Tim McLoughlin is a partner at Cofounders Capital - an early stage venture capital firm investing in B2B software startups in and around North Carolina. Tim gathered extensive entrepreneurial experience from founding and running startups. He is passionate about helping disciplined and tenacious founders to build dream companies. He has actively contributed to the growth of the NC startup ecosystem, serving on the board of the Council for Entrepreneurial Development and as a member of the NC Idea Grant Selection Committee.
Tim McLoughlin is a partner at Cofounders Capital - an early stage venture capital firm investing in B2B software startups in and around North Carolina. Tim gathered extensive entrepreneurial experience from founding and running startups. He is passionate about helping disciplined and tenacious founders to build dream companies. He has actively contributed to the growth of the NC startup ecosystem, serving on the board of the Council for Entrepreneurial Development and as a member of the NC Idea Grant Selection Committee.
Highlights
[4:42] How is an investor able to empathize with entrepreneurs?
[11:30] First, the ‘origin story’ and the ‘why story’.
[15:01] It’s okay to say, “I don't know the answer to that. Let me go figure it out.”
[21:05] Investors can hardly add value when the founder gives inaccurate information.
Non-profit: Council for Entrepreneurial Development
Tim McLoughlin: [00:00:00] One piece of advice I'd have for entrepreneurs is ask your investors potential investors. Is there anything you know about the company now that at the end of the day, you would say no to an investment....
Gopi Rangan: You are listening to the sure shot entrepreneur podcast for founders with ambitious idea. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision. Welcome to the sure shot entrepreneur today's guest is Tim McLachlan. He is a venture capital investor at co-founders capital previously.
He was a successful entrepreneur. He's been an investor at other places and he is located in Raleigh, North Carolina. Welcome to the show shot [00:01:00] entrepreneur.
Tim McLoughlin: Well, thanks so much for having me excited to be here.
Gopi Rangan: Tell me about yourself, starting with, how did you shape your career right after college?
Tim McLoughlin: Yeah, it was an interesting journey for me.
I graduated from Harvard in 2008, played a little ice hockey there and unlike all my friends that went into investment banks. I decided to start a small services company, which was a hockey training business back in my home of Raleigh, North Carolina, which isn't exactly the ice hockey hotbed of the world.
But I came back, I was close to my family. I was able to thrive in the hockey community here scale-out programs that ran all the way across the country and really be an entrepreneur growing a business from nothing into something. Even those services. Technology focused. Like I would focus on now. I had all the pains that entrepreneurs go through, trying to figure out how to make payroll the next day and not having any money in the bank account, trying to grow and scale [00:02:00] and taking all your profit and pouring it back into your company.
I learned a lot through that process that helped me look into an entrepreneur's eyes now and know what they're going through a little bit. After that, I sold that back to my business partner at the time the company is still in existence today. So going on 14 years, Went back to business school learned everything I could about professional training in the entrepreneurial world.
Since I lived it through my real world experience the entrepreneurial world and the world of venture capital and thinking about how much I would have done differently. If I knew the mechanics of going out and raising capital from investors. That led me to work with private foundation here in North Carolina, that gives out grants to non-dilutive grants, to startups by we're reviewing several hundred plans a year and doing diligence on those deals.
As you can imagine, when you give out non-dilutive grants, you're not short of deal flow. But that helped me work through deals real quick. Look at companies quickly worked with some other venture funds and then ultimately [00:03:00] landed a position at co-founders capital at the end of 2015.
Gopi Rangan: That's a bit about the journey there co-founders capital.
And I see that where you are today started with adventurous didn't as an entrepreneur right after college. And then you've shaped your career through how is co-founder's capital different from other VC firms?
Tim McLoughlin: Well, like the foundation I talked about, which says we're going to give out non-dilutive grant funding.
The next thing you can do for deal flow, which we do at co-founders capital is say we don't shy away from pre-revenue companies. So if you really want to differentiate yourself at a conference or something in your venture capitalists, just say, you'll invest at the earliest stage. Which we traditionally have done.
