In the last 10-15 years bootstrapped, internet-enabled, technology businesses have grown into a thriving market driven by two main themes:
The word “bootstrapped” narrowly means a business built without outside capital, but it has come to represent a culture of entrepreneurship that explicitly rejects many aspects of the venture-backed startup culture.
Specifically bootstrapped entrepreneurs reject:
Bootstrappers by contrast:
Bootstrappers don’t raise capital because there are no aligned capital options for them.
Most capital options for tech entrepreneurs have either been (1) a terrible fit for their business like bank loans and credit cards or (2) traditional venture capital, rejected for the reasons above. Thus “bootstrapper” founders frequently conflate the values of this particular approach to entrepreneurship with never taking outside capital. This is a market failure and our opportunity.
The right fund with appropriately creative financial products could offer capital and back these businesses and persuade them that capital can be an effective tool for their business without compromising these values.
These businesses are a strong investment opportunity
Broadly there are four main types of businesses in this space in decreasing order of focus for the Calm Company Fund:
These businesses are frequently bootstrapped but offer very strong investment economics for the following reasons:
The Calm Company Fund will make three kinds of investments outlined below. They are presented in order of the expected size of investment but Thesis 2 will be the focus of this fund.
Thesis 1 – Incubate: Enabling a broader spectrum of founders to go full-time on their products
Even as the model of bootstrapping a software business has become perceived to be less risky and more widely known, there are still a huge number of potential founders with the skills to build profitable software businesses that are unable to make the leap into working on their products full-time. Specifically, some of the most common obstacles are:
An incubator-sized amount of capital ($25-100k) could allow founder(s) to work full-time on a pre-product-market-fit business.
Thesis 2 – Accelerate: Early-stage growth capital experienced founders in competitive markets
Experienced and talented founders are increasingly finding that the software market is no longer a blue ocean. Many niche markets have several competitors and there is an increasing interest in the idea of growth capital for businesses that might have stayed bootstrapped 5-10 years ago. Even ardent bootstrappers are beginning to realize the value of a capital infusion shortly after early product-market-fit to outrun competitors and accelerate customer acquisition and scaling.
An accelerator-sized investment ($100-250k) structured in a way that aligned the fund with the goal of a profitable independent business would be increasingly attractive to top-tier founders.
Thesis 3 – Diversify: Enable founders of profitable businesses to “take chips off the table”
Founders of successful profitable software businesses currently have very few options to diversify their personal finances while retaining some upside in the business they built. The primary model is a full sale of the business via a small number of niche brokers. The pool of capital available for sale is mature but still relatively small and there are almost no options to sell a portion of the business to “take some chips off the table.” Finally, the market lacks a go-to financing structure for an outside investor to buy a portion of the business and be paid back primarily through profit-sharing versus a liquidity event.
As the first big waves of successful bootstrapped businesses start to hit years 5-10 of operation, founders will increasingly want to liquidate a portion of their businesses to (a) diversify their personal finances which are heavily concentrated in one business (b) fund significant life events like a house, college tuition, etc. An investment option ranging from $250k-$1m+ would generate returns from immediate participation in profits.
The Calm Company Fund will use an investment structure aligned with founders’ goals and businesses who ultimately aim to become sustainable and profitable while offering competitive risk-adjusted returns.
Fund invests $200k in Thesis 2 company.
Over next 5 years fund receives $700k (3.5x) in dividends.
Dividend share ceases.
Fund retains a minimum 2% in options on the business.
Fund invest $75k in Thesis 1 company.
Initially has equity option for 15% of business.
In years 2-3 fund is paid back $100k of dividends (of $300k total cap). Implied ownership stake is “paid down” to 10%
In year 4 business is sold for $1.5m. Option converts and Fund receives $150k (10% of sale).
Fund invests $100k in Thesis 1 company.
Product hits early product-market-fit and raises a seed round at $2m pre.
The investment converts at 20% discount: $100k / ($2m * 80%) = 6.25%
No further profit-share.
Target fund size
$5-10m deployed over 3-4 years.
By Founders for Founders
The Calm Company Fund is primarily raising capital directly from successful founders and, in rare cases, funds managed by previous founders and operators.
Everything from the risk/return profile, to the language we use, will be optimized and aligned with founders long-term interests.
Goals of the operating structure
Fund 1 will begin testing the cost-benefits of various value-adds such as:
A key component of a true accelerator is creating a defined investment offering with clear terms that many founders/businesses can apply for. At this stage, EC Fund 1 will optimize for learning exactly what that ideal early-stage investment structure is for the target market. If the opportunity presents it self, we may carve out a chunk of the fund for a batched accelerator pending further research.
Diversifying & Expanding the entrepreneurial ecosystem
There’s not a ton of diversity among successful founders of bootstrapped startups. One thing I think the world of venture capital is making good progress on is starting to acknowledge privilege and a structural lack of diversity and providing more opportunities for founders who don’t fit the typical stereotype. I’m not saying they’re great at it, but all it takes is a few dedicated funds or committed VCs to decide they want to fund more women, more people of color, more people in a different age bracket or from a different part of the world and it happens. The bootstrapped startup world doesn’t have those kinds of mechanisms and I think it is to it’s detriment.
Clear decision-making & feedback
One of the worst things about the VC world is the way that they will never ever give you a clear: No. They always want to maintain the option to invest later, or jump on a round if another VC decides to lead it, so every pitch that doesn’t end in “Yes” will end with some form of open-ended feedback or critique. I hated that so much, if you’re not going to invest, just tell me and give me some clear reasoning. We will always give founders (who request it… sometimes it makes sense for both parties to have an open-ended discussion) a clear decision in 14 days with our honest feedback.
Optimized for Learning
This fund will be breaking new ground in many different ways. Pursuing multiple theses at once and maximizing flexibility in the first fund will lay the groundwork to scale successful investments in the future. This fund structure will all significant experimentation which could substantially de-risk a more structured incubator, accelerator, startup studio or larger follow-on funds.
Lean, Remote, Flexible
Build the fund like the businesses it works with. Remote-friendly, flexible, lean, transparent.
Part of the opportunity is that there are very few comparable or competitors in this space.
“Don’t take on venture risk for debt returns” – Bryce from Indie.vc
Adverse Selection. It’s possible the best entrepreneurs in this space are hustling without capital and only second-tier founders would end up taking the money. Not likely, but a risk to pay attention to.
Bootstrapper culture backlash. A large subset of bootstrapper culture has become quasi-religious about not taking capital at all. A commitment to be transparent and to engage with the community with be essential.