Donald Thompson: My name is Donald Thompson, and I am bringing to you today a fireside chat with David Gardner of Cofounders Capital. What an opportunity to listen to somebody who is wealthy and helped other people create wealth by investing capital right here in North Carolina. So onethink upfront, thank you guys for coming out.

We’re super excited for you guys to be here. I’m going to do a brief bio on David, but obviously this is a great opportunity for all of us to learn from one of the most successful investors in the Southeast. But, David’s a seven-time startup founder, successful exits include one for over a hundred million dollars, People Click.

Co-founders capital has invested 40 million into local tech startups. So that’s a really important distinction, right? There are funds that are larger, but in terms of the Southeast and in terms of North Carolina, David, and co founders, capital are active, right? They’re writing checks in our local economy and our local ecosystem.

And that’s really, really powerful.

Named to WRAL’s Tech Virtual Hall of Fame, author of Startup Hats and we’ll talk about that. And my personal experience with David before I met him, before I reached out to him on LinkedIn and a couple of mutual friends introduced, I read the book Startup Hats. When I have the opportunity to meet with somebody that’s very successful whose time’s valuable, I want to know a little bit about how they think before I interact with them. And I got so much out of the book it got me really more comfortable asking meaty questions of him right up front, because it felt like we were friends. And so as we talked for a little bit today, the book is amazing in its simplicity for how it talks about growing your business.

So without anything further, I’d like to welcome Mr. David Gardner.

So David, to get started and for you to just kind of set the table a little bit, tell people a little bit about your background, not so much the business part, but a little bit about where you grew up and then pivot that into how you started as an entrepreneur.

David Gardner: Sure. Well, it’s – yeah, I would not recommend my particular path of staggering around, but I was the first person to go to college on either side of my family and did not have a lot of guidance. I thought you just studied stuff that was interesting, and so I ended up with degrees in philosophy and a master’s in theology and dead languages. And I often say the best thing school did for me is it left me with absolutely no marketable skills.

Because if no one will hire you and you need to make money, you’re an entrepreneur. I did start writing some software. I’d gotten an IBM PC, one of the big luggables with the nine inch amber screens, which you guys don’t know anything about. But, it weighed, I think, 42 pounds. And so, when you carried it to the library, that was your workout for the day.

It was – but, I started writing some software for people and building and assembling some computers. I couldn’t afford a computer, so I ordered parts and kind of assembled my own and other people said, wait, would you do that for me? That’s a lot cheaper than buying, you know, off the shelf. And so back in those days, you would build the computers, you put in a network, you wrote the software, you trained the staff, you wrote the training manual, and you did some more calls.

That was the IBM model of a solution. It wasn’t a whole lot of off the shelf software to pick from that didn’t run on a mainframe somewhere. So, that’s kind of – totally by accident, I never meant to be an entrepreneur. It’s just I discovered I had like, $60,000 in student debt back in the ’80s, which was a massive amount of money and they actually like you to pay those back at some point. And so I was just trying to pay back student loans and make ends meet.

Donald Thompson: So that’s great as a backdrop. When you think about being an entrepreneur and starting down that path, what are some of those lessons learned, right? What are some of those mistakes?

What are some of those things that you’ve reflected on over the years that you would share with our live audience here and those that are following on the web?

David Gardner: Sure.

Oh, well, I mean, I did everything wrong initially. I guess the one thing I did right, is I didn’t do things wrong for long. I would try something if it didn’t work, I’d try something  else.

And, you know, everyone says that that Darwin taught, you know, survival of the fittest that the most intelligent and the strongest survive. That’s not the case. What he actually said is the most adaptable survive, and I think that’s really true in startups is that you’ve got to have a plan. You know it’s not right, but you always gotta have a plan and you execute on that plan.

And you be honest to what you’re getting back, the feedback that you’re getting, the metrics that you’re getting, you adapt that plan. Rinse and repeat. Go back at it. And eventually, you’re going to figure it out. That’s why in the investing world, we invest in jockeys, not horses. What that means is a bad idea and a great entrepreneur will make you a lot more money than the other way around. So we want people who move quickly and systematically rinse and repeat and have that process. And they have a confidence, not the confidence that they’re always right, but the confidence in the process that they are executing on will lead to the right result eventually.

Donald Thompson: Oh, that’s really powerful.

Let me seize on the component of the jockey metaphor. How do you determine that when you’re meeting people? ‘Cause when you’re evaluating a business, you’re looking at financials, you’re looking at the product market fit, all those different things, but you described the most important thing is the qualities of the entrepreneur.

