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Fund 3

Written By:
Tyler Tringas
March 23, 2021

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Calm Company Fund III is open now with first capital calls coming in July 2021. Sign up >

Mission

We believe that entrepreneurship is an inherent societal good and powerful lever for progress and human achievement.

Our mission is to maximize the number of successful internet entrepreneurs in the world through capital, mentorship, and community.

Thesis Overview

The long form version of our macros thesis is published here, but these are the highlights.

We are entering the Deployment Age of Software as the dominant opportunities in the software market move from winner-take-all open markets, to a steady process of applying the gains of software to every niche of the economy.

This shift is creating strong demand for a new default source of funding that isn’t the traditional venture capital model. The explosion of capital options—revenue-based financing, Clearbanc, Pipe, Stripe and Shopify Capital, and many more—is part of that search and it won’t be a winner-take-all market but there will be a new default path for entrepreneurs that looks more like:

Calm Funding to get started → Pipe/Clearbanc to extend cashflows as needed → RBF to build a sales & marketing engine → growth private equity for secondary liquidity and expanding to enterprise → debt to fund operations secured by mature recurring revenue.

“Pre-seed → YC → Seed → Series A → Series B… etc etc” will become the exception not the default as more and more entrepreneurial opportunities are asset-light and tech-heavy, but not “venture scale.”

The linchpin of what makes this transition possible is the Peace Dividend of the SaaS Wars that makes it faster, easier, cheaper than ever to build and launch a software of software-enabled business.

Software is Eating Entrepreneurship and the New American Dream is to own a profitable, high margin, low overhead, remote-first, SaaS or software-enabled business.

And it’s not just entrepreneurs who want to own these businesses, every flavor of private equity wants to buy them, putting steady upward pressure on the value for exits and/or secondaries.

First Principles Thinking & Building

We try to cultivate a first principles approach to problems we see in the market for funding early-stage companies. Too many of the best, or at least very common, practices in the industry haven’t been questioned or re-examined. If something doesn’t make sense for us or the founders we want to support, then we’ll build what we need to create better alignment.

Remote-first: We have been a remote-first organization from day one, well before COVID. It’s nice to see many funds adapt to the remote reality, but it’s in our DNA.

Shared Earnings Agreement: Traditional early-stage financing structures are not aligned with founders who want to build profitable companies and potentially never raise another round. So we created our own, in public, with collaboration from our community. Learn more about the SEAL.

Trailhead: The standard approach to pitching leaves a lot to be desired so we created our own product that allows founders to asynchronously build their pitch, with plenty of learning material from us along the way, and submit when they are ready. So we created Trailhead.

Skin in the game mentorship: Many mentorship programs fail as mentors are either unengaged or just there to upsell companies on their services. From day one we required everyone in our mentor community, now over 160 entrepreneurs and operators, to be an investor in the fund. This has worked incredibly well. Read more about our approach to mentorship.

Subscription Funds: Before rolling funds launched, we identified that the classic fund structure was misaligned with the priorities of our LP base, largely composed of individuals and entrepreneurs. We designed our own subscription fund model with fixed quarterly LP commitments and 1-year funds. In collaboration with our fund administrator, Aduro Advisors, we have built out our own highly automated and scalable back office to manage our fund structure with a very lean staff. Read the deep dive.

Carry-sharing for team + early LPs: Early LPs and team members rarely see the upside for launching a new investment company. We like to play long-term games where people who bet on us are appropriately rewarded. In 2020 we launched a carry-sharing program, carving out 20% of all carry across all our funds allocated across team members and early LPs. The benefits were 100% retroactive for former employees and Fund 1 LPs. Learn more about why we share carry and are so incredibly focused on aligned incentives.

Portfolio Construction

The crux of what we are betting on is that the conventional thinking on how to invest in early-stage companies is, if not wrong, not the only way to do it successfully. The traditional model is based on power law outcomes where most of your investments fail, but a tiny few of them are mega-winners and generate all the returns. We think this is one way to do it, but that it’s not a law of physics that every portfolio has to look this way, especially in the Deployment Age of Software.

Our aim in investing is to generate returns that are competitive with top tier early stage venture firms, typically 3x cash-on-cash returns within 10 years, with two notable differences:

  1. Less concentration of returns and thus less overall risk. Diversification is the only free lunch in investing and our strategy is to hit a wide variety of “single, doubles, and triples” with the types of companies we back versus having all our returns concentrated in “mostly strike-outs and one home run” (apologies to the non-US crowd for the baseball analogies).
  2. Faster timeline to liquidity. Early stage venture investing usually means locking up your capital for nearly a decade until a multi-billion-dollar exit or IPO. We target a much faster time to seeing realized returns in our portfolio. Our initial, somewhat conservative, model expected the bulk of returns to be in years 4-7 of a fund, but from our earlier funds we are seeing an even faster timeline with Shared Earnings and exits within 2 years.

