William Leonard

Hey, ladies and gentlemen, welcome back to the Atlanta Startup Podcast. I’m William Leonard, your host, and investor with Valor Ventures, a leading seed-stage VC firm here in Atlanta, Georgia. And today, it’s my pleasure to welcome Tim McLoughlin, partner at Cofounders Capital to the podcast today. Tim, thanks for joining man. 

Tim McLoughlin

William, thanks so much for having me on. I’m very happy to be on.

William Leonard

Let’s dive right in here. Tim, give the listeners an overview of Cofounders Capital.

Tim McLoughlin

Sure. Cofounders Capital is a seed-stage venture capital fund, located in the triangle in North Carolina. Our office is actually in Cary, North Carolina but we spend a lot of time in Raleigh, Durham, and Chapel Hill. We invest in B2B software companies, primarily in North Carolina, but into the surrounding states as well. We are typically your first institutional check into those B2B software companies. The majority of our companies we’ve invested in have actually been pre-revenue, or just at revenue. We’ve invested in 29 companies across our two funds so far. We are investing out of our second fund which is a $31 million fund right now. That’s a little bit about us. We’re very hands-on. We read at the intersection of entrepreneurship and venture capital, we jump in and work with the management teams, and consider ourselves named Cofounders.

William Leonard

Awesome. I love that name. I was reading that Cofounders Capital was named one of the most or actually the most active tech investors in North Carolina, again by CrunchBase. Congratulations to you and David there. Can you talk to us about the North Carolina tech landscape and equally the talent that’s helping underpin the growth within the region?

Tim McLoughlin

Sure. I think that there’s a real opportunity from an investment perspective for where supply and demand are a little off in the triangle in North Carolina in general. There’s a ton of entrepreneurial talent. Entrepreneurship is one of the fastest-growing degrees at UNC-Chapel Hill, NC State, Duke, Wilmington. There’s a huge entrepreneurial uprising going on there. But there’s still a lack of early-stage seed capital, especially from institutional funds. That’s kind of a gap that Cofounders is trying to fill. I think you also have some successful outcomes from founders for over the last decade, that are now investing back into the local ecosystem. Over the last 10 years, I really think that we’ve planted a lot of seeds, right? The seed-stage planted a lot of seeds in the triangle and across the state where I think you’re going to see more follow on, bigger rounds of investment, more exits. The triangle is one of those second-tier markets that are very hot right now. It’s compared when we look at it, Boulder, Austin, Raleigh, and Durham. I think we’re very well positioned, we’d like to bring some more early-stage capital to the area. That’s one of the things we’re trying to do with Cofounders.

William Leonard

Yeah, that’s awesome. North Carolina, what are your ties to the area?

Tim McLoughlin

I grew up here. My family’s here, my in-laws are here, my parents are here. My wife and I met in first grade in Raleigh. Yeah, I know. She’s put up with me for a very, very long time. This I often say it’s a long con. She hasn’t figured me out yet. We have two young children that we plan on raising here. When I went back to business school at UNC Kenan Flagler, that was a big decision. Was this where we’re going to plant our roots? And the quick and easy answer was yes. One of the things that I am trying to do over the next 25-30 years of my career is growing a family of funds in North Carolina to help promote the entrepreneurial community and the ecosystem across the state. That’s really what I’m driven to do. This means that my short-term decisions and feedback for entrepreneurs and how I build our brand and reputation, I think, is important because I want it to be here and helping the community for decades.

William Leonard

Yeah, man, that’s a great story. Diving in a little bit more to your background,  you’ve co-founded a hockey training company and now you’re a VC investor. Talk to us about that journey. How did you start up here?

