A version of this article was previously
published on CREtech in Sept 2018
Coming off another successful recruiting for our 3rd Dreamit UrbanTech cohort, we had the pleasure to meet quite a few truly incredible startups.
This piece is not about those startups.
This is about the other ones, the startups that, like milk past its expiration date in a coworking space refrigerator, we’d really like to quietly disappear and be replaced with something fresher. So, after canvassing a few of my colleagues, I’ve compiled this list of startup pitches that, absent extenuating circumstances, we’d just as soon not see again.
It’s a community portal for tenants
I live in Manhattan. I don’t even want to talk to my neighbors in the elevator so why would I want this? In virtually all the buildings I’ve lived in, there has invariably been “that guy” (or woman) who has tried to rally the other tenants to be more social. Often, we like “that guy” a lot – he’s nice, he takes our mail in, signs for our packages, etc. We just have no interest in what he’s trying to do.
Kidding aside, there’s nothing about this idea that couldn’t have been done as far back as the late 90s which should be a huge red flag to any entrepreneur considering a startup like this. With so many hungry and talented entrepreneurs out there, good ideas don’t just sit around waiting. In fact, established companies like BuildingLink have community sections that are invariably ghost towns. If you have a burning conviction that the world needs a tenant community portal, you should consider the possibility that you are “that guy.”
It’s a real estate crowdfunding site… but with blockchain!
The most charitable thing I can say about these pitches is that they (or most of them, at least) were not ICOs.
We started seeing pitches for real estate crowdfunding sites as far back as 2014, if not earlier, and there are already a number of players in the space with significant head starts (RealtyShares, Fundrise, RealtyMogul, Patch of Land, etc.) so if you are a pre Series A startup in the space, you are pretty late to this party. Since these are basically marketplace plays, first-mover matters.
But wait!” you say, “we use blockchain!
So what? It’s not that hard to keep track of fractional shares in a building using an old-school, centralized ledger. If you standardize the legal documents and purchase process, you’ve already removed the friction on this process. The hard part here isn’t transactional friction but marketplace liquidity: you need enough buyers on the platform so that when someone wants to sell their shares (or tokens) in a property, there is someone willing to buy it. If you don’t have a deep pool of potential buyers, you end up with an asset like small cap stocks: easy enough to buy but hard to sell (especially in a down market!)
The possible exception to this rule are companies like Harbour who focus on tokenizing high-end trophy properties. These are the blue-chip stocks of the real estate world. There will likely always be smaller investors willing to own a piece of the Empire State Building. So giving its owner the ability to sell part of it to a mass market rather than to the current small circle of big players who can afford to invest at that scale both greatly increases marketplace liquidity and reduces transactional friction, unlocking (at least in theory) significant value for the building owner.
It’s a lead gen site for commercial real estate
I have the utmost respect for lead gen and, given the size of these transactions, there is potentially a lot of money to be made selling leads to landlords and their brokers. The trick is getting the tenant to start their search on your site… and you need to do it in a way that your competitors cannot immediately copy or else your cost of customer acquisition will be bid up until your margin is gone. Put another way, if you are using Google AdWords to drive traffic to your site, so can your competitors.
Zillow, for instance, succeeded in creating a site that residential buyers know to go to at the very startup of their home or apartment search by aggregating and cleaning up messy, fragmented public data and presenting it to the public in an easy to use interface. In theory, anyone could have done this but they moved first and fast, creating brand equity that’s hard for a potential competitor to displace without either creating something a quantum level better or spending a lot of money on advertising to launch a competing brand.
Our app helps community residents get in touch with their representative and get more active in local politics
If they wanted to do that, wouldn’t they start by at least voting? This is an example of civic tech backwards think: instead of creating an app to fill demand, they want to create demand with their app. And since here too, people have been banging their heads against this wall for nearly two decades, if you still think the public is just dying for an app like this, it’s very possible that you are “that (other) guy.”
We are a chatbot for residential brokers
It is telling that these startups rarely include successful real estate agents on the founding team. Converting a productive buyer into a client is mission critical, especially in an industry with little competitive differentiation. Agents convert products with personalized service and emotional rapport. A chatbot is the exact opposite of this and, as a result, agents are extremely reluctant to rely on them for this stage in the conversion funnel.
