Early Stage Tech Investing that isn’t VC
The Calm Company Fund is a new approach to investing in technology companies with a completely different risk profile to traditional venture capital. We call it Early Stage Value Investing.
- Rational valuations: average entry valuation of $2-3m for companies with working product and revenue
- Faster Liquidity: profit-sharing in 1-3 years, exits in 5-7 years
- Lower failure rate: focus on profitability = 0 write-offs in 3 years across 60+ investments
- Less dependent on follow-on financing: businesses where “first check, last check” is a viable strategy.
- Retain uncapped upside: calm companies can still become rocketships by unlocking adjacent markets or viral growth loops. Eventually we will back an Atlassian, Mailchimp, or Qualtrics.
Overview
The Calm Company Fund is a growth-focused fund investing in entrepreneurs building profitable software and software-enabled businesses. We invest across the early stage (post-launch, with revenue, roughly comparable to early “seed” stage) to later stage ($2-10m in annual recurring revenue) via two distinct funds. Our Calm Company Fund III invest $100k-350k in early stage companies and targets a mix of equity value appreciation and profit-share income via the Shared Earnings Agreement structure we created. Our Founder Liquidity Fund invests $500k - $2m (where founders can take as much of that “off the table” as they prefer) in mature profitable software companies ranging from $1m - $10m in annual recurring revenue and uses a similar structure to target a blend of returns via an exit or dividends.
The best way to think about our approach is investing in great sustainable businesses, with a much lower failure rate than traditional angel/VC investing, with strong upside for growth but with a pathway for investor returns if companies become a profitable cash cow.
What is a calm company?
It’s a broad term for the vast vast majority of businesses that for various reasons are not a fit for the narrow Venture Capital profile, that are building towards profitable sustainable growth for the long-term. A classic example would be B2B software serving a niche industry where a great business can be built, but there isn’t a plausible path to a $10B+ company serving that market.
Despite the fact that founders overwhelmingly prefer to build calm companies over hyper-growth companies, and despite representing the best approach for the overwhelming majority of entrepreneurial opportunities, founders of calm companies have very few options for capital, community, and mentorship. Our over-arching goal as a firm to is to listen to this vast and vastly under-served group of entrepreneurs and build what they actually need to help them succeed.
I believe all allocation decisions effectively boil down to: Why this? Why them? Why now?
Why this.
World class assets. Recurring revenue, high margin, profitable software companies are some of the most valuable economic assets in the world. But valuations in the private markets for software companies that fit a Venture Capital profile have gone off the rails in recent years.
Unique opportunities. Our unique thesis and strategy for investing in calm companies, allows us to invest in companies the rest of the tech investing world simply cannot. This allows us to find genuinely novel opportunities and to broadly invest at much more reasonable valuations. For the vast majority of our investments, the founders are considering working with us or bootstrapping, that’s it.
A strategy that can scale, re-invest, and compound for the long-term. Calm companies represent a market opportunity that is almost by definition an order of magnitude larger than the entire Venture Capital industry. We have built a model that can generate reliable returns even as we scale up to the opportunity. But while hyper-growth companies are almost never able to “pivot to profitability,” calm companies absolutely have the potential to unlock a hyper-growth trajectory in the right conditions. While we are explicitly not “unicorn hunting” in our portfolio construction, every new bet we make contains the implicit upside of potentially being the next Atlassian or Mailchimp (both bootstrapped).
If you want to have exposure to the vast long tail of tech and tech-enabled companies, with less downside risk and faster liquidity than other tech investing strategies, this is one of the only opportunities in the market to do so.
Why us.
We have the preeminent brand in a wide open market. One of the things we look for in founders we invest in is an “unfair advantage” and one of the best of those is having a deep and long-standing connection to the market they’re building for. The founder of Calm Fund has been building calm companies, writing blog posts on the topic, and connecting with this community of founders for a decade. Our hyper transparent approach to publishing much of our strategy and progress has built a strong brand and trust base with the entrepreneurs we want to work with.
The team (11 strong already) we have built is second to none and has an intuitive sense of how to serve calm companies that resonates throughout our branding and messaging. Our effective re-framing of “not VC” or “alt-VC” to “calm companies” plants the flag for what we stand for and shows we can scale up a brand to continue to be the first choice for calm company founders.
Our 200+ strong mentor community, where all of them are investors in our funds, is second to none and provides a scalable community-based approach to giving every founder in our portfolio their own unfair advantages.
We are first principles thinkers. Our approach is to take none of the status quo for granted and to ask questions and seek answers with an open mind. With our thesis we questioned: “is power law investing the only way to back tech companies or just one way?” By creating our Shared Earnings Agreement we answered: “can we create better alignment with the success trajectories founders actually want to aim for?” With our Subscription Funds we made the process of investing in our funds much better aligned with how LPs want to allocate capital.
We are allergic to group-think and confident in our ability to come to first principles conclusions and act on them. Practically speaking this means we are probably going to be the most un-correlated investment in your portfolio.
We are builders to our core. We are a team of founders and people who could easily be founders and we ship at a very high velocity. I believe in telling people what you’re going to do and then shipping it and our earliest LPs can confirm our track record on this.
- Our “Trailhead” approach to dealflow leverage automation, no-code, and rigorous workflows to minimize wasting founder time and maximize GP time and bandwidth (see demo here, password is “apply”)
- Our Scout Program grows exponentially our ability to source and vet high quality investment opportunities and streamlines scout incentives and referral tracking.
- The Founder Summit, which we co-produce, is our epic event series bringing together founders from all over the world.
Note: in 2021 we raised $1.7m in GP equity to be able to invest in the team, products, and processes ahead of our AUM. This allows us to punch well above our weight and prepare for scale.
Why now.
We are at the beginning of the next phase of tech investing. The long-term driver of our fund is what I call the Peace Dividend of SaaS Wars: the long list of open source frameworks, scaleable infrastructure, and off the shelf B2B tools that allow a new software company to launch a real product with a fraction of the investment needed even five years ago. Ideas that used to need $5m to ship a product, now need <$500k in capital and sweat equity to get to a real revenue-producing products. This has, relatively recently, dramatically expanded the number of opportunities for tech entrepreneurs that can be tackled and we are the only fund positioning ourselves to be their preferred partner.
Reversion to reasonable multiples in tech companies is a tailwind for us. Although short-term market fluctuations are not a factor in our long-term strategy, the recent correction in tech stocks poses a big opportunity for our more value-based approach to early stage private investing. Our strategy is able to continue investing into new companies with far less risk that multiples compress and our investments go underwater.
Calm Company Fund is at an inflection point in our track record. After 3 years of investing in 60+ companies across 3 funds, our track record is already looking solid. As more companies in our portfolio mature, start sending back more profit shares, and exit to private equity, our track record will move from promising to undeniable (our latest fund valuation memo is here). Given the size of the total market opportunity, our long-term plan is to continue to scale up significantly. 2022 is likely the last opportunity to invest in our funds before our minimum check size starts adding zeroes.
Current Investment opportunities
Current:
Calm Company Fund III: Minimum subscription is $10k per quarter for 4 quarters. More info and a form to subscribe to the fund can be found here (space for new LPs is limited but currently available).
Founder Liquidity Fund: $100k minimum, called over 12 months. The fund summary memo and subscription process can be found here.
Upcoming:
Calm Company Fund IV (1 July 2022): Same strategy as Fund III but minimum subscription increasing to $15k per quarter for 4 quarters
Ways to get involved
PS - along the lines of calling your shots, here’s our 10-year roadmap laid out back in 2020 (note we used to be called Earnest Capital). Click through for the full thread.