Calm Investing in Un-Calm Times

“Well it’s certainly Calm Fund’s time to shine, right?” … I can’t tell you how many times I’ve heard that over the past few months. It’s true, the market conditions have shifted in a way that dramatically favors our style of investing early stage in companies that stay capital efficient, focus on profitability, and grow at a sustainable pace. But I thought it would be good to unpack our specific strategy for this next phase of investing in and supporting entrepreneurs.

So what’s happening?

• The bubble, that we all saw in plain sight growing unsustainably huge, finally burst. Public market tech companies saw huge draw-downs which suddenly made >100x revenue late stage private deals look very underwater.
• The truly insane valuations being offered to startups by price-indifferent investors are coming back to Earth.
• Huge multi-stage funds are slowing their pace dramatically, as the IPO window for tech companies slams shut.
• Every VC/PE fund claims to have a ton of dry powder, but I’m skeptical of how likely it is they’ll actually call that capital given their LPs are also in a liquidity crunch. We’ll see.
• Meme stocks and crypto crashed, and a multi-year period of “whoever YOLOs the hardest generates the best (on paper) returns” has come to an end.

The Great Pivot To Discipline is underway as investors of all types are now preaching from the Twitter street corners extolling the virtues of long runways, capital efficiency, and profitability.

What does this mean for Calm Fund and the calm companies we invest in? In short, not all that much. Here are a few ways in which calm companies, and our approach to investing in them, should be resilient, and possibly even a bit anti-fragile, to the current market uncertainty.

• Capital efficiency: calm companies focus on maximizing their optionality and only plan to raise capital opportunistically. They intentionally avoid situations where they will be dependent on closing another round to survive.
• Sustainable hiring and growth: amazing humans are the lifeblood of modern companies, but they also represent the largest cost center by far. Without access to limitless buckets of capital, calm companies have always taken a more cautious approach to hiring. This means most of them will not have to make significant layoffs even if they go through a period of flat revenue growth. In fact, many calm companies will benefit from this, picking up talent recently laid off from large startups.
• Optimizing for resiliency: A tenant of calm companies is “be long-term ambitious” which means focusing on staying in the game long enough to reach your goals. Calm companies are run with plenty of slack in the business and should be well-positioned to survive and thrive through this period of uncertainty.
• Lack of interdependency: Our approach to a portfolio of calm companies is heavily weighted toward software companies each selling to a different vertical/industry.  While no portfolio is immune to an overall market downturn, we shouldn’t see the cascading problems you get with a portfolio full of startups selling mostly to other startups.

By and large our approach to this phase is to stay the course with our existing fund thesis. But here are a few areas we’ll focus on.

Valuations

A critical part of our thesis for generating strong returns for our LPs is the idea that we would be able invest in great founders at fair/reasonable valuations by simply not competing with VCs for the same opportunities. We intentionally seek out and prioritize opportunities that are clearly not a fit for the venture profile, and avoid the hot markets other investors are piling into. This means our term sheets, and the eye-popping numbers you read about in TechCrunch, are just an apples to oranges comparison. Most of the investments we do, the founders are only really talking to us or planning to continue bootstrapping. This has allowed us to simply offer fair investment terms for both parties, resulting in much more reasonable valuations.

But as the amount of capital chasing founders reached a frenzied crescendo last year, we did sometimes see examples of venture funds competing with us for opportunities that were clearly a fit for us and not “venture-scale” as well as angels investing early in companies at unrealistic valuations, anchoring expectations of the founder to something we couldn’t match. This only really affected us at the margin, so we mostly just passed on these opportunities and therefore won’t be updating our approach to valuations, we just expect a slightly higher success rate on term sheets getting accepted.

Across the board we never really inflated our valuations all that much, and pretty much stayed the course. Now the market levels are returning to somewhere around what we’ve been doing all along.

We also have no plans to mark down our portfolio as our mark-ups are almost all a function of a conservative multiple on revenue progress, not overinflated mark-ups from follow-on rounds.

Dealflow

We are already seeing our inbound application volume nearly doubling in the last few months. I expect this trend to accelerate as our approach to building companies looks particularly attractive in this market. I also expect a huge cohort of ex-employees from recently shut down startups, who saw millions in equity wiped out because the company raised too much and tried to hyperscale too fast, will want to build their first/next company on our thesis.

Our game plan:

• Stay even more focused on capital efficient business not dependent on raising follow-on capital.
• Help founders achieve profitability as fast as possible while growing at a sustainable pace.
• Bulk up our investing team and bandwidth to handle the surge in dealflow.
• Raise as much capital as we possibly can. It’s not the best time to be raising for larger funds, but we’re pressing ahead as I think this is the ideal time to invest aggressively in early stage companies operating on a calm thesis.

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