The rental side of real estate, especially on the lower end of the market, can be a brutal, time-consuming slog. Most agents transition from representing renters to other parts of the market as soon as they possibly can, leaving this segment to newbie agents or high volume / low service shops so it’s conceivable that a chatbot for renters’ agents might have legs….
We make 3D models from 2D floor plans
There’s value here if you can pull it off but there’s just not enough data in a 2D model to get to something buyer-ready automatically. So either the landlord has to customize the raw results a lot (too much effort for them) or the startup does a lot of post production (and becomes a service industry selling man hours rather than a scalable tech startup).
While not full-fledged startups, these phrases were often enough to make us gag all by themselves
Blah blah blah… drones!
Yes, drones are pretty cool and they do have the potential to change a lot of things, both in construction and real estate and the world in general. But if your startup is basically a glorified drone piloting service, you are selling man hours (not a model that VCs like to back), have no competitive advantage and no barrier to entry. To us, you are basically a taxicab company.
Blah blah blah… AI
So what exactly makes it AI (or Machine Learning for that matter) as opposed, for instance, to a simple database query? As the famous quote goes, “I do not think that word means what you think it means.“
… and the user gets a dashboard…
My car has one dashboard. Why would you expect a property manager to want 6 or 7? I’ve head the phrase “dashboard fatigue” a lot lately…
Instead of covering them another dashboard, integrate with their existing dashboard or, better yet, automate the responses to the data you collect so they don’t have to check a dashboard at all… or even think about it. Just. Make. It. Happen.
We’re Houzz meets Uber meets Robinhood
Here’s a hint: the Hollywood style analogy should get you an instant “Ah, I get it.” If the investor has to think about it to understand what you mean, it’s a #fail. I don’t care how cool you think it sounds, skip it and cut to simple description.
Note: A version of this post previously appeared on EdSurge.
If you go to startup pitch events, you’ve seen it happen:
An entrepreneur says something—something so naïve, egregious and hackneyed—that it makes the investors, along with educators who are now increasingly in the audience, physically cringe. As funders wince and squirm uncomfortably, some are thinking along the lines of: “How do I respond to this pitch genuinely without coming off like a jerk?”
In the interest of fixing this problem at the source, I reached out to some of the advisors and investors in the Dreamit Edtech network to get their “lemon lists” of concepts, statements, and business models that Edtech entrepreneurs may want to think twice—or thrice—about.
For convenience, I’ve aggregated their suggestions into two broad categories: Cringe-worthy Concepts and Modest Missteps.
These are not inherently “bad ideas” per se. It’s just that the investor community have seen tons of these, and in order to impress you need to jump right to what makes your approach a quantum level better than everything else out there. Hint: “It’s mobile,” “We have a better UI,” and “It’s for millennials” are not the answers.
Student engagement and retention mobile apps
Yes, this is a big problem. But there are many startups in this space. Most of them offer some variation of the thesis that improving how “engaged” students are in their coursework and community will boost academic outcomes which will then increase retention. Yet academics are not the main reason student drop out; according to a study from Inside Track, it’s the fifth most important factor.
The other solutions I see in this space tend to throw a lot of features (such as calendars, student to student messaging, event check-in, and newsfeeds) into an app and hope better retention just happens. I’d cite a few examples of this approach but, as you can imagine, startups who take this approach rarely get off the ground and those who do don’t last long.
Parent communications platforms
There are already several well-capitalized startups (including Bloomz, ClassDojo, Remind), established companies (SchoolMessenger), and other deep pocket players from learning management system providers that already boast significant traction here. Like Peter Thiel says, if you are not delivering a 10x improvement, you don’t stand a chance.
Chatbots are hip and cool these days and, while I agree that they have a lot of potential, most of the pitches are simply applications that turn IBM Watson’s natural language processing technology loose on a university’s existing FAQ page. If that’s all you’ve got, what makes your business better and defensible? In these situations startups that master the space early get a rush of initial business—until the mass of fast-followers come in and drive prices down to the bare bones.
College recruiting and lead generation
The growing population of 18- to 24-year-olds in the U.S., along with the stream of foreign applicants to U.S. universities (which, to note, has taken a small dip under the Trump administration), the widespread adoption of online applications, and nearly 700 colleges accepting a common application, combine to make college admissions more competitive than ever. So finding and getting into the right college is clearly a major pain point.
