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Inhale. Exhale. Find the space between… Calm Company Fund is going on sabbatical and taking a break from investing in new companies and raising new funds. Here’s why.
I’ve come to the conclusion that the thesis of Calm Company Fund absolutely works, but the business model does not.
The thesis, developed five years ago, is to invest at the early stage in founders aiming to build capital-efficient profit-focused calm companies. Although this might sound like common sense, it was basically heresy among professional investors five years ago and still remains a deeply non-consensus approach to investing.
Calm Company Fund began as an experiment to question whether the Venture Capital model was the only viable model, or whether you could also invest in bootstrapper-minded founders building companies that grow at a sustainable pace in niche markets while still earning a competitive return on investment. In my recent retrospective, I argued that the still-early results are promising and I’m happy with how we’ve delivered on the expectations we set for our investors including: lower failure rates, faster liquidity, uncapped upside, and overall fund performance. The portfolio is doing well and the thesis works.
The business model of Calm Company Fund is similar to most VC and PE funds. We raise a pool of capital from Limited Partners, use most of that capital to make investments, and set aside a portion (in our case ~10-15%) as management fees that pay for the team and tools we use to deliver the “product” of Calm Fund: researching and responding to investment opportunities, marketing ourselves to reach the right founders, building a community of founders and mentors, aggregating resources for and directly supporting portfolio founders, monitoring a portfolio of ~80 companies, reporting to investors, taxes, compliance, and quite a bit more.
Since 2019, we’ve raised four small funds, the management fees from which would cover the budget for a tiny team. Some micro-funds are able to operate comfortably at this scale with just one General Partner and an employee or two. But we are the lead/only investor in almost all of our investments, supporting a growing portfolio where almost every company is still actively operating, creating our own Shared Earnings financing structures, and generally trying to create an entirely new funding category. We take on a ton of work that most small funds don’t have to deal with and in my assessment that takes talented people to do well.
I knew early on that this was a strategic challenge for us and that we would need a team closer to 8-10 people in order to deliver a product that we’re proud of. A budget for that sized team via this business model would require raising larger funds (think $50-100m) which requires raising money from large institutional investors, not just from individuals. Beginning in 2021 we executed a plan to get there. We raised a crowdfunding round of equity for the Calm Company Fund management company, used that money to build the team, tools, and processes we would need to deploy a fund of that size, and then having laid the groundwork, we went out to raise those funds. The last part of the job fell primarily to me and, well, I didn’t get the job done. Maybe somebody else—a better storyteller or with a deeper network—could have pulled it off, or maybe we just didn’t have the fund version of “product-market fit” and it was doomed from the start. I’ll never know for sure, but I do feel that I gave it my best shot.
Many people have been generous with their time, advice, and introductions. We’ve learned, iterated, pitched, and refined but I just don’t see a path to scaling our fund size until our early funds start to have concrete irrefutable cash returns of multiples of what our investors put into the funds. Because our strategy is to invest at a very early stage, often times when the company is just a founder or two, we’re not supposed to see a lot of those kinds of results—from exited or substantially profitable portfolio companies—for many more years to come.
The other way to solve the budget challenge, which a few funds have indeed done a great job of, is to create other revenue streams besides management fees. We tried that too, but it turns out it’s very hard for the same still-small team to run the entire fund business and bolt on an entirely new business line that is a net contributor to the budget. We did generate revenue via online memberships, events, no-code consulting and sponsorships, but none of them had enough traction fast enough to be able to support the team we needed. If I could go back in time, the one thing I would definitely do differently is to focus on building some sort of strategically aligned revenue stream first, and then layer on the fund business.
I changed course in time to execute a painful reduction of the team and paring back of anything not absolutely at the core of our job of investing in entrepreneurs. The last 12 months or so have been an experiment to see if we could still deliver a product we’re proud of with a radically leaner team. I’ve come to the conclusion that the answer to that experiment is “No.”
Imagine trying to run a startup where you knew you were going to be stuck at a low-six-figure revenue for 10+ years, meanwhile your customer base, feature requests and support tickets just kept growing every year. That’s what running Calm Fund on the fixed management fees of our fund sizes looks like. You can operate a business for a few years like this, but you need a pathway to growing out of it and right now I don’t see that.
Compounding the difficulty through this period is the fact that a private equity firm, SureSwift Capital, that we co-hosted the successful Founder Summit events with, has persisted in litigation against us. That process has been an eye-opening realization that someone who is committed to wasting their own money in a pointless legal process can force you to do the same and it has been a massive drain on our already strained bandwidth and budget. The uncertainty of future litigation costs, which can be enormous if the other party forces the case all the way to trial, has made it all but impossible for me to hire or delegate or really make any long-term decisions.
It’s clear that operating a fund at this scale, where a single lawsuit can be an existential threat, is just too fragile of a way to build a business. Unexpected things are going to happen, and businesses need to grow to a resilient size to weather them.
The net effect is we’re just not doing a good enough job on any front of our business. We’re not responding to inbound investment opportunities fast and effectively enough, we’re not keeping all our stakeholders informed frequently enough, we’re not invigorating and tending to our community well enough. Everything is just stretched far too thin with no clear path to improving. In that context, I’m not comfortable continuing to make the kind of long-term commitment of raising new capital and investing it in new companies. I have made the decision that we will not be calling any more capital from our current fund and won’t be raising a new fund any time soon. We’re also pausing our process of reviewing applications and closing new investments. We’re going to take a big deep breath and re-center.
The irony is not lost on me how “un-calm” these past five years have been. I told myself that “we are doing the un-calm things to help 1,000s of founders build actually calm companies.” The jury is still out on whether that was a good plan.
I still believe strongly in the investment thesis and I’m deeply passionate about helping founders build the kind of companies they want to build, on their terms, with aligned capital, community and mentors.
But we’re going to take a break and see if we can figure out something entirely different.
Candidly I don’t know yet what that is. I don’t think there are easy answers and it may require going completely back to the drawing board and getting creative. It may require new structures, new partners, or new co-founders. Maybe we’ll come up with something soon, or maybe we’ll just have to wait a few years for our current portfolios to mature and turn into an irrefutable track record. Time will tell.
To our existing portfolio founders and fund investors: I’m not going anywhere. I am absolutely committed, and highly incentivized, to continue managing our existing funds and supporting portfolio companies in whatever way I can. Honestly, I expect to have more time and energy to do a better job of that going forward.
I also want to share that I am deeply appreciative of the feedback, support, effort, energy, and capital that 1,000s of people have given to the Calm Company Fund mission. It has been an absolute privilege to work with so many incredible team members and to turn some of my entrepreneur-heroes into collaborators, investors, and many of them into friends.
Okay, you probably have questions, so let me try to answer those here:
To investors our current funds
To investors our Reg CF crowdfunding on Wefunder
To founders in our current portfolio
To founders seeking funding