We've invested in pre-product, we've invested in pre-revenue. And one thing that we say now to differentiate ourselves with art now that we're investing out of our second fund is not only can we give you the seed capital at the earliest stage, but we have enough reserve capital to really help fund and grow the business.[00:04:00]
Once you've jumped over the initial hurdles of launching the business. We also say we're value added investors and hands on, and all the buzz words that a lot of venture capitalists use, we say we do all those things, but we actually mean it. When we say it, we give a knock to the other VCs while we say that to entrepreneurs.
Gopi Rangan: Pretty much, every investor says we are early stage and even pre IPO stages, early stage compared to post IPO. So what is early stage? It's very hard to define. I'm glad that you clearly define it as pre-revenue pre-product I say, pre website and pre incorporation. Sometimes I've invested in some companies at that stage as well, but it's good to clearly define what you're looking at.
The question that often comes up is how is an investor able to empathize with entrepreneurs? Investors are not considered entrepreneurs to begin with their investors. How do you empathize with entrepreneurs and what is helpful?
Tim McLoughlin: One thing that's helpful is just all of the [00:05:00] members of our team were entrepreneurs long before they were investors are three full time team members and our venture partners were all entrepreneurs.
It's always nice to just say, Hey, I've been in your shoes at a different stage in my life. And using the example I know you've had to hire, you've had to fire, you've had to raise some money. You've had to figure out how to make payroll we've been there. And so we get it. But the other side of it is.
Investors have to go out and raise capital, or at least the venture fund that we live in. But every few years I'm going out, I'm pitching to tons of investors. I have a thesis, I have a plan on how we're going to invest and how we're going to create shareholder value. And. As a venture capitalist, you go and you raise those funds, you increase shareholder value, and then you get fortunate to turn around and do it again.
So every time we hear a pitch and we have to say, no, I still feel that pain every time, because I've been on the other side and know that I'm going to be on that other side, pretty short or. Where I hear a lot more nos than I hear yeses. And that's okay. [00:06:00] Something that entrepreneurs, when they walk in, especially the institutional VCs that have had to raise large rounds of funding sometimes forget, is that at some point that investor was in their shoes getting a, maybe a yes or maybe a next meeting, or maybe.
Gopi Rangan: Yeah, I have developed more empathy for entrepreneurs after I launched my own VC firm. Fundraising is not a trivial task. I understood that, but now I understand it firsthand. Also raising the first fund, a smaller fund is much more difficult than raising a bigger fund later stage fund. After when you have the first few funds established, it's very similar to how startups go there.
Pre seed round or seed round of funding is very difficult. They're more diluted. And the later stage rounds are a lot easier compared to the amount of effort. Number of pictures that you have to take for the series BNC.
Tim McLoughlin: Rounds or your next fund. If you look at it in terms of a serially successful entrepreneur versus a first [00:07:00] time fund manager fundraiser, right?
If you have the proven track record and you've made a lot of people, a lot of money, you can go back to them and ask for more money, or you can just show people your track credit. But I also have to thighs with the first time entrepreneur that is smart. Tenacious has all the characteristics. Being a great entrepreneur, but just hasn't proven it yet.
A lot of times that's a big hurdle, whereas your really successful entrepreneurs can basically just name how much money they want to raise and investors will come flocking.
Gopi Rangan: That's true. What kind of startups do you invest in? What do you focus?
Tim McLoughlin: We've already defined the stage, right? We invest at the earliest stages, pre revenues.
Okay. Some parts of our fund. We're looking for a little bit of revenue, but we've invested in pre-product before as well. But as far as types of companies, we invest in B2B software. We like B2B enterprise software. If we can we're industry agnostic. So we're across a bunch of industries, but we like companies that solve a real business problem by that, I mean, better, faster, cheaper [00:08:00] demonstrable ROI solution.
That if I was walking with one of our portfolio companies into a sales meeting, I could clearly articulate what the value props would be to that customer and think that a reasonable business person would be interested in buying our product, whatever we're offering. Where is there a lot of demonstrable ROI?
