Cary-based Cofounder Capital is about to close its third early-stage startup funding today as it prepares for an open house where prominent local angel investors and entrepreneurs are expected Aug. 3. The $12 million fund operates differently than most venture funds or angel groups.

Founder David Gardner tells WRAL TechWire he expects the fund will close on term sheets with Triangle-based Employus, a app firm that lets ordinary people connect someone they know who might be a great fit for a given job and earn an average referral bonus of $3,000.

The fund generally makes an initial investment of $300,000 and has already backed two other local firms. It focuses exclusively on B2B companies because they generally require far less in startup capital than B2C companies that have to advertise to get customers. B2B firms also frequently sell to enterprise customers who are not price sensitive and can write big checks for a solution that solves a problem.

The fund also operates free office space via Cary Cofoudners lab, which is supported by the Town of Cary. It includes work tables, high speed Internet, conference rooms, office equipment and even an outside patio.

In the trenches due diligence

Gardner, a serial entrepreneur who invested with others in 17 startups prior to launching the Cofounder Capital fund and rolled them into the portfolio of the firm, does personal due diligence of a particular kind when evaluating startups. “I like to get down in the trenches with them, go on sales calls, hear what customers say about them,” he says.

A hands-on style of due diligence is one of the major things separating Cofounders Capital from other funds, he notes. It’s necessary because startups often do not have the historical data. “Seed stage companies don’t have all these financials to look at,” he says. “They don’t have customer satisfaction surveys. You have to get in the trenches with them.”

He doesn’t like going in as an investor, because then “You get the investor pitch. I don’t want that. I want to see how they perform. You have to see it for yourself.”

It’s a time-consuming process that out-of-area venture capitalists and angel investors don’t usually do.
“You can’t do it from Silicon Valley,” he says. But Gardner learned the technique when investing privately. “I saw patterns. I could see who would be successful and was predicting that with almost 100 percent accuracy.”

How does he know a company will succeed?

What did he see? “When we talked about things they listened and executed. The next time we talked, it was done.”

That,, he says, led to his beginning to write checks. He developed a good track record, often investing with other prominent local serial entrepreneurs and angels. “So, a lot of people asked me to start a fund,” he says. He liked the idea and although nay sayers warned it could take 5 years to raise $2 million, instead, in 90 days he raised an oversubscribed $12 million.

He’s focused entirely on area companies because the early stage funding gap is tough even for promising startups in the area to overcome. “We don’t have early stage funds and an angel investor culture here even though valuations are a fourth what they are in Silicon Valley,” he says.

The fund’s portfolio companies have pulled in some West Coast money, though. Also, Mark Cuban invested in one of the fund’s companies, and Steve Case backs another. “We’re bringing capital to the area,” Gardner says. “They just need to see a guy on the ground doing the heavy lifting.”

At the open house Aug. 3, he expects a number of the 80 or so local investors he’s worked with to meet and mix. His fund co-founders include Alex Osadzinski and Whitney Rowe, both now part-time venture partners. His advisory board includes Scott Moody of AuthenTec and 4KConnect, 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.

http://cofounderscapital.com/

http://cofounderscapital.com/free-lab/

http://www.employus.co/