How do you do due diligence on that entrepreneurial spirit?

David Gardner: Well, the fastest way to learn is just lose a lot of money by investing on the wrong people. And then you learn, you go, “Oh, wow, don’t do that again.” You learn to do background checks. You learn not to invest in someone with a bad credit score.

If they can’t manage their own money, they certainly can’t manage a company. You learn to look for certain things. And this is the – there’s a lot of art and science to investing. We certainly run the numbers and do market sizing and model the business and you know, all of that. But, there’s also a lot of art to it.

You know, we want entrepreneurs that are articulate. Can they articulate the message? If they talk for two minutes and I still have no clue what they do, they’re probably not going to make you money. I want entrepreneurs that are pushing me. They have this sense of urgency and they’re pissing me off cause they call me every other day with some update, but I like that. I’m like, you know, this person is is aggressive and is going to get stuff done. You know, if we’re calling them back going, “Hey, how’s the business doing?” You know, it’s probably not gonna to work. But there’s lots of things we look for. References are massive. A lot of people talk a good game, but it’s much harder to hide from your past.

So we spend we’ll do 40, 50 interviews, as part of our due diligence process, we want people who you’ve reported to. Teachers, employers, people who have worked with you, people who reported to you, we’re going to get a pretty comprehensive view of who you are and how you think. Not only to decide whether or not to invest or not, but once we invest, we’re stuck with you.

So we’ve got to help you, and we need to understand you. Well, everyone’s got strengths and weaknesses, things that are right-handed things that are left-handed. So part of that diligence process is us understanding that entrepreneur and where they’re going to need help and what kind of team we need to help surround them with to mitigate their weaknesses.

Donald Thompson: That’s fantastic. When you’re looking at the difference between being an entrepreneur, which you have done personally, an angel investor, and now you run a fund. Take us through that progression, right? In terms of why you started Co-founders Capital.

David Gardner: Yeah. I mean the – though, you know, you think all those things are related in some ways they are, but wow.

They’re just very different. I had a huge learning curve at every one of those steps I thought because I was a good entrepreneur. I’d be a great investor. That’s a really cocky mistake that we all make. Running a company is very different from being an advisor, an investor. You’re not making the calls and the companies, you know, I’m in 50 companies from my angel investing in my two funds, we don’t make any decisions.

The first thing I tell the CEOs is, look, I don’t make management decisions. I can’t hold you accountable unless you get to make all the decisions. Now, if you ask me, I may even force you to endure a sad story, how I did something similar and really messed it up one time, but ultimately you’ve got to make all the decisions.

So now you’re leading through influence through asking questions, through asking for the right metrics, and that’s very different than being the chief executive officer where you can just say, “do this, do that, get this done,” you know .And you’re also – you’ve got to trust the people that you’re hiring. I think a mistake that I made early on angel investing is I assumed entrepreneurs would do what I would do in that situation.

And that’s just not the,  not the case. Another mistake I made a lot is investing in a great idea. It’s really not so much about the idea. It’s about the entrepreneur. I always say, you know, I made my investors money, but it wasn’t always on the plan I showed them. So, you know, sometimes you’ve just got to shuck and jive and, and pivot and whatever.

Those are things that you learn in angel investing. And then as you move into professional investing, again, it’s another, it’s a whole nother thing. Being responsible I love being an angel investor because it was my money. I didn’t answer to anybody. I could do what I wanted. It didn’t matter whether it was in the thesis of my fund or whether it was what I told my investors.

You know, the problem with having a fun thesis is you tell your investors “I’m gonna invest in X, this geography, this stage, these amounts, these technologies.” If you don’t do that, they tend to sue you. So, you know, so you’ve got to – there’s reporting requirements and  you’re looking at, “Oh gosh, how much money am I going to need to protect these two companies? And are we going to produce? What if this company is off plan? Do I have enough capital reserves? Am I overexposed in this area?” So there’s this higher level of portfolio management.

Donald Thompson: Yep.

David Gardner: And I’m really lucky that I have some fund mentors, Alex Osadzinski , Scott Albert, who teaches in it now. You know, they have decades of fund experience. They’re just great at advising me on how to manage the fund and what proper ratios are for doing things. And so, they’ve really helped me avoid a lot of the mistakes.

I think of, you know, your first couple of funds.

