Case Studies

Overview

Prior to Capacity, Bragdon was the co-founding partner at the management consulting company Credo, based in Chattanooga. Credo helps companies build better cities by connecting businesses that care about their community with financial and social capital, effective resources, and guidance. He has served on the boards of local ecosystem organizations CreateHere, Chattanooga Technology Council, and Chattanooga Chamber of Commerce. He also has actively engaged with other local impact organizations including CO.LAB, GigTank, UTC Entrepreneur Forum, Seed Project, Chattanooga Renaissance Fund, LAUNCH Chattanooga, and Chattanooga 2.0. Bragdon is a serial entrepreneur who was previously the co-founder at Very, Foresight.io, ReadyCart (acquired by Grapevine Inc.), Stork, Your Secret Weapon, and Tricycle Inc (acquired by Shaw Industries).

Capacity was launched to prove its model in Chattanooga with this initial pilot fund and then scale nationally by providing a playbook for other ecosystems.

Capacity is targeting $1.5M for its first fund with over $500K raised from the Kauffman Foundation and Rockefeller Foundation as of June 2022.

Investment Strategy

Capacity will primarily invest in revenue-generating companies led by underestimated entrepreneurs in Chattanooga and opportunistically across the rest of the US. The team will make revenue-based investments of $50K to $200K in 15+ companies. Capacity will invest in SaaS, light manufacturing, or service companies that hire locally and meaningfully impact their communities. It targets companies with $200K to $500K in annual revenues and expects to grow them to at least $1M after three years. The fund is targeting a 15% net IRR and 2.0 net MOIC over its seven-year life.

Capacity Capital will target companies with the following investment criteria:

• Location: operate and hire locally and actively involved in local communities
• Sectors: SaaS, light manufacturing, and services
• Metrics: limited collateral, <$1M in revenue, predictable & repeatable revenue model, with a line-of-sight to double in 12-18 months
• Founders/Owners: overlooked and underestimated founders seeking financial and social capital, and who want to maintain control and optionality
• Employment: opportunity to add local workers as revenue grows

Capacity believes great, regular businesses build better cities and contribute more than high-risk startups. Businesses with stability and steady growth create more value through long-term growth than startups focused on disruption and “hockey stick” growth. They believe these small businesses can generate better risk-adjusted returns from a balanced RBI portfolio than a traditional VC portfolio—doing so by delivering mostly 1.5-4.0x investments with limited losses over seven years compared to the rare 10x, a few 3-5x, several 1x, and mostly 0x investments over 10+ years. Additionally, Capacity expects to generate private equity-like returns by unlocking value for underestimated companies and leveraging its local and national networks.

Redeemable Equity  

Capacity offers a redeemable equity product, inspired by Indie.vc’s term sheet, for small businesses. Bragdon wanted to bring innovative capital to close a major capital gap for underfunded businesses in his Chattanooga community and the Southeast. Local entrepreneurs typically found it difficult to receive loans from banks due to low collateral assets, and difficult to receive Capacity offers a redeemable equity product, inspired by Indie.vc’s term sheet, for small businesses. Bragdon wanted to bring innovative capital to close a major capital gap for underfunded businesses in his Chattanooga community and the Southeast. Local entrepreneurs typically found it difficult to receive loans from banks due to low collateral assets, and difficult to receive for VC investment due to differing opinions on valuations, long-term market position, exit potential, or specific control terms.

Capacity’s redeemable equity approach enables the fund to hedge risk in economic downturns for small businesses. The redeemable equity structure has more predictable liquidity due to its revenue share component than the traditional VC approach, while maintaining upside opportunity with equity. Startups and investors playing the VC game rely on raising larger and larger equity rounds at higher valuations, but there are still no realizations. Even if revenues stay flat or slightly dip, Capacity will have realizations that can be recycled or distributed to LPs.

Access to Local Capital  

Prior to launch in 2020, Capacity Capital met with 60+ investors nationwide to learn more about revenue-based finance tools and partnered with The Benwood Foundation, Credo, and LAUNCH Chattanooga for additional research into this model. Capacity believes redeemable equity is the best investment model to scale underestimated, revenue-generating businesses that are more likely to grow and hire locally in overlooked communities. Redeemable equity terms are more flexible than debt and provide greater liquidity than equity while better aligning founders and investors. Capacity thinks investing in disconnected local businesses is what it takes to build cities where a workforce is developed, living wages are increased, communities are connected, and long-term wealth is created for more people.

Track Record

Fund I (2020, $1.5M target) – Capacity has invested $805K in 10 portfolio companies as of Q2 2022. Six companies are already making revenue-based payments to Capacity and have produced a 0.2x realized MOIC. The rest of the portfolio companies are expected to start making revenue-based payments in the next six months. The fund is in line to produce a 2x MOIC including upcoming revenue-based payments and a 2.4x MOIC including upcoming revenue-based payments and equity investments.

Portfolio companies include:

• BARQUE (Chattanooga, TN) is a locally owned and operated neighborhood BBQ restaurant.
• Dolly Monroe (Tampa, FL) provides training and certification for estheticians.
• Logic Products (Fairfield, IA) offers effective non-toxic products made with natural ingredients that are safe for children, people, pets, and the environment.
• ZOE Angling Group (Chattanooga, TN) designs and distributes ethically sourced fishing goods and transforms lives through its supply chain
• Omega Digital Solutions (Maryville, TN) is a fully remote, cloud-native company that strives to turn complicated business problems into simple solutions using right-sized technology.
• Surv (Newport, RI), formerly Rent Sons, connects young adult workers with community members in need of moving, landscaping, junk removal, painting, and other odd jobs.
• Watauga Butchery (Vilas, NC) is a custom meat processor that offers butchery and packing services with commercial and retail quality packaging.
• WYRE Technology (Chattanooga, TN) is a security-focused managed service provider for non-enterprise companies.

Fund Structure

• Management Company: Capacity Management, LLC (Tennessee LLC)
• Fund: Capacity Capital, LP (Delaware LP)
• Fund Type: Rule 506(b)
• GP: Jonathan Bragdon

Fund Terms

• Target Fund Size: $1.5M
• GP Commitment: $50K (3.33% of target fund size)
• Investment Period: 3 years from final close with up to 2 one-year extensions
• Fund Life: 10 years from final close with up to 2 one-year extensions
• Management Fee: 2.5% of committed capital during Investment Period; 1.5% of invested capital thereafter
• Carried Interest: 20%
• Preferred Return: None
• Key Person: Jonathan Bragdon

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