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.
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.
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.
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.
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.
We agree that we are entering the Deployment Phase — the right side of the technology S-Curve. This means a few key things:
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:
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.
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.
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.
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.
We call this The Peace of Dividend of the SaaS Wars and it includes:
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.
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.
Here’s what you need to know about calm companies:
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.
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.
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.
Here are some of the attributes of a portfolio constructed around calm companies:
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.
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.
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.
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.
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.
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.
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:
What we have learned after evaluating several thousand businesses in 3 years of operation is that the canonical business for us looks like this:
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:
That's the thesis. If you'd like to learn more about investing in our funds you can do so at the link below.