The Triangle tech ecosystem may not be strutting around quite as confidently these days after the still-too-fresh double sting of both Apple and Amazon turning up their noses at the region for their major expansions. But there’s nothing like a few minutes with Cofounders Capital general partner David Gardner to dispel any gloom.
“I think the Triangle is the new Silicon Valley,” says Gardner. “It’s where Silicon Valley was in the late ‘70s, early ‘80s. I see some of the same conditions here. The valuations are low, there is tremendous innovation, lots of talent, great universities. Silicon Valley now is just too expensive. If you’re not a unicorn B2C company, it just costs too much to operate.”
But Gardner isn’t just a booster; he’s putting his—and his investors’—money where his thesis is. Gardner and his Cofounders partner Tim McLoughlin have just closed their second fund at $31M after hitting the maximum 99 limited partners. In fact, Gardner says, they had to turn some investors away because they “waited too long.”
Fund II is nearly three times as large as Cofounders’ first fund ($12M) and is arguably the largest seed fund in the Southeast. The Cary-based VC has already made four investments totaling $2M from Fund II, including in Cary’s CareNexis and Asheville’s Ecobot.
While Cofounders will still aim to make initial investments of roughly $400-$500K, the larger size of Fund II will enable Gardner and McLoughlin to make significantly larger follow-on investments. This will help bridge a gap that has developed as VC firms, especially on the coasts, have tended to raise larger and larger funds that, in turn, must write larger checks.
That’s made the funds more risk-averse and increased the hurdles companies must clear to land that next funding round. Whereas five years ago, for instance, a B2B software company with $1M in ARR (annual recurring revenue) might reasonably expect to close a Series A, many VCs now want to see as much as $2-3M ARR to write that check. Hello, pain point.
Now when a Cofounders portfolio company is steaming toward $500K-$1M ARR and needs another infusion of cash, Cofounders can step into the breach with as much as $1-2M as a bridge or perhaps part of a larger round, whether a seed or Series A. (The labels are pretty fluid at this point.)
“This way, our companies won’t need to slow down to fundraise when they’re at that level,” says McLoughlin. “It’s not that they haven’t been able to raise that next round, because generally they have, but often they’ve needed to almost drop everything else because fundraising takes so much time, especially since a lot of times it’s coming from outside the area. But nobody knows our companies better than us. So now we could move quickly to provide that funding, and the companies can focus on their business.”
While the increased size of their fund will enable Cofounders to tweak the back end of their investment model with significantly larger follow-on infusions, the front end will remain much the same. They still will typically be a company’s first outside investor and are willing to write term sheets for pre-revenue companies. Their focus remains early stage B2B software companies, and their geographic sweet spot is expanding only slightly from the Triangle to North Carolina as a whole.
While the increased prominence of angel groups in the Triangle—including those affiliated with the three major research universities (UNC, NC State, and Duke)—have added to the potential pools of seed capital, Gardner firmly believes that Cofounders is still unique and vital in the area’s startup ecosystem, especially at the seed stage.
“The universities and angel groups generally won’t lead a round,” says Gardner. “And the other VCs around here won’t lead on a pre-revenue company. So a firm of our size that will lead a round and isn’t risk-averse is a very unusual animal.”
That “animal” just grew some bigger teeth.