Tim McLoughlin

Is that not the typical VC background, just a hockey training company going into VC? Now, a little bit about the story, growing up, as part of your last question ties to North Carolina, I played ice hockey around here growing up. I went away to boarding school and to college in Boston and played little hockey there. When I came back in 2008, I started my own hockey training company. I had some connections actually training by doing all the youth programs for the Carolina Hurricanes. I had done that previously. I built a facility actually in Wake Forest, North Carolina. A training facility that was inside of an ice rink, and then scaled programs out kind of across the country. It was as services, as services get. But you learn some things about being an entrepreneur, hiring, firing, transferring money from your personal bank account to the business bank account, at one day before payroll hits, just so you have enough to cover, how to try to get capital to grow and scale. I saw a lot of those things as I was growing that business for seven years. And then I went back to business school at UNC and that’s where I started getting more formally educated on the entrepreneurship and venture capital scene. I started working with several venture funds there as an intern. Our friends, IDEA Fund Partners, which is another one of the most active investors and venture capital funds here locally, did some work with a group called River Cities Capital Funds, just interning with them and then I worked with a phenomenal organization called NC IDEA, which is a nonprofit private foundation actually. It gives grants to startups. Through that program, I was reviewing hundreds of early-stage applications for a non-dilutive grant that NC IDEA gives out. It really kind of honed in my ability to quickly look at deals, sift through them, and kind of narrow them down to the most deserving companies that I thought could grow and scale. I had that background and my partner, David Gardner in Cofounders Capital, just raised a $12 million fund. David was looking for an intern with a little bit of help. I had debt from college at Harvard, I had debt from Business School, and then I read his email which said, “I’m looking for help at the fund. It’s shitty hours, little to no pay, but you might learn something.” I jumped all over that. That’s right up my alley, just keep the debt going. But anyway, we built a good partnership from there. That’s how I got my foot in the door at a venture capital fund, right after he raised his first one in 2015, and raised a $31 million fund and just kept growing.

William Leonard

As you went back to grad school going in, did you have the intention of coming out as an investor? Given that you had started your own hockey training company, you had that entrepreneurial experience, were you going into UNC with the mindset of coming out as an investor? 

Tim McLoughlin

No, I went in with the mindset of coming out as an entrepreneur, and probably starting my next business with a little bit more formalized education on how to do it. I didn’t know what venture capital really was when I went to business school. We’re talking 2013/2014, I didn’t know it. I couldn’t explain to you what venture capital was. But I started taking the classes. Once I realized that there was this intersection between entrepreneurship and investing, it just had my name written all over it. How I could work with multiple companies, how I could really roll up my sleeves and be truly an entrepreneur but also being a source of capital to them, it just fit exactly what I wanted to do. You just had to put in the hard work, right? That’s what I did during business school, and afterward to help me get into this role.

William Leonard

Yeah, and I think you said something interesting there about the intersection of entrepreneurship and investing. What’s your viewpoint on the contrast now of being a venture investor versus being an entrepreneur? 

Tim McLoughlin

I think a lot of times, it’s always laid out, like, there’s this butting of heads between VCs and entrepreneurs. I always like to ask the entrepreneurs to take a step back and say, “Hey, VCs are probably a little bit more like entrepreneurs than you give them credit for.’ A couple of things are, first of all, we have to go out and raise money. The only difference is, when we go out and raise money, we have to tell the investors, “We’ll tell you what that money is for later.”, because we don’t know what the companies are that we’re going to put this money into. I think in our last one, we had hundreds of first meetings to try to raise our $31 million funds. We get told “no” way more than we get told “yes”, just like entrepreneurs do. We got to fundraise. We got to create shareholder value. And then after a couple of years, guess what? You’re going back out and raising capital again. In that perspective, it’s a lot like entrepreneurs, but also the earlier the stage of investor you are, for us it’s at the earliest stages of the companies, the more you have to be actively involved to help those companies be successful. I go on sales calls with the entrepreneurs, I helped them close deals, I helped them raise their next rounds of capital, I help them recruit, interview their management teams, but those deals together, and structure strategic partnerships. If you have a true value add, a hands-on investor at the earliest stages, they just need to be more than capital, they have to be actual entrepreneurs that can think as you do. 

William Leonard

Kind of going off on a tangent here. Why are you and David focused on the earlier stages versus the later stages?

Tim McLoughlin

Well, that’s what we know. I think pattern recognition is very important. When you invest in 29 companies that are close to pre-revenue, or just at revenue, you start to see patterns over and over again, and you get better at your job. If you’re a little bit all over the place, then it’s hard to see those patterns, right? That’s kind of where we focus, which I think is important. And the second thing I think, for David and I, you can create a lot of value early on. Going from zero to one creates a lot of value in a company. If you’re willing to spend the time working with the companies, I think that that’s where you can create a lot of value. It might not be as scalable as investing later on in the companies that are more established. But we love the excitement. We love working with a company closing one deal that moves the needle for the business. And that’s super exciting when you become friends and work right alongside the companies you invest in.

