The Calm Company Thesis

At Calm Company Fund we invest at every stage in software and software-enabled businesses. We’re not a typical VC though. We’re not in the business of putting founders on a “unicorn-or-bust” trajectory. We don’t endorse blitz-scaling or growth at all costs. 

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Instead we invest in calm companies. Calm companies grow at a sustainable pace, are focused on being profitable, are capital efficient and raise reasonable amounts of capital but are never dependent on it, and have a much wider range of successful outcomes. 

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A question we often get asked is how we’re able to invest on such a radically different thesis than the one used by virtually every venture capitalist. This is our long form thesis about the market dynamics that we believe will allow calm companies to thrive and our specific strategy for building a fund to support them.

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The Macro Momentum: Software is Entering the Deployment Phase

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We are in the middle of a fundamental shift in the dynamics of the market for software and software-enabled companies. The transition is best summed up in this essay from Jerry Neumann that builds on the widely read work of Carlota Perez to argue that software is transitioning into what both would call the Deployment Age.

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Both Perez’s work and Neumann’s analysis are very in-depth, so I’ll only briefly cover the relevant points. Perez argues that technological revolutions follow distinct long-term waves with different characteristics in each phase. Neumann connects this specifically to the software market and argues that software is transitioning from the “Installation Phase”—which consists of frenzied adoption, financial bubbles, winner-take-all opportunities, and spectacular failures—to the Deployment Phase, which consists of more steadily and incrementally spreading these new technologies to every aspect of the economy. A key characteristic of this phase is that new forms of capital are needed to fund the deployment process as the old financing models no longer make sense for the majority of opportunities.

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We agree that we are entering the Deployment Phase — the right side of the technology S-Curve. This means a few key things:

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• Many of the most obvious verticals have large successful incumbents and are crowded markets. There are very few opportunities to be the first-mover in a large market like CRM, ecommerce, project management, etc.
• There are far fewer opportunities to “blitzscale” and create winner-take-all outcomes.
• There is an explosion of opportunities to spread the fruits of technology to every niche and corner of the economy.

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For a few decades, venture capital (or angel investors deploying a very similar strategy) has been the default/only form of funding for software and software-enabled companies for two key reasons:

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1. For a long time, software companies perfectly fit the profile of venture capital. They had high startup costs of racking servers and hiring developers and designers for 1-2 years before launching, high technical risks, and often had highly scalable winner-take-all outcomes in huge markets that were untouched by software.
2. These companies are entirely locked out of traditional banking and small business loans because they lack the collateral and other characteristics needed for underwriting.

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But the shift in risk/return means Venture Capital is not the best financial model for almost all businesses in this phase and we need a new default way to fund and support the companies that will thrive in this phase. 

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Note: we’re not predicting the end of VC. There is still plenty of venture-scale opportunity in other sectors besides software like biotech, hardware, space, and so on. It’s just rapidly becoming not a fit for SaaS and other kinds of software businesses.

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The Essential Ingredient: The Peace Dividend of the SaaS Wars 

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A peace dividend refers to the idea that in wartime there is a frenzied application of resources to create all kinds of new technology (to win the war). But when the war is over, we still get to keep the technology and put it to better uses. 

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From Geocities to Salesforce and Shopify, vast sums of money have been poured into software companies enabling, among other things, the building of substantial capital stock that today’s entrepreneurs don’t have to waste time and money reinventing. 

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We call this The Peace of Dividend of the SaaS Wars and it includes:

• Quick start open-source development frameworks (Ruby on Rails, Laravel)
• Scalable server infrastructure (Heroku, AWS)
• A full-stack suite of off the shelf tools for the basic operations of software businesses (help desk, email & social media marketing, FAQs, billing, analytics)
• Free distribution networks from piggy-backing on fast-growing app stores and platforms
• No-code platforms allowing entrepreneurs to reduce their engineering costs to get to market (Zapier, Webflow, Airtable, Shopify)

The biggest impact of the Peace Dividend is that the cost and risk of launching a technology business has come down dramatically in a short period of time.

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Calm Companies will take the lead in this era of entrepreneurship 

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With software shifting into the Deployment Phase and both the cost and risk of launching a software company plummeting, what kind of companies will thrive? We like to call them calm companies and rebranded our firm around supporting them. But this is not a necessarily novel approach to building a company, you may know it as bootstrapping. Bootstrapping, building a company that is profitable, not reliant on outside capital, and grows at a sustainable pace, is the dominant mode of entrepreneurship in virtually all markets. But bootstrapping is typically defined in the negative: not taking any outside capital from investors. Nothing wrong with that but, after speaking to our community of founders, we think calm companies better represents the best attributes of these businesses and allows for the fact that you can work with outside investors without giving up the best benefits of bootstrapping.