You look at healthcare, it, you look at FinTech. So some HR tech InsureTech that happens to be where most of our investments are going right now. It's a result of the fact that there's a lot of innovation that still needs to happen in those spaces.
Gopi Rangan: The B2B software is a vast area. Are there certain teams that you like certain types of industry sectors that you have preference?
Tim McLoughlin: Yeah, we always look at if our funding for a company can get companies to the right inflection point in their business. And so let's call it a million dollar investment and that can give companies 12 months runway. Can that get a company to a certain inflection? [00:09:00] You try to avoid companies with super long sales cycles, for whatever reason, if it's an 18 to 24 month sales cycle, that might be challenging for us, for a company that doesn't already have a pipeline built.
We try to stay away from areas that we don't particularly understand. Sometimes it's easier to find where you do invest by saying what you don't invest in areas. We might not understand or know how to differentiate products might be in the cybersecurity world. We don't do anything in crypto. We've stayed away.
Blockchain technology so far, just because it's not our areas of expertise, but really it's ruling some companies out where you don't think you can add value and honing in where your investment can help get a company to the next inflection point, whatever that is.
Gopi Rangan: Can you give an example of a startup? How did you meet the founders? How was the first meeting? What questions did you ask them and what gave you.
Tim McLoughlin: Almost all of our introductions. We get our warm introductions and it is incredibly easy to get a warm [00:10:00] introduction to us.
Gopi Rangan: So someone in your network already knows the entrepreneur and they introduced the founder.
Tim McLoughlin: That's right. It could be an attorney and accountant. It could be another venture fund. It could be another entrepreneur. It could be the neighbor of somebody that we know. There's a lot of ways to do that. All else fails. You can find my email address pretty easily and reach out and say, you saw me somewhere and I'll consider that a warm introduction.
We speak at a lot of events. We go on a lot of podcasts. I consider a warm introduction and also being that in the room with me, or heard me speak and want to talk about something. The next thing is probably a specific ask of the entrepreneurs. Maybe we can start talking. And when we are having our meeting on setting expectations, is this an entrepreneur that's looking to raise capital today?
Is it an entrepreneur that's looking to raise capital in a year? Is entrepreneurs looking to raise capital? Not from us, but from someone else. And it's just an entrepreneur that we might be able to help and give feedback to setting expectations pretty early in a meeting is very simple. There's been several times where I know specific company X comes in [00:11:00] and 100% thinks that this is a fundraising pitch and they're going to raise capital after a minute or two minutes of that conversation.
They realized they're not in our fund thesis because they're not in our geography. They're too far along. All of these things have happened. That could free up the rest of the conversation to say, well, how else could I help? What introductions could I make? What are you doing wrong then? Maybe like my advice on when those companies first come in, what's the conversation about it's what do we want to get out of this meeting?
Right. I like to always hear the origin story to why are you doing this? Of all the things you could be doing? Why are you doing this one business that sets the tone for the rest of the conversation?
Gopi Rangan: Why is that important for the origin story?
Tim McLoughlin: It helps set the background for the entrepreneur, the entrepreneur, and the why an origin story will likely say how they stumbled across a problem that they're building a solution for.
And it gives you some insight into how big of a problem it actually was, which has important. [00:12:00] It lets you know what the primary driver of the. Entrepreneur is, does the entrepreneur want to create a lot of wealth? Are they trying to create a lot of wealth for their family, for their employees? Probably some combination of that.
Do they really just care about being the CEO of a company and they were looking for the next CEO opportunity and anyone would do, sometimes you can tease those little tidbits out from that origin story. Other times you can tell whether or not it's just a passion project or whether the entrepreneur really believes there's a big market and big opportunity out there.
You see a lot of companies founded around an emotional experience that the entrepreneur may have had, but we see a lot of that in the healthcare world, but might not have been as vetted. It could be, but it may not have been as vetted of right. Business opportunity. As some other folks that have a different origin story, you can tease those out in those kinds of conversations.
