The Operating Growth Fund, A New Approach to Early Stage Investing

The mystique of venture capital suggests that the greatest companies are launched with VC investment.

To many, venture capital owns a foolproof formula of selecting very smart entrepreneurs from a sea of desperate capital-seekers, funding them with millions, and then racing them to a huge exit.

Sometimes, this formula has worked well, but it certainly isn’t foolproof.

Only industry insiders really understand how many billions of dollars are wasted on failed investments while in search of the billion dollar Unicorn.

In fact, most of the visionary companies that have risen to greatness have done so outside of the VC mechanism.

Nordstoms, Shopify, MailChimp, Grasshopper, RVCA, Geico, Qualtrics, Unity, BaseCamp, Veeam Software, Tough Mudder, Lynda, DealerSocket, Survey Monkey, and many others have grown with a different formula.

They’ve become icons in private and public markets, including the majority of the companies on the Fortune 1000. They employ tens of millions of people. They’ve driven almost every aspect of technological and industrial growth throughout history.

Within these ranks, there are hundreds of thousands of smaller companies who started on a shoestring and grew naturally and patiently. Largely unsung and unnoticed, they quietly become $20m to $50m then $100m to $500m companies that are profitable and well run for decades.

At some point, they’re acquired, recapitalized, or inherited to the tune of many billions in personal wealth for the founders, employees, families, and shareholders.

Perhaps, there’s a way to be more efficient with the billions of early stage investment capital and build a massive new generation of healthy companies.

How? By establishing an alternative early stage investment category and execute it based on the formula that’s responsible for the greatest of small and large visionary companies. These are the companies that are Built to Last, as Jim Collins famously proved over 20 years ago.


While a handful of VC funds have embarked on a similar approach, in 2017, Sunray Industries launched the first Operating Growth Fund (OGF), distinctly intent on establishing an entirely new class of early stage investment.

The purpose of an Operating Growth Fund is to fill the void between the inefficient aspects of venture capital and the later stage vehicles of private equity.

Unlike other early stage funds who invest in young companies and their founding teams, the Operating Growth Fund independently identifies and validates viable business models and then allocates capital from within the fund to launch them.

In effect, the Operating Growth Fund is the founder and has the ability to “self-fund” its own seed and early capital rounds. The OGF chooses what companies to launch, recruits the management team, and oversees execution.

This is an approach with distinct advantages and characteristics designed to:

1. Maximize the strength and stability of each portfolio company.

2. Limit the risk threshold for investors and,

3. Consistently deliver an outstanding return on invested capital.

The core characteristics are shaped by years of research and feedback from industry experts combined with decades of real world, in-the-trenches insight:

Experience at Launch: From the start, OGF portfolio companies are managed by highly qualified operators with proven leadership skills. An OGF intentionally chooses to avoid many of the perpetual challenges associated with investing in founders who might not be prepared to manage an organization.

Equity Strength: An OGF owns its companies wholly from the beginning. They control the company’s equity as they provide seed capital through a series of capital rounds. This creates a distinct return-on-capital benefit that yields a higher multiple because of OGF’s majority equity stake upon liquidity.

For example, a traditional investment fund holding 20% to 35% equity in a portfolio company might require a 5x or 6x return to meet their internal target. By comparison, the same portfolio company, launched and funded within the OGF instead, would yield 10x or more as the fund would hold more than 65% equity upon liquidation (while it is true that the Operating Growth Fund may have invested more capital than the example fund above, it is also likely that the OGF will have invested at the lowest valuation compared to traditional funds who must negotiate terms with founders or enter the deal when the valuation is higher).

Success Mindset: OGFs live with the expectation that each portfolio company will succeed. No investment is made without the absolute expectation of realizing the company’s full potential and a willingness to do everything possible to get there. While that result may not always be possible, the mindset is success-driven and leads to a high rate of portfolio success and a frugal allocation of OGF capital.

Patient Approach: OGFs operate with speed and efficiency within natural timelines instead of unrealistic or uninformed benchmarks. Inherent in this methodology is a culture of bootstrapped caution until true scalability is a reality.

Runs Batted In (RBIs): OGFs are focused on moving every portfolio company into a scoring position vs. only swinging for the fences. The OGF will hit several singles, doubles, and triples to compliment the occasional home run or the elusive Unicorn.

Performance Investing: Beyond capital, a successful OGF maintains an unwavering and focused commitment to investing in:

1. The leadership strength of the portfolio companies through the constant recruitment of exceptional managers who are supported by world-class performance development systems in leadership, entrepreneurship, productivity, and innovation; and

2. The strength and viability of each business model and their products in an evolving marketplace, and a genuine dedication to real revenue, smart and steady growth, and profitability.

Pay-Per-Performance: OGF compensation isn’t based on the traditional 2% and 20% fee schedule. Instead, the Operating Growth Fund utilizes an annual operating budget that reasonably meets the needs of management while remaining below 2% of the fund size. Instead of the traditional 20% carried interest paid up front upon liquidation, the OGF establishes a waterfall payout that returns a 2x payout to LPs before carried interest percentages are earned by the fund managers.

Co-Investment: LPs can participate (on a limited basis) as independent investors in portfolio companies. This opens additional opportunity for LPs to maximize their investment by capturing direct equity in stand-out portfolio companies.

Transparency: LPs can view portfolio project plans, timelines, and overall performance in real-time whether a company is on track or experiencing a period of challenge or even failure.

Authentic Forecasting: Fund projections and actuals are based on net returns, using a combination of standards including a conservative Internal Rate of Return (IRR) approach, Public Market Equivalents (PME), Total Value to Paid-In Capital (TVPI), and Distribution to Paid-In Capital (DPI) multiples. Discussions of “estimating the unrealized” and J-Curve projections are not factored into Operating Growth Fund performance reporting.

Manageable Fund Size: An OGF manages single funds that don’t exceed $500m as historical data demonstrates that funds in excess of $500m consistently underperform as compared to smaller funds.

Unlimited Deal Flow: OGFs are not limited by the head to head competition for deal-flow that exists within the venture capital industry. Because Operating Growth Funds launch their own companies, there is no deal-flow limitation and investment decisions are based on analysis of world-wide innovation, access to invention, independent discoveries, and recruitment of strategic leadership teams. The OGF does not concern itself with which companies have been financed, but rather determines whether it can compete effectively in a marketplace and meet its internal success criteria.

No Mandates: An OGF doesn’t outline industry-specific investment mandates that often limit a funds ability to access other viable market opportunities. Remaining industry agnostic allows the fund to fulfill the strategy of rounding the bases by hitting singles, doubles, and triples that compliments the occasional home run.


The chatter of industry disruption has persisted for nearly two decades. It’s ironic that, as an industry full of entrepreneurial innovators, a disruptive shift for the better hasn’t yet happened. (The Kauffman Foundation, after completing a comprehensive study of more than 20 years of their own venture capital investments, introduced a host of transformative recommendations in We Have Met The Enemy and He Is Us, by Diane Mulcahy, Bill Weeks, and Harold S. Bradley.)

Perhaps now is the time. As a start, institutional investors can influence disruption through alternatives like Operating Growth Funds – redirecting billions into more efficient vehicles of early stage investment.

That’s real disruption, the kind that has the ability to ignite the launch of many more successful companies compared to any previous period in history.

By Jeff Chavez, CEO of Sunray Industries, an Operating Growth Fund that builds companies from launch to liquidity. He is also the Managing Partner of Authentic., a professional transformation firm teaching leadership, entrepreneurship, and production to clients including Coke, PwC, and Chanel.  @JeffChavez