Donald Thompson: Yeah, that’s pretty powerful. And one of the things that I would just echo is you’ll find the most successful people are still very open to feedback and seek out advisors. And it’s amazing, even in my limited experience as an angel, how many people feel like they have all the answers and they’re just going to do it that way.

Here’s David, a very, very successful entrepreneur investor, and he still has mentors and is in that listening mode as well as that coaching mode, which is really, really powerful. Let’s pivot to the book, Startup Hats. You condensed your knowledge, right, into a book. Why did you do that? Where did the idea come from to take the time to put it on paper and now it’s going to be on audio and now it’s digital, but where did that – that? the Genesis of that book come from?

David Gardner: You know, I started writing. I was putting together some notes to help entrepreneurs that I was working with. And at the time I had invested in Filter Easy, Validic, and Archive Social, I had just invested in some of those companies and I was spending a lot of time saying the same thing over and over.

And I was like, “you know, I should just write this down, you know?” And so I started writing down and giving them 18, 20 pages of stuff, but then eventually it just kept getting bigger and bigger. And I said, “I should just make this into a book.” And then it just – I kept saying, I found myself saying, “Hey, you gotta put on your banker hat here.

Oh, you got to pull in your sales manager hat here.” Yeah. And I kept using that hat analogy when I was talking to entrepreneurs. And so, I said, you know what? This is – you know, that could be every one of these hats could be the chapter of a startup book. I kind of took things that I had learned as an entrepreneur and some lessons from some of the companies that I had invested in and tried to make that very, very readable.

It’s not a finance degree kind of book, cause I don’t have a finance degree or an MBA or anything, but it’s a book from the school of hard knocks on how to think and how to go about starting a company in each of the – the problem with being an entrepreneur is you have to do everything reasonably well.

You don’t have to be an expert in anything, but you gotta be able to do a little finance. You gotta be able to do a little sales. You gotta be able to manage. You’ve gotta be able to recruit, you know, so all of these are hats that you have to wear reasonably well because there ain’t anybody else it’s just you.

And you’ve got to wear that hat long enough to get things going where you can hire someone. Who’s a lot better at that than you are and bring them into your organization. And so that’s why I thought the hat was a good metaphor for a startup book.

Donald Thompson: And I echo that it’s a great, easy read, but the nuggets are things that you can apply tomorrow. And those are the kinds of books as a business leader that I like because if I have to think too heavy about the subject matter, I’m probably not going to apply it tomorrow. And in that economy of now, we need information and knowledge that we can fix a problem we have in the next hour or the next day. And so from that standpoint, I’m a super fan of the book. When you look at a Co-founders Capital, talk about your fund thesis for a minute, and then also this is the second fund. So just talk about that transition in the size and maybe one or two success stories that you care to elaborate on if you can.

David Gardner: Sure. Well, when I started doing angel investing, I was in a bunch of companies and one of the hardest things – well, I started off not investing.

I started off just being a free mentor to startup companies. You know, I, after the seventh company, my wife really wanted me to retire. And by the way, retirement’s not everything is cracked up to be, you know, you think you enjoy your hobbies and your leisure, you enjoy those things ’cause you don’t get to do them often.

You enjoy those things because they’re special and you feel like you deserve it when you’ve worked hard and you go home and you get to play a game on the Xbox or do something, you know, that you love. If you do that all the time, you’re not going to like it anymore. And so, the Chinese curse be careful what you wish for you may get it, is very valid.

What you need is something that you’re excited about that gets you up in the morning. You need some challenge, something that could go either way, and you’ve got to live by your wits and figure out how to make it go this way and not that way. That’s what I think makes life interesting. And you got to have a purpose.

You know, someone asked me the other day, what do I fear? I said, the only thing I fear really is irrelevance. You know, I want to always feel relevance, and then when I do have leisure time, I feel good about it ’cause I’ve earned it. So anyway, just a life lesson there that you probably won’t understand until you – you know, so many things people tell you and then like, until you’re there, you don’t get it.

But,  I was just helping the kids. I was working a lot at NC State with some of the entrepreneurs out of there. What I discovered is, you know, I can help them with their plans and their fundraising decks and all that. But, getting money was tough. Even the angel groups around here, you’re lucky to get a hundred grand out of any of the angel groups in North Carolina.

