Calm Company Fund Is Taking a Break

Something like Calm Company Fund would presumably offer lower risk and lower returns (per company) than a typical VC fund targeting high-risk high-growth. But with the advent of high interest rates, the fund is now competing with a lot of low risk alternatives.

Indie.vc is as started as a fund in O’Reilly Alpha Tech Ventures, a traditional VC fund.

VC funds typically run on their 2% management fee. Have $10m in assets under management, and get $200k a year to run the fund on (including paying GPs and employees). To increase this operating budget, you raise more money from LPs.

When indie.vc had trouble raising more money, it returned to traditional VC. When Calm Company Fund had trouble raising more money, it started conferences and a low-code agency - ostensibly to get more operating budget.

Now that the markets care about profitable businesses, indie.vc has reopened. But, Calm Company Fund has had to deal with fallout from their non-investing activities - and I’m sure they have to disclose the lawsuit to all potential investors which probably scares them away.

So, there’s a lesson here about how VC funds should invest in businesses, not try to create additional revenue lines.

I have utmost respect for Tyler and what he’s been trying to build. He’s excellent at brand building.

(Disclosure: I have a small stake in Calm Company Fund).

Let's assume a hypothetical case of running a $100 million tech investment fund. The first 10-11% of return should go straight to investors (not the manager), for the simple reason that 7-8% is available in the stock market, and unlike the public markets, tech funds are illiquid--unlike investing in SPY, you can't wake up one day and trade out of your interest in a fund like this. You're locked in. That shifts the return expectation upward.

So assuming the manager's cost of equity (what investors demand) is around 10-11%, maybe a great manager can get the return number to 15-16%. That's a pretty good return on the fund but it's only $5 million in absolute gross returns (10->15% on $100 million). Considering the manager might get only 10-20% of this (the rest goes to investors), it's just a lot of work to earn $1 million in performance-based comp, over 2-3 years of active work and perhaps a decade of full fund life. These things are also typically run by teams (several partners) so the returns are split.

The point is that $100 million funds just aren't making their managers rich. The two outcomes of this, which you see over and over, are (1) for managers to try to manage much bigger funds ($500+ million) or (2) big management fees of 2%/year or more, which significantly erode returns.

The net result being, VC is a very hard business that almost always delivers substandard returns to its investors, after long lock-ins with very little liquidity. It's very tough and I'm not surprised to see these guys shutting down.

> 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.

That explains what a calm company is?