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Here’s what you need to know about calm companies:

• Software is eating entrepreneurship. Previous generations of entrepreneurs achieved success building businesses like a regional chain of health food stores, an auto dealership, or multiple franchises of retail mattress stores. Those same entrepreneurs in this generation are building software CRMs for auto dealerships, software-enabled networks to track and deliver the freshest possible produce to health food stores, and direct-to-consumer e-commerce businesses for sleep products.
• Calm companies in the technology space are higher margin and more scalable than any other category of SMB. In particular, Software as a Service (SaaS) businesses, but any other recurring revenue tech-enabled business can often achieve 85-90% gross margins even while doubling or tripling revenue.
• Owning a calm company is the aspirational goal of many of the best entrepreneurs in the world. They are pursuing building a profitable technology business that can be run from anywhere in the world.
• Calm companies grow at a sustainable pace that maps to the right risk profile and opportunity they are going after. They do not pursue the “growth at all costs” mentality of venture-backed startups. 
• Calm companies are capital efficient, leveraging different sources of outside capital strategically without becoming dependent on it. They maintain strong unit economics and make more money than they spend

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Lastly, let’s dispel the myth of the Lifestyle Business. Many investors are under the mistaken impression that calm companies are small un-impactful businesses run by unambitious founders. But here’s the truth: calm companies are long-term ambitious. The founders of calm companies understand that over a long enough period of time, the primary obstacle to achieving ambitious goals is the founder or team burning out or otherwise killing the whole business. The calm company approach is a series of strategic decisions designed to make sure the founders and the company stays in the game long enough to achieve their goals.

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The value of a portfolio of calm companies

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Even if we are headed into a new era of entrepreneurship where calm companies will thrive, the question remains: can a fund investing in these businesses provide an attractive risk-adjusted return for investors. The answer so far is a resounding yes. 

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A portfolio of calm companies is different enough from traditional early-stage technology investing that we believe it is a new asset class. We call it Early Stage Value Investing: a risk profile that looks more like value investing versus “high growth” but at an early enough stage that you still have uncapped upside.

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Here are some of the attributes of a portfolio constructed around calm companies:

• Lower failure rate, less concentration of returns, and much less power law. The core differentiator of investing in calm companies is that we are not striving for the power law of outcomes, with most of the portfolio failing and 1-2 100x investments representing all the returns. While a power law is not in itself a bad outcome (see below on asymmetric upside), we are not dependent on those outlier outcomes to drive returns. 
• A portfolio not dependent on mark-ups and companies not dependent on follow-on financing. We analyze every deal through the lense of “can this be the first check, and the last check the company will ever need.” Some calm companies will raise more capital, but in general they are optimizing to never be dependent on it. This means the portfolio is less exposed to risks like a Series A Crunch (too many companies getting seed funding and struggling to raise their A round) or getting stuck in a down round because they raised too much money at an inflated valuation. Two risks that are particularly acute this year and going forward.
• Faster liquidity through profit sharing and many more exit options than IPO or bust. The median time to a successful exit for venture-style early stage investing is now 10 years or more. A portfolio of calm companies provides much faster liquidity in the form of both (a) profit-sharing, which can come as fast as 1-3 years post-investment and (b) a much wider array of exit options to private equity and strategic acquirers. The pools of capital that can provide a 25m-250m exit are vastly larger than the market for $10B companies, which means we have an expectation of liquidity of 5-7 years on average.
• Reasonable valuations. The primary cause of massively inflated valuations in the early stage market has been too many funds with the same strategy competing with each other to get into the same deals. Investing in calm companies, which typically are not a fit for a venture portfolio, has virtually no competition. This creates the space for investors and founders to agree on rational valuations.
• Capital efficient. Calm companies optimize for making investment dollars go a long way and in general avoid hiring far too many employees too ahead of revenue. Calm companies tend to have or strive for a very high revenue per employee. They also tend to focus on organic/free sources of customer acquisition rather than piling capital into pad acquisition. In aggregate this means our investment has much more impact relative to check size.
• Uncapped returns and asymmetric upside. The last benefit of a portfolio of calm companies is that, if you make enough bets, you will eventually back a Mailchimp, Github, Calendly, Atlassian, 1password (all companies that bootstrapped to a $1B+ valuation). While our portfolio construction is not dependent on hitting these outliers, we are still investing in structures where a 100x return is possible. 