Gopi Rangan: Teasing out details is very interesting. The origin story makes it easy. I really liked listening [00:13:00] to origin stories because that shows the passion of the entrepreneur, why they're building the business, the mission of the business. And like you said, sometimes it's a great way for them to accelerate their career and take a leadership role at a company.
Might take many more years in a larger company or elsewhere.
Tim McLoughlin: We have a company in our portfolio called relay one and the founder cam Sexton I'm on the board with cam. And if he were to tell me his entrepreneurial story or his origin story, it would start with him probably finishing up his college career as a quarterback, by like investing in athletes.
They're very disciplined and very tenacious. And then trying to start a couple and work in some early technology companies and ultimately leading him into a career in med device sales. He has a story about how poor the communication was between hospital ORs operating rooms and external medical device vendors that need to be present during surgeries, but he can tell story after story [00:14:00] about that.
Miscommunication where surgeries had to be rescheduled. People were actually on the operating table and they had to reschedule a surgery which led to a lot of traumatic experiences for family members, just because of poor communication between. The hospital staff and external vendors or internal hospital teams, he wanting to be an entrepreneur, wanted to get into that field and solve that problem.
And he did with his company relay want in that origin story, I knew he had felt a pain point himself. I knew that he was an athlete, which has characteristics that I liked. I knew that he had dabbled in other entrepreneurial experiences and had some success and some failure, the origin story told me he was passionate about this.
He had a lot of experience in the space. I liked some of his characteristics. And just in that five minute story, there was a lot that I liked and took it to the next level.
Gopi Rangan: Yeah. You picked up on a personal connection with the guy.
Tim McLoughlin: Yep. That's right. And that's why I knew it was a bit of a passion, but it was also vetted out as a real business.[00:15:00]
Gopi Rangan: Do entrepreneurs need to be fully flushed out and ready to dazzle you? Or how much of preparation is needed? What tips would you give?
Tim McLoughlin: Before they come to meet you depends on how much they want to act like they have everything flushed out. I have no problem with an entrepreneur that comes in and says, here's what I know.
Here's what I need to test out. Here's what I need to vet. And here's my strategy for vetting these items over the next several months. I love that two examples of an entrepreneur, an entrepreneur that has everything all buttoned up, but then you ask them one question and they just can't say. I don't know the answer to that.
Let me go figure it out. You'll ask an entrepreneur, Hey, what's the market size? How are you defining the market size? And they'll give you a 20 minute answer and not answer the actual question because they just don't know, but they won't say, I don't know. I need to work on that. I much prefer the entrepreneur on the other side, which is here is what I've experienced.
Please let me know what I need to find out [00:16:00] what I need to figure out when we go to the market or to make this a more interesting investment opportunity.
Gopi Rangan: Yeah, too much. Polish makes it difficult for me to really evaluate and get to know the entrepreneur. We talked about empathy early on. The empathy part is difficult to achieve.
If there's too much Polish in the story. I have a lot of difficulty with Y Combinator startups, for example, because they've been trained to do that elevator pitch so effectively that they just dazzle everybody. But the real stories behind that story and very difficult to get to, unless you spend some time with the founders.
And I like these raw stories that are more out there.
Tim McLoughlin: Yeah. And normally you get down to it right after you make the investment. They've gotten the money and all of a sudden they don't know anything. They're trying to figure out everything. Yeah. Whereas right before, and this shines through when entrepreneurs provide financial models to investors and go be, I mean, I know you've seen your share of financial models and the magic word that entrepreneurs use when they hand it over is [00:17:00] saying, yeah, by year three, we're going to be doing X, millions of dollars and everything's going to be great.
And oh, by the way, this is a very conservative. Financial model. Everyone says it's a conservative financial model yet. Very few entrepreneurs actually hit their financial forecast. The reason for that is entrepreneurs are optimistic, but also they want to act like they know all the assumptions that drive their business model.
When in reality, they haven't had enough time or enough reps to really know what those assumptions need.