William Leonard

When you joined Cofounders Capital, you and David were working to establish the fund, how relevant were the thoughts of specialization as an investor versus being a generalist investor?

Tim McLoughlin

It’s something we go back and forth on. You see some trends across our portfolio. Several healthcare IT investments, HR tax, and FinTech, so you start to see pockets of how you could piece together companies, but I think most people would call us generalists. But I do think there’s some specialization in there. The stage of the company that you’re working with, the type of company, so we have criteria for our companies that I think are consistent across our portfolio. We like investing in companies that have demonstrable ROI. Better, faster, cheaper solutions, sell a deal, write a case study on it, then you can go and use that as sales collateral to sell your next 2-4 customers, right? We do specialize, maybe not in an industry, but in a type of company that we want to work with where we can think we can provide value. I think if you’re a generalist across the board, whether it’s an industry stage it’s hard, like I talked about before, to pattern recognition, right? You do have to specialize somewhere. I think what we’re really good at is going from zero to one. Getting those companies their first few deals, getting into their next round of financing. I think that’s where we stepped in. As far as the industry goes, and having the expertise there when we go out fundraising, we talk to a lot of smart people. A lot of very wealthy people. One common theme across all those folks is that they know what they’re good at, and they know where they can go to get help from somebody smarter. That’s what we try to apply. When there’s this deal, let’s call it healthcare IT deal, we’re going to reach out to our investors in our network, our healthcare IT specialists and get their opinion and get their help with that company. Same when it comes to Agtech or FinTech, we have that network of people that are true specialists in a given vertical that we can tap into and just say, “You have a lifetime of experience in this field, we don’t. What do you think? And really leverage your expertise.”

William Leonard

That makes total sense. As an investor, you’re taking pitches a lot of the time, you’re sitting on boards, and you’re really having a plethora of founder conversations and interactions. As you reflect on these encounters with the founders, what are some of the common traits you see in successful founders? Is there anything that founders should be doing more of when they interact with VCs like yourself?

Tim McLoughlin

We see a ton of plans. We’ve looked back in and really tried to figure out, “Hey, what are some things that a founder can do really well that maybe we should be paying more attention to? Or what are some red flags that come up?” One of them is, and I’ve said this many times before, it’s just the ability to articulate. What is their product? Who is their customer? What are the value props? Can they quantify it? Can they explain that in a clear way? Often like that, say, by minute five of a pitch or slide five of the deck, we should have a pretty good understanding of all those questions, right? What the answers to all those questions are. And for founders, it’s not just in giving the pitch, it’s going to be in closing a deal. Can you explain to your customer what the value prop is? It’s going to be hiring, can you explain to a potential employee what the opportunities are they’re going to have with you? That ability to articulate I think is really important across the journey of the company’s life. Another one is, you don’t want entrepreneurs that are too entrenched in an idea. Here’s my product, here’s my solution, and I’m going to keep hammering this home until somebody buys it. You want them to be receptive to the data that’s coming back to the market. But you don’t want them to have this shiny object syndrome, where every piece of feedback they hear, they’re going and completely changing their product or their market or their pitch. You want them to be able to accept the data points, analyze them, and then react to what they’re getting. That takes a little bit longer when you’re working with an entrepreneur rather than just the first pitch to try to figure out, but there are certain trends that you can see there. Are they a yes person? That might be in a pitch. If I say, “Have you thought about…?” or, “What about this and that?” And if the answer to every question I’m asking is, “Yes, yes, yes, that’s a great idea. That’s a great idea.” They’re probably closer to that shiny object person than that one that analyzes the data points, right? And then if they say no to all of the ideas, there’s a good chance that they’re one that’s not receptive to the data that’s coming back. They’re going to be super focused on whatever their original product and solution are. You get a feel for it. But over time, you can really test it out. 

William Leonard

There’s sort of a healthy balance of accepting feedback, pushing back a little bit within reason, and really trying to justify certain aspects of the business that may be the investor or outside counsel just doesn’t particularly understand. Is that correct?