And it’s just – how do you start a company on a hundred thousand dollars? That’s really tough, especially if you’ve got a, you know, six, eight month R and D cycle writing software or something. So,  I realized that the thing that they needed help with was getting capital together. And I was like, “Well, I have capital, maybe I should.” And I spent a lot of time working with these guys, so maybe I should do some investing. So kind of reluctantly, I started putting some money into these startups and they were doing well. The problem with putting money in a startup is then you have to like protect your investment.

So you’re really in then, and you’ve got to help them with any crisis that comes up. And, you know, you’re only running out of money in a startup if you’re doing really well or not doing really well. And so it’s a lot of, a lot of fundraising. After a while I said, I should pool other people’s money. Other people wanted to invest because my first three or four investments did really well, and other people wanted to invest with me.

And so I remember things that I told entrepreneurs, like when you’re looking for investors or putting a board together, always get more than capital. If you’re parting with equity, always get more than money. You want someone who not only has money, they also have industry expertise, big Rolodex, they can be an advisor to you or bring credibility to what you’re doing. And so I said, you know, I should take my own advice. I should put together a group of investors that are CEOs, influential people in the startup community. ‘Cause if I take a little of their money along with mine, I get more than their money.

Now they’ve got to protect that investment. So when I call them up and ask them to help this company with their marketing strategy or with, you know,  “Hey, can you make some introductions to some other, you know, hospital systems?” They’re willing to do that because they have a vested interest now in my success, which means they have a vested interest in the success of our portfolio companies. So it was all an equal strategy to get mind share more so than money out of those early investors. So, I talked to my fund mentors and they said, “David, we just want you to know it’s really hard to raise a fund. It takes on average two years, you’re going to have hundreds of meetings. And your first fund is probably going to be $3 million to $4 million. And  it’ll take at least two years. Well, 30 days I had had a couple of dozen meetings and raise $12 million. So, I stopped taking money. I was like, “Hey, this is a seed fund. I don’t need any more money than that.” That’s a lot of money for seed investing because you don’t want to have more than 15 to 18 kind of investments.

And that’s about all you can manage in a fund. So we deployed that capital and learned a lot. The problem that I we ran into is investing has kind of been a moving target over the last, you know, five to seven years the funds have gotten so big. It’s a little bit of a misnomer. You read all of this venture money is now out there, but I want you to know that money is going to later stage companies not to start up companies. And because these funds are getting bigger and bigger, they have to write bigger and bigger checks. And I keep telling the economic development people in North Carolina this, we’re not going to get a $500 million fund in California to fly here, to write a $200 thousand angel check.

They’re just not going to do it. They’ve got to write $5 million, $10 million checks minimum. And so the companies have to be far enough along to take that check size.

Donald Thompson: Gotcha.

David Gardner: And as the funds get bigger and bigger, it actually gets harder and harder for startup companies to find capital because no one wants to write a check that small and do the heavy lifting of early stage investing. That is something we have to do ourselves here in North Carolina, and that’s why our fund is focused on North Carolina. Almost all of our investments are in North Carolina. One of the things is the, A round – when I was an entrepreneur, when you got with a SAS based software business, when you got to about a million dollars in recurring revenue, you were clearly in a round territory.

Well, the investors would line up to write you a $3 million, $5 million check for your next round and you were off. So you only had to raise enough seed capital to get your minimum viable product out the door and get to about a million dollars in recurring revenue and you were there. Today we hear over and over again, as we syndicate, you know, A rounds, well, we need you to be at $3 million, $4 million, $5 million in recurring revenue.

We can’t write – we have to write a $10 million check. We can’t write a $3 million check.

Donald Thompson: Gotcha.

David Gardner: And so this is a huge – this is a fundamental shift in early stage investing. So I realized that for my next fund, what we really needed well as a lawyer. And it sounds crazy having a $30 million, $40 million seed fund, but the fact is not only is it a seed fund now you have to protect those investments.

‘Cause that goalpost on the next round of funding just keeps moving out. And I honestly don’t know where it’s going to stop. So, you know, the first rule of investing is make sure you have enough dry powder to protect those investments. And so when we invest now, we’ll start off with a $500,000, $700,000 check and we’ll set aside a few million dollars for that company to make sure that we’re going to be able to see them all the way through the process so that I think that our fund, the way we positioned fund two is right for the environment that we’re in at this time.

Donald Thompson: When you look at the Startup Hats and yourself as an investor, where were you the strongest and where were you the weakest and needed most help and coaching and grooming?

David Gardner: I was articulate. And that was always a big help for me because I could articulate the vision and what I wanted to do, and I could articulate the value props to customers. I could articulate why people would want to come work for my risky little startup and the potential of doing that.

