David Gardner Startup Hats 2014

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When David Gardner started raising money for his new Cofounders Capital fund earlier this year, investor friends told him it'd take more than two years and he'd be lucky to raise $5 million.

It didn't take long to prove them wrong. 

After 90 days of fundraising and a period of due diligence, the Cary angel investor and serial entrepreneur has closed on $10 million of a $12 million fund. By the end of the month, he'll have the rest of the funds from 80 or so local investors, many of whom have co-invested with Gardner or funded one of his previous businesses. He's already got term sheets out to two companies, and follow-on investments planned for Testive, FilterEasy and Pack Purchase, companies in his personal portfolio that he rolled into the new fund.

Gardner appears to be bucking a national trend—the National Venture Capital Association reported in April that though total dollar commitments to U.S. venture funds grew 21 percent in the first quarter of 2015 over the quarter prior, fewer funds raised money and they closed significantly less than in the first quarter of 2014.

The goal of Gardner's Cofounders Capital, unique from most funds, is to invest all local. He wants to overcome a shortage of capital here, to get fast-growing companies in the Triangle to profitability or later stage rounds more quickly, and to preserve local investors' shares as those companies hit increasingly higher valuations. He sweetened the deal for investors by rolling in his existing portfolio of 17 companies, only one of which is in the process of shutting down, and by letting investors add funds to any company's round without a fee. That's not customary in the venture world.

"It's a way for people to get access to the deal flow I have and be able to do personal investing but have the fund lead terms and negotiate rounds and mentor the entrepreneurs," Gardner says. He expects some investors to be involved as mentors too.

He'll continue to stay laser-focused on funding B2B software companies, a niche in which he's most confident after starting and successfully exiting seven businesses. He recounts those experiences in a book published earlier this year called The Startup Hats. It's mandatory reading for any new Cofounders Capital founder, as is a period of mentorship before Gardner will write a check. If a founder can execute on homework Gardner assigns, he's likely to follow up with funds. That's the case for the two companies soon to be added to the portfolio—he's worked with both sets of founders for nearly a year. 

While Gardner is executing on most of the plans he announced earlier this year, some things have changed. He reduced the size of the fund from $25 million to $12 million so he could raise the money faster and focus his investments only within the Triangle.

As the largest LP with $1 million in the fund, he's also the sole managing partner. His co-founders Alex Osadzinski and Whitney Rowe reduced their roles in the fund to venture partners. Both will help vet deals, perform due diligence and mentor companies, but only part-time.

Gardner also hopes to spend a lot less time fundraising on behalf of his companies. That's because he'll have the money to make follow-on deals and easy access to dozens of other investors to join in. Helping the trio make funding decisions is an advisory board made up of well known local entrepreneurs and investors like Scott Moody of AuthenTec and K4Connect, Tom Lotrecchiano of Canvas On Demand, Scot Wingo of ChannelAdvisor, venture capitalist Bruce Boehm, Jeff Stocks of Manpower Group and Gaurav "G" Patel of Eschelon Hospitality.

Most of those entrepreneurs will show up to Gardner's new free workspace in Cary to work with entrepreneurs in the portfolio or those Gardner is mentoring and vetting.

Gardner expects to make five or six new investments and at least two follow-on investments in the first year, and to make fewer deals each of the next four years until the fund is mostly committed. Whether he'll raise a second fund is yet to be determined. It's his first time running a fund, and he admits it's "a very interesting model and it works for him, but it's very time consuming and labor intensive."

So far, that model seems to be working. And investors continue to line up to invest with Gardner. 

Perhaps this Gardner quote sums that up best: "The best presentation in the world is when you say, 'Remember how much money I made you last time?'"