Tim McLoughlin

That’s a great way to summarize it. One thing I say a lot is if I give three or four pieces of feedback, or thoughts on maybe what the opportunity could be, or a way to present it, and the entrepreneur hasn’t really thought of any of those and thinks all of them are great ideas, is this somebody I want to invest in? Is this somebody that knows your industry well enough? Because they should know their industry better than I do. They should know their product better than I do in that first or second meeting. If all my ideas were great, and they hadn’t thought of any of them, there’s probably a problem there, right? There’s no way my ideas are that good.

William Leonard

That’s true. You’ve been with Cofounders Capital for five+ years now. You’ve seen some of the macroeconomic impacts on fundraising, and just a natural cyclicality of early-stage investing. Can you maybe share some insight to our listeners as to how raising capital at the earliest stages has evolved over the last few years? And is there any advice to others on how to capitalize on this trend or industry?

Tim McLoughlin

One thing that you see is seed funds, micro seed funds, micro VCs pop up, other Angel groups that are popping up for more diverse access to early seed stage capital. I know now more than ever, there are probably more early-stage Angel groups available. Angels in general that are willing to write some earlier checks, and then these micro VCs. But here’s something that you see, as we grow, think about Cofounders Capital, let’s use that as an example. We went from a $12 million dollar fund to a $31 million fund. Inherently, the thesis has to change. The checks that we started writing were a little bit bigger, the companies we were investing in, were a little bit further along. Now there’s this, this new gap that comes into the market where we were playing before, which we’re not playing as much in with our new fund. What happens when we raise our next fund? Are we going to keep going up the market? How is that going to change? I say all that to give the entrepreneurs an idea of looking at it from your investors’ viewpoint. If they’re managing a $100 million fund, they’re probably not writing a $200,000 check into your business. They just had way too many checks they would have to write to make that reasonable. What kind of check do they need to write that fits in with the size of their fund, and what they’re trying to return? If you have a business that you think could turn $200,000 into a million dollars, and it’s a 5x return? That sounds great. But it doesn’t make sense to a $100 million fund. That million-dollar return doesn’t move the needle for that fund. They got to return $40-75 million to have the impact that that fund wants. Does your business align with that investor’s thesis? To try to put that lens on it, but I think it’s just important when we’re talking about the cyclicality and how funds are moving is, at that time, what is that investor’s goals, right? If you’re talking to an angel group, an individual angel, a micro VC, one of these accelerator programs, do your goals match what you’re trying to do? And just keep that in perspective because things change over time. Where it might have been a fit five years ago, for a certain group, it may not be now.

William Leonard

I think that’s so true. We’re going to see a continual kind of involvement of how funds are taking shape over the next few years, as we see more rolling funds coming into the picture now, syndicates becoming ever-present, and things like that. I think it’s going to be a continual process of involvement here. 

Tim McLoughlin

I think that people have identified that there are wealth gaps and gaps in access to the earliest of capital. When companies come and present to us, a lot of times they raise some significant friends and family money. Whether that’s $50,000 or $100,000, it’s significant friends and family capital that have allowed them to prove something out. If there are founders that don’t have access to friends and family that have that kind of money or are credited angel investors, where are they getting access to that capital? I think I had mentioned a great organization like NC IDEA that’s seeding funds. I think there’s going to be more accessible to crowdfunding in the future that’s going to allow folks to raise that capital. There are more Angel groups that I’ve seen lately that are focused on underrepresented founders that are going to provide groups that capital. Hopefully, more companies have the opportunity to pitch to institutional capital to get those larger checks.

William Leonard

Yeah, I agree. We’re seeing that trend, specifically here in the southeast, that’s really taking shape. And I think that’s something that’s going to significantly advance the ecosystem here. I’m so excited to see that. As you and David look ahead over the next five to ten years or so, what are some of the sectors or industries that you all are most excited about and excited to invest in?