We underwrite our investments against a fairly conservative and boring model of the future opportunity for the companies we back. In the successful scenarios we’re modeling our target returns against: the company grows reasonably well through its own cashflows, becomes profitable enough to pay some Shared Earnings, and then we get some liquidity either through an exit or secondary at a very reasonable financial multiple. We don’t bake in strategic acquisitions at 50x revenue, hyper-growth inflection points, raising big growth follow-on rounds from a position of strength into our model. But of course, these things are all completely possible for the companies we back, they are just free asymmetric upside to our core thesis.

A good analogy is that we should have a distribution of outcomes that looks more like middle-market growth private equity investing but with earlier stage check sizes and more potential upside. This is made possible by the Peace Dividend of the SaaS Wars which means companies are substantially more de-risked when seeking a ~$200k investment than they were 5-10 years ago.

Here’s our unfair advantage in this current market: we are truly contrarian and backing companies that for the most part no other funds want to invest in. This means we are completely decoupled from the eye-popping valuations, driven by more and more VC funds fighting for access, of the latest YC batch. We make fair win-win investment offers at reasonable valuations.


Dealflow

The vast majority of our dealflow is inbound inquiries based on our written content on the site, social media, and word of mouth among like-minded entrepreneurs.

We are beginning to see flywheels spinning where new investment opportunities are being referred by our existing portfolio, existing LPs, and finding us through our community and events at the Founder Summit.

We leverage no-code automation and our Trailhead process to efficiently handle a high volume of inbound per GP.


Traction

Fund 1

  • Size: $3.1m
  • First Check: Feb 2019
  • Deployment Period: 18 months
  • Companies: 22
  • TVPI: 1.88x (as of Dec 2020, 22 months since first investment)
  • DPI: 0.35x (1 exit, 3 companies distributing Shared Earnings)
  • IRR: 40%+

Note: TVPI and IRR are calculated on an “as converted” basis using our internal (fairly conservative) valuation methodology which is outlined in more detail in this memo. TVPI is “Total Value to Paid In” which is [the current value of the all investments in the portfolio] + [all distributions to LPs from Shared Earnings and exits] / [the total initial fund amount].

Summary: Our goal with Fund 1 was to start investing and testing the model as quickly as possible. We raised $3.1m in six months and went live. Over 18 months we paced about 1-2 investments per month with an average check size around $150k. We hold investments that are <12 months old at cost so only about half the fund is out of that period and that cohort is showing very strong returns. Our cohort of investments just from 2019 has a TVPI of 2.43x already and the rest of the fund is on track for strong returns.

Fund 2

  • Size: $5m
  • First Check: Aug 2020
  • Deployment Period: 12 months (still being deployed)
  • Companies: 11 and counting
  • TVPI: N/A (all investments are <12 months old which we hold at cost)

Summary: For Fund 2 we switched to a subscription model for LPs. Read more about the thinking here but the upshot is that LPs now commit to a fixed quarterly amount that is allocated into a new fund structure every 12 months. The response to this has been fantastic bringing in a wide array of entrepreneurs into our LP/mentor network.

No major change in strategy from Fund 1 to Fund 2 except that our average check size has been creeping up and is at about $200k for this fund. This is purely a function of more slightly later stage companies coming into our pipeline looking for a bit more capital.


Reg CF GP Equity Offering

We have launched a Reg CF crowdfunding campaign to source $2m of GP Equity (a slice of long-term carried interest in all funds) at a $20m valuation. This raise will give us more firepower to build out the team, platform, and scouting programs ahead of AUM. View the campaign on Wefunder.


Investing Team + The Future of Calm Company Fund

Currently Tyler Tringas is sole General Partner with investing authority (and the writer of most every essay on this website). But the medium-term plan is to expand the investing team and unlock the bottleneck of a solo GP, to back more entrepreneurs per year.

With Fund III we intend to begin a series of small experiments, where Tyler still retains final investment decisions, but “super-charged scouts” (yes we need a better name) bring fully vetted investment opportunities as an on-ramp to GP status in future funds. We have a solid, albeit somewhat informal, pipeline of interest, that we intend to formalize in the near future.

Tyler will continue to personally deploy the vast majority of Fund III, and retain final investing decisions over the entire fund deployment, while gradually layering in small experiments with potential future GPs. Learn more.

Fund III Details

  • Max size: $10m
  • Deployment Period: 12 months
  • Minimum LP Commitment: $10k per quarter for at least 4 quarters. Contact us if you need a lower minimum. Exceptions will be made with a priority for underrepresented investors.
  • First Close/Capital Call: July 2021

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