And that made me good at sales, which let me tell you, you got to do sales. I mean, you’re in sales. I don’t care if you’re the CEO and the deal’s big, you’re going to be in sales. Every one of my CEOs – and that’s another thing we look for is, can they sell? ‘Cause you’re constantly selling people and why they should give you money, why they should work for you, why they should buy your product, why they should not sue you.

You’re selling. The thing that I was not good at early on was just managing people. I really just thought if you told people what to do, they would go. And  the concepts of empowering someone with a – yeah, giving someone a fiefdom, letting them decide the tactics, agreeing on performance metrics, then just being there to support them, but letting them do it their way, but yet checking in. You know, there’s an art to managing people and not stifling their creativity. You don’t want to make people into gophers, you know, go for this, do that. They really got to feel that they’re contributing. And so often I would know the direction that I wanted us to go in, but I would bring a team in and just start asking questions and wait until someone in the room would light on it.

And then it would be their idea. And I was like, “Oh, like, Bill’s idea. That’s a really good idea. We need to, we need to figure out how to do that. You guys go put together a plan and come back.” But figuring out how to get people to feel that they’re really contributing and that they’re empowered to make decisions.

I was fortunate in one of my early companies, I had a partner and he couldn’t sell anything, but he was a great manager. And so, I learned a lot about how effective he was with people and how uneffective I was. And, you know, that’s the thing about good entrepreneurs is they stop beating their head against the brick at some point and go, “Yeah, there could be a better way.”

And so we liked smart and adaptive. And so that was something that I really had to figure out. And the last few chapters of my book, people have told me are the most impactful for them. The chapter on management and the chapter on leadership. I think one of the analogies I use there is,  from, Stephen Covey. The manager is making sure that all the woodcutters are cutting down the trees appropriately.

They’re meeting their quotas. The teams are showing up, everyone’s well-staffed. The saws are sharp. They’re following safety protocols. That’s a great manager. The leader is the guy who’s climbed the tallest tree and yells “Wrong forest!” You know, but that is the difference and why I separate management from leadership in my book.

It’s two very different hats.

Donald Thompson: No, that’s super powerful. So last question from me, when you look into the future for North Carolina, right? One of the things that you made a very conscious decision, the majority of your investments are here in North Carolina. What do we need to do as a state, as RTP to continue to grow, right? We’ve gotten recognition moving to the Triangle is now more appetizing than it has ever before, but how do we keep the ball moving? What advice would you give maybe to our government? What advice would you give to entrepreneurs, business leaders to make this a thriving place for startups to be able to really nurture and grow?

David Gardner: Yeah, I think we’ve actually done a really good job. I look at what was available here in the ’80s when I was starting companies – and the ’90s – versus today. I mean, we have coworking spaces. We have grant programs and a lot of mentors. It’s fashionable now for entrepreneurs to give back. And,  and that’s really cool.

We have –  entrepreneurship is the fastest growing degree at our university programs now. They have funds. I participate in a scholarship at State that let students, after they graduate, stay on campus for six months to work on their business idea and actually get a stipend so they can eat in the cafeteria, keep their dorm room.

‘Cause surprisingly, as soon as they graduate, the parents wanted them to get a job and start paying back student loans and so we figured out how to bridge that gap a little bit. So all this stuff is fantastic. And I think we do a really good job. We have a very supportive entrepreneur ecosystem here.

What we don’t do well is just funding. There is very little capital here in ratio, you know, to the number of startups that we have. I mean, we’re seeing three or four plans a day. A day. And we are one of the few, maybe even the only venture fund in North Carolina that’ll write a pre-revenue term sheet.

Angel groups are great, but in North Carolina, they typically don’t have enough money to fund a company. And so they like to follow. If we write a term sheet, they’ll follow us, but you got to have someone who will write that pre-revenue term sheet and we’ll put in enough money to get the company off the ground.

And that’s really hard. A lot of the venture funds that are in North Carolina, deploy most of their money outside of North Carolina, just because they’re a venture funds here doesn’t mean that they’re committed to putting that money in North Carolina companies. I did the Co-founders Capital because I saw this gap.

There was a lot of investors here in North Carolina who want to deploy their investment dollars, where they live. And so, we gave them a vehicle do that.

Donald Thompson: No, I appreciate the time you’re spending with us in the open to share your perspective. David, thank you so much.

David Gardner: Thank you.

Donald Thompson: Thanks for spending time with us.