Tim McLoughlin

I think of the first lens that we want to put on it, are we investing in trends that are accelerating? Or are we investing in something that’s only hot because of whatever’s going on right now? And that’s the first lens that we like to put on. The perfect example is COVID. Through COVID, there are certain businesses that are booming, but are they booming because of COVID? Or has COVID accelerated a trend that’s going to last long, long beyond this pandemic? Grocery retail, online grocery ordering, we’re in a company called Myxx that enables consumers to order groceries and meals online, and brands to market online. Well, that trend has accelerated so much over the past 12 months. Then you see other companies that may be focused a lot on virtual K-12 schooling metrics. Well, I don’t know if that trend may last after this, but I have to put the lens on if this is something that schools are going to have a budget for when 95% of students are back in school, which hopefully is soon? I don’t know what the answer to that is. Looking at those trends, the next thing that I would say is when we look at what industries, where is there a lot of waste? Where is there a lot of value creation? One of the areas is healthcare IT. I mean healthcare spend is everyone knows how to control and you see more and more of our investments are kind of shifting towards healthcare IT because there’s so much collaboration between the HRs, you can find a lot of value creation opportunities inside of healthcare IT. We’re placing some bets there. But, we’ll see. I don’t know.

William Leonard

Time will tell for sure. Jumping into more of the personal side of things here, we know you like hockey, but what are you up to in your free time? Do you have any unique hobbies, interests, or anything like that?

Tim McLoughlin

When I’m not chasing around my almost four-year-old, my oldest who will be four on St. Patrick’s Day, Finn McLoughlin, born on St. Patrick’s Day, that’s about as Irish as it gets. When I’m not chasing him around, or taking care of my almost eight-month-old son, Logan, my wife, and I, we have a lot of families here locally, we like to spend time with. We love going to live events, whether that’s concerts, sports, or sporting events. Last year was a little interesting, having a newborn and not being able to go to those events. But we love doing that. I like to play golf. I don’t play nearly as much golf as I did four years ago before my oldest was born. But you know, every couple of months, I like to get out and do that stuff, too.

William Leonard

Awesome. And I know you started a podcast recently called First Check. Talk to us a little bit more about that. 

Tim McLoughlin

Sure. You can find it’s called First Check. Two words. A little pawn on early-stage investing and also on my hockey background, taking a couple of checks in my day, taking away more than I’ve given, that’s for sure. But you can find it on Spotify, Apple Podcast, or you can go to earfluence.com which is the production company that puts it on, and look up First Check. The goal of the First Check is really just to educate potential angel investors, folks that want to get involved in venture capital and entrepreneurs, what they should be looking at when they’re thinking about writing or raising that first check. The podcast is with a lot of other VCs, angel investors, and entrepreneurs. And it’s some fun stories. It’s how colossal failures from investors that wrote their first Angel check into a deal they thought was a no-brainer was gonna make tons of money, and then crash and burn and what they could have done differently. It’s also from entrepreneurs that I’ve given a term sheet to and then ultimately didn’t invest in. And it was a huge mistake on my part. What should I have done differently? I’m not afraid to have those conversations with those entrepreneurs and have open honest discussions. Thanks for bringing it up. Everyone, check it out, First Check podcast.

William Leonard

Awesome. Tim, it’s been an amazing conversation here. I think our listeners will get a lot of insight out of this chat here. What is the best way for our listeners to contact you if they want to pitch you or just learn more about Tim?

Tim McLoughlin

Sure. Find me on LinkedIn at Tim McLoughlin. My email’s there, it’s the best way to get a hold of me. My email’s on our website, cofounderscapital.com. Go there. Find me. Reach out, tell me what you heard. All your warm intro needs to be is that you heard me on this podcast and I’m sure we’ll get a follow-up conversation started. 

William Leonard

Awesome. Tim, thank you for your time today, man. And we’ll have to get you back on the podcast soon.

Tim McLoughlin

Anytime. We’d be happy to do it. Thanks, William. 

Lisa

Thank you for listening to the Atlanta Startup Podcast. You know, we’re not just a podcast, we’re a community, and we’d love to see you at one of our digital or physical events, go to valor.VC and sign up for an event that makes sense for you. We have events for founders and the investors who back them. Another event you might enjoy is Startup Runway. The Startup Runway Foundation is a Valor organization that provides $10,000 grants to founders who are women or people of color building next-generation software products. Applications are free and we’d love to hear from you at startuprunway.org. And as always, thank you so much to the organizations that make this podcast possible. Not only Valor Ventures, but also Write2Market, a tech marketing and PR agency in Atlanta, Georgia, and the Startup Runway Foundation and Atlanta Tech Park Valley’s headquarters, and also headquarters for over 100 local entrepreneurs, building global businesses. See you next week. Please bookmark the podcast and join us.