Building a fund for Calm Companies

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Building a fund dedicated to providing capital, mentorship, and resources for calm companies has required to re-think and re-build many of the basic concepts of a fund. Here are some of the highlights. 

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Align incentives: Much of the traditional toolkit for investing in startups creates misaligned incentives when investing in calm companies. One of the first things we did with our fund was create, in an open source public fashion, our Shared Earnings Agreement (SEAL). This agreement puts no cap on founder salaries but aligns the economics of the company such that investors receive a share of Founder Earnings (founder compensation + Net Profit). If companies want to re-invest every dollar into growth or raise more capital, we’re on board with that, and if they want to take their foot off the gas pedal and harvest some profits, that works for us too.

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It’s important to note that the Calm Company Fund is not a fund centered around a specific financial product (like for example certain debt funds or funds offering revenue-based financing structures). Our primary innovation is not the financial products we create. The Shared Earnings Agreement is simply a means to an end of allowing us to invest in calm companies. We have invested using other financing structures (SAFEs, equity, et al) and will continue to do so and create new financial products besides the SEAL.

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Community, Mentorship, and Shared Resources: Nearly the entire universe of content, mentorship, strategies, tactics, books and podcasts are focused on entrepreneurs following the venture-backed path. So from day one we have begun cultivating an ecosystem of community, mentorship, and resources optimized for the calm company strategy. At this point we have an active community of 100+ portfolio founders, 200+ experienced mentors (all of whom are investors in our funds). We bring them all together at our annual conference: Founder Summit.

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Build for scale: Almost by definition, the market for calm companies ought to be much larger than the entire Venture Capital industry ($600B+ invested worldwide in 2021). Every decision we make has been around building to scale up to meet that demand.

• We have been a remote-first distributed team from well before COVID. This allows us to access the best talent from all over the world. While many funds have struggled to adapt to investing remotely, we have been doing it natively from our first dollar invested and have built all our systems around investing in the best founders around the world.
• In July of 2020, we raised a $1.7m “seed round” from 800+ investors. This was equity in the management company, separate from the capital that goes into our funds, which went straight to the operating budget and allowed us to staff up to 11 people much faster than our AUM would allow at the time and invest in products and processes for the future.
• We believe the typical process used to invest in startups, like hearing cold pitches on zoom, is still far too “small batch artisanal.” We have been continuously improving our application system to be able to make the most effective use of founders’ and general partners’ time. Our “trailhead” application system asks all the questions we would typically ask in an introductory call, with guided resources and links to our thinking on each topic, allowing founders to give us the information we need asynchronously and on their own time.
• Even as a small team we pay well above our weight, in terms of the velocity of work we’re able to do. This is in large part due to building our own cutting no-code tools and automations. We have a dedicated no-code engineering team building tools that make the whole organization more efficient. In any given month we have 10-20k automations running, making every aspect of the business more high leverage.

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Our Mission: to build and scale solutions to challenges for the full lifecycle of Calm Companies. We believe, while the number of companies we can invest in at the early stage is absolutely massive, the overall opportunity of calm companies is even bigger. Most entrepreneurial ventures are calm companies and almost nobody is listening to their challenges and building solutions for them. We have a 25+-year mission to discover, build, and scale up a long list of solutions that calm companies need throughout their lifecycle. This year we launched our second financial solution, the Founder Liquidity Fund, to buy secondary interest from the founders of mature $1m-10m annual revenue software companies. We’re just getting started.

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How We Pick Calm Companies

Investing in calm companies still requires picking your bets and taking equity-like risk. Meaningful checks that move the needle for businesses cannot, in our opinion, be fully automated, underwritten as debt, or approached as an index. You still need to have a good thesis and make good bets on founders and opportunities. Here is how we approach selecting calm companies:

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1. Assessing the market: look for micro-monopolies. The most successful calm companies operate in a market that is big enough to build a real business, but small enough that tech giants and heavily-venture-funded competition won’t find it worthwhile to compete with them directly (not that calm companies would always lose that match up, it can just get very expensive). We look for opportunities where a fantastic $25m-250m business can be built by capturing the dominant market share, leaving little incentive for competitors to fight over second place. 
2. Back founders with unfair advantages. We do not subscribe to the model of “just back great founders for whatever idea and hope they succeed.” We rigorously analyze the market, business, and opportunity, but we do still look to back founders who have an unfair advantage that makes them more likely to succeed than anyone else executing the same business plan. We focus on unfair advantages in (a) differentiation: they have a deep understanding of the market that allows them to build a superior product and (b) distribution: they have an audience, credibility, or some other connection to their customers that allows them to acquire customers more easily. Note: we do not rely on signals like Ivy League degrees or prior backing from well-known investors or accelerators to determine unfair advantages.
3. Find market momentum, have a secret. When thinking about the demand or the market for the product, we think in terms of intensity and momentum. Ideally, this demand is non-obvious and is some sort of secret discovered by the founder.
4. Optimize for capital-efficiency. We try to avoid obviously capital-intensive businesses like e-commerce with a heavy inventory component, but we also look for non-obvious ways that the business could become capital intensive over time including a need to hire talent in a skillset that is highly in demand. Some examples of capital efficiency could be: a talented full-stack team that can take the product a long way before needing to hire, very low or negative churn, strong sources of organic/free customer acquisition. 
5. Stick to your circle of competence (but stretch the edges). The concept of calm companies applies to a wide array of industries and business models. One of the reasons we are so focused on SaaS is that the founder and General Partner has deep expertise in SaaS. We believe it’s important for GPs to stick to their circle of competence but also explore opportunities at the edges of it. Overall we will grow our collective circle of competence by bringing on more General Partners with differing areas of expertise.
6. Make sure values and priorities are aligned. One of the reasons we are so transparent about our investing strategy is that we want to make sure we are actually aligned with the founders’ values and priorities. There can be a strong temptation to just tell investors what they want to hear to get the money, so we vet for alignment when interviewing founders.

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The Canonical Calm Company

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What we have learned after evaluating several thousand businesses in 3 years of operation is that the canonical business for us looks like this:

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• A founder works in a specific industry, trade, or segment of the economy and identifies a pain point still being done by hand with spreadsheets, email, or sticky notes.
• The first order total addressable market, while large enough to build a real profitable business, is too small for VCs to back or for tech giants to serve.
• They learn to code or find a technical co-founder and build a specific SaaS or software-enabled solution. The pain point is large enough, and with no direct tech-based competition, they can charge a substantial average revenue per customer of at least $100s/mo or $1,000s/year
• Potential customers are well known and the target market well-defined (“film production studios” and not “people in leadership roles”) and the founder can find their first 25-50 customers manually through founder-led sales.
• The product quickly becomes the no-brainer default solution in the industry. Non-revolutionary customer acquisition strategies like long-tail keywords, attending industry trade shows, and customer referral programs have a strong ROI due to tight product-market focus and efficiency in the funnel from free trial conversion to churn.
• Of course this is early-stage investing so we frequently make investments that look nothing like this, but a little more than half of our initial portfolio looks very similar to this in most respects or has characteristics that achieve the same results.

How Calm Companies Can Win: Be Long-term Ambitious

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It’s important to dispel the misconception that calm companies are so-called lifestyle businesses built by unambitious founders. While these businesses and founders do exist, calm companies are largely ambitious and talented founders building fantastic businesses. The way they win is by being long-term ambitious: optimizing for achieving their goals over the very long term. Here’s what that means:

• Never burn out. Over a long enough timeline, founders and employees burning out is the biggest risk to achieving your long-term goals. Structuring the entire company and strategy around avoiding this is long-term ambitious.
• Retain key employees. Many calm companies we know have had employees who stick around happily for 10, 15, even 20 years. This is a major advantage of being calm.
• Don’t risk the entire company. By raising capital and growing more sustainably, calm companies are not racing down a runway that means the whole company will die if it falls short of aggressive growth targets. This means calm companies have a much higher survival rate.
• Don’t stuff the business with too much investment. One of the most common and gut-wrenching ways tech businesses fail these days is raising far too much capital at too high of a valuation and not being able to hit the lofty growth rates needed to catch up to the valuations. We call this foie gras’ing the company. Many companies that would otherwise have been great businesses become “zombie startups” or shut down simply due to being crammed with too much capital. Calm Companies avoid this entirely.
• Grow at a sustainable, profitable pace. Aggressive spending and acquiring customers at negative margins are short-term ambitious. Calm companies know that the best way to stay in the game is to grow at a sustainable pace that maintains healthy margins.
• Make more money than you spend. What a novel concept we know, but it is an essential ingredient in the success of calm companies.

That's the thesis. If you'd like to learn more about investing in our funds you can do so at the link below.

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