Gopi Rangan: Yeah, the startup journeys are highly unpredictable. It's very difficult to hit those metrics consistently and entrepreneurs tend to be ambitious. They are always ambitious and more optimistic. And it's the job of the investor to be the pessimist and ask tough questions.
We have to do that sometimes. Can you give an example of a story where the numbers really played out? The startup became really, really successful. How did it work?
Tim McLoughlin: Yeah, I'll give you two examples. One was [00:18:00] an entrepreneur that while optimistic, he was the most realistic in his model. This is a company called the Luma project.
I'm on the board of that. And he had a very detailed rollout strategy that he worked through with his customers. But this was a pre-revenue company when we invested and they were able to in the next, probably 18 to 24 months, take it close to a million dollars in revenue. When we invested, we worked closely with customer number one and number two on every assumption around the rollout in their organization.
By doing that, we heard all the objections firsthand from our first partner. We were able to be real. Accurate with our budget and when cash was going to be coming in, that has set the company off on a great trajectory. Let me give you one more example, which is one of our companies that's a little bit farther along and has raised tens of millions of dollars.
At this point. Their success [00:19:00] has been. On their ability to take the variance in their assumptions, driving their model cost of customer acquisition sales cycle, all of these price points, all of these key drivers, they've been able to take their variants very close to zero because they analyze those assumptions and the realized numbers every single month, they could be doing a multi-million dollar monthly forecast and can be awful.
$85 like that, that wouldn't be a rare thing for us to see because they are so accurate, but they've had time. The first example was a pre-revenue company. And the second one was one where the numbers played out because of the diligence and the attention to what their long-term assumption should be.
Gopi Rangan: That sounds like a rare story of success. What made it successful? What was in the team that you saw were the perfect ingredients that made this.
Tim McLoughlin: Both entrepreneurs weren't entrenched on their original idea or [00:20:00] beliefs that were flexible, flexible, listened to customers, listen to data that was coming back and made adjustments to them.
Accordingly. I also think that either of them had headed as shiny object syndrome, which is a customer says, Hey, this is going to solve all your problems. If you just did X, Y, and Z, they had enough data points from the market that they could average out their customers and what the journey is going to be like ISI entrepreneurs all the time that any customer that's interested in their product or anything, a single customer tells them about pricing or.
Rollout is how they think it has to be. And every board meeting, it seems like it just completely shifted how they were pricing their product or how they were going to market. Really good entrepreneurs know that every conversation, every piece of advice they get is just one data point and they collect those, put them together and build their model accordingly.
Gopi Rangan: They were flexible, but they also had discipline and how to execute, [00:21:00] whether it was pricing or what features to add to the products. We talked about a success story. Can we talk about a story that was not so successful? Can you give an example of a company where things didn't really go the way you expect.
Tim McLoughlin: Sure. When you look back at every time we invest in a company, it didn't work out. We'd look back and do a post-mortem and see what we could have done differently. Sometimes it's just market trends. We have a company in our fund, one portfolio that is selling into hospital systems and that company. During the pandemic.
When they first started, they started to build a pipeline. They started to get customers. They started to get accounts and, and then everything just shut down. If you weren't selling into healthcare, it with a solution that specifically solved the problems surrounding the pandemic, you had no chance of selling into healthcare.
So that company, when we look back. It wasn't a fault of our own. It wasn't a fault of anything we could have found in [00:22:00] diligence because we didn't know a global pandemic was coming and they'd be trying to sell on healthcare. It that post-mortem. And you do on that company, you look back and you say, okay, that would've been hard to uncover you look back at some of our companies and I'm going to leave the name of this one out.
You realize at the end of the day, you were never getting honest information from your family. On the sales pipeline, the progress, the team, how well the team was jelling when you're an investor in company like that. It is very hard for you to help if you don't have accurate information. Now, how could we have done a better job with that specific company that is something we should have vetted out in diligence.
That is something that a few more reference checks, a few more deeper dives finding references that weren't on the list we were given by the entrepreneur that we should have dug into a little bit more. We always want to make sure that. We are checking every box we can to make sure we're getting open honest information from the entree.
