say, “I need a mentor,” and it worked out where we brought in someone who they reported to, and they became the chief marketing officer or something. Every time, the entrepreneurs have said, “Now I get it.”

►You are famous for your openness to meeting with entrepreneurs. Why is that?

While I’m very stingy with my time, I also have a personal passion in helping entrepreneurs. For 20 years, I’ve had a philosophy that I’ll meet with any entrepreneur who wants to meet with me. I don’t charge anything. I consider that part of my charity work. What goes around, comes around. Most of them say they know about me because they read my book or that we had helped a friend five years ago.

People find us because we are the only guys in North Carolina who will write a pre-revenue check. Which means you can walk in and potentially get funded. There are very few of us around, but I’ve been an entrepreneur and have some thoughtful assumptions on what can work.

►How would you characterize the state’s venture-capital market versus a decade ago?

There’s more money going into venture capital, but it’s all going into late-stage companies. I’d argue there is less money available now for early stage companies than 10 years ago. No one wants to run a VC fund; it’s too much work.

There are a lot of angel funds, but they will only provide $100,000 to most companies. That’s not enough in my business. [Software-as-a-service-based] companies need $300,000 to $500,000 to have a chance.

►How did you go about hiring a third partner?

We had more than 100 candidates, and we did a few dozen interviews. We had a totally unreasonable wish list. Tobi had been a seriously successful entrepreneur who had been a CFO and also had a very strong marketing background. Tim and I don’t have marketing analytics backgrounds, so we wanted someone to balance our team.

►Private-equity investment is often criticized as too male-dominated. Did you consider that when hiring?

We really tried to hire a female. I’m tired of being lectured about it. We talked to a lot of women and got really close to one. Ultimately, I felt good that we did everything we could do. But I had to hire the best candidate.

►How does North Carolina’s treatment of tech startups compare with other states?

We do a good job with our ecosystems of meetups, university-entrepreneurial programs and conferences. We do a good job of getting kids hot and bothered — we just don’t give them any money. We aren’t known for our venture capital.

The state wonders how can we attract big VCs into the state, but for that we need [later-stage] companies that have grown up here, [such as] the Pendos and Red Hats. The big VCs want to deploy $15 million or $20 million. No one is going to fly here from California to spend a $500,000 check. That is the piece we have to do ourselves.

►What changes would you suggest?

The angel-investor tax credit made sense because it enabled investors to get tax credits for putting money into startups. But it didn’t work that well because certified financial audits were required in the first year and that could cost $12,000 for a guy who had just raised $100,000. That didn’t make sense and was the kind of stupid stuff from people who don’t understand startups. (North Carolina no longer offers the credit.)

►Do startups create enough jobs to warrant favorable tax treatment?

Our funds have companies with 500 people employed because of the money we invested, but we never get credit for that.

Our state doesn’t mind bribing late-stage companies to come here through tax incentives. There’s nothing wrong with that, though it has a dismal track record. I just think spending a little bit of money on promising companies would be smart.

►You hold an annual dinner on how to give away money effectively. Why do you do that?

People are very interested in that topic. They want to make their money count. Most charities are not sustainable and not impactful in the long term.
I’ve helped Opportunity International raise a lot of money to support Third World entrepreneurs. I’ve learned that you don’t just give money to them. You have to be hands-on and provide tools and consulting. We operate in countries in which many women can’t have bank accounts.

►Why have you been critical of U.S.

Immigration policies for stunting growth of some tech companies?
We have a lottery system that is messed up. We get bright people over here from other nations, and then we kick them the hell out even if they might be ready to create dozens of jobs. It has more to do with xenophobic tendencies and getting votes from people who don’t understand the system. We are taking away employers who will create jobs. It might play well in a political speech, but it hurts us.

Source: Business North Carolina