In this specific company at the end of the day, when we really [00:23:00] started digging in to try to sell the company, the soft land, the company, we found that a lot of the information we were being presented just wasn't accurate. And it's really hard to help when you don't have accurate information.
Gopi Rangan: That is a challenge, indeed.
Especially when you're making decisions on a sharp timeframe. There's a lot of data you need to look at. It's possible that you miss a few in hindsight. Yeah.
Tim McLoughlin: Easy to explain, but when you're in the middle of decision making, it's not that easy. Oh, in hindsight, you look back and you just say, how is it possible that I missed this?
It's unbelievable. Keep you up at night. Just trying to figure out how you miss it and what you need to do as an investor is just put safeguards in place. So it doesn't happen. Right?
Gopi Rangan: Thank you for sharing that it's an authentic story of how you could have done something differently and also the startup, roughly, how long does it take for you to form that conviction from the first meeting to the point where you say I'm ready to make an investment?
Is it a matter of one or two meetings or is it a time that takes more than a few weeks or maybe a few [00:24:00] months?
Tim McLoughlin: We can come to a decision in two weeks that there's nothing. We could know. Now that's going to rule out this investment. I'll give you a couple examples of this. We're a geographic based fund.
We invest primarily in North Carolina. Well, if we're looking at a deal on the founding teams in Atlanta, we know in week one, whether or not Atlanta versus North Carolina, whether or not that you rule out that investment, that's a very clear cut case. We can make that decision. Another case might be. Hey, we know that this company produces content and might have more of a services component, but that's been explained to us and we know what those percentages are.
We shouldn't go two or three months into diligence with that company to then at the end of the day, make a decision based on information we knew in week one and week two. I like to get over those things. Now in two weeks, we could probably get to the point where we say we know enough information that we want to dive into diligence.
There's nothing we know. Now that's going to officially rule this company out because I don't want to waste my time. And I don't want to waste the [00:25:00] entrepreneur's time. Now it might be another 30 to 60 days before we actually write it. And that might be things that we need to explore more. We might need to do some technical diligence.
We might need to do more market analysis and competitive analysis. We might need to talk to a few customers and we might need to just frankly, get to know the founding team better. If it's a team we haven't known for awhile, we might need to spend more than two or three meetings before we know we want to work with them for the next seven or eight years, but that stuff we can do from week two to day 61 piece of advice I'd have for entrepreneurs.
Ask your potential investors. Is there anything you know about the company now that at the end of the day, you would say no to an investment for if there is something let's get it out of the way right now, before we all spend a lot of time together.
Gopi Rangan: That's a great, I agree to make the fundraising process efficient for the founders.
Ask the investor. What would make you say no, and let's get to the answers now so we can move forward more. [00:26:00] I want to switch to the next part of our conversation and ask you about your community involvement. Is there a nonprofit organization you are passionate about?
Tim McLoughlin: Sure. I like it to be at the intersection of where I can give back and what I know and where I think I can be most impactful.
I spend a lot of time with the council for entrepreneurial development here in North Carolina. It's a, non-profit helping connect entrepreneurs to high quality resources could be investors. It could be vendors that can help them launch their business, but just a support organization for all entrepreneurs.
Those entrepreneurs don't necessarily need to be venture backed entrepreneurs. I have the knowledge that I can give back to that area and provide a little bit of expertise and guidance from what I do in my everyday life, but in a way where no compensation and no expectation of compensation from the office.
Gopi Rangan: Tim. Thank you so much for spending time with me today and sharing insightful stories, both success, stories and stories [00:27:00] where things didn't go well, the way you expected. And it's rare to find an investor who's willing to share real life experiences. Thank you very much for coming onto the show.
Tim McLoughlin: Gopi thanks so much for having me.
Gopi Rangan: Thank you for listening to the sure shot entrepreneur. I hope you enjoyed listening to real life stories about early believers, supporting ambitious entrepreneurs. Please subscribe to the podcast and post a review. Your comments will help other entrepreneurs find this podcast. I look forward to catching you at the next episode.