The catch is that the vast majority of people suffer it only once. This means that customer acquisition is challenging and your company’s revenue model has to be rich enough to support it. Unfortunately, the days when you could sell a lead to the university solely because a student visited its page on your website and clicked “save” are long gone. For your lead to be worth much to the college you need to have robust data about that student’s underlying needs and preferences, and demonstrate that students value your site or app as a highly trusted source of information and advice.
Peer-to-peer or crowdsourced tutoring network
Simply saying “We’re the Uber of education!” doesn’t make it so. There’s a graveyard full of these startups (such as Tutorspree) and only a few survivors like Wyzant. They almost all underestimate the cost of customer acquisition and overestimate how much usage and viral boost they will get.
To be clear, it is not any specific dollar amount that concerns us; it’s the ratio of customer acquisition cost (CAC) to the lifetime value (LTV) of the customer. As a general rule, LTV has to be 3x higher than CAC for the business model to work. But when I see these kinds of businesses, if they estimate CAC at all, it’s based on a small experiment that won’t scale. So I ask them, “If the economics are that good, have you maxed out all your credits cards to pour every last cent into this customer acquisition channel?”
Invariably, they start backtracking, hemming and hawing, and eventually admit that there either are channels that cannot absorb more marketing spend (e.g., they were bidding on rare search terms that just don’t come up that often) or that CAC starts to rise as others spend more (e.g., startup bidding on more competitive search terms).
Particularly unconvincing: telling us you got a few hundred signups at your college “with zero marketing spend.” What this tells us is that you have no idea what it will cost to get students onboard at the other 4000-plus colleges you do not attend.
Any B2C app for language learning
Personally, I like using Duolingo, and Voxy is a great option for people who want to learn English. But as with tutoring networks, the customer acquisition costs are much, much higher than you think, especially the ones that, like Google Adwords, can scale with you are you grow.
Some of the apps do reasonably well at getting free users, but usage drops off pretty sharply when they are asked to pay anything. That means the acquisition cost per paying customer is very hard to recoup.
These next few ideas were great…back in the day. Now, the market is pretty much locked up. Startups that are attempting to build the following tools are at least 10 years too late to the party, especially if they’re attempting to tackle the US market.
Yet another student book exchange
Yet another LMS
Switching something as deeply entrenched in a school’s operations as their LMS is so painful that it’s basically a non-starter. Switching costs are high, and most schools are not likely to switch from solutions like Blackboard or Canvas for the sake of a prettier interface or more “social” features. Sometimes you could give your solution away for free and they still wouldn’t switch. In fact, a freebie option is emerging as some schools are adopting Google Classroom as a lightweight LMS.
Yet another Test Prep Provider
MOOCs or General Assembly for country X
Do you know what company is “Facebook for country X?” Facebook is. (Except for in China, perhaps.) Which leads us to…
Don’t Say These Things
“90%+ of teachers hate their LMS/SIS/etc.”
And yet they don’t seem to switch. What does that tell you?
“It’s fully integrated. Plug and play… as long as there are APIs.”
So it works. If it works. Except when it doesn’t work. Gotcha.
“And we haven’t even started selling to parents yet!”
Yeah, that’s not hard at all…
“If we only get 1% of the market…”
Yeah, that’s not hard either…
“I created this because it is what my child/class/students needed.”
My follow-up question: “Is it what other child/class/students need?” If, after two years of cranking away, there are only a few dozen of other schools that are willing to pay to solve this same problem, most investors will lose interest very fast.
“We will get the teachers using the free version and then school will pay for it.”
Ah, no they won’t. Why would they when teachers can use the free version? It’s not surprising that a go-to-market strategy that avoids the pain of selling directly to a school administration by hooking the teachers and effectively deputizing them to drag the principal along appeals to a lot of founders. But figuring out where to put the paywall between free and premium is critical. The free version has to be useful enough to teachers that they will use it, but you have to keep enough value in reserve that the administration will make budget for it.
So now that you know how to make an Edtech investor cringe… please don’t. Take the time to pick the right concept and get it right. Then, we’d love to hear from you.
Author’s note: I’d like to thank all the people who contributed their ideas to this warning list… but most of them asked to remain anonymous (I wonder why?) so I’ll just say “Thank you all… and you know who you are” 🙂
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Startups, ever wonder what it’s like on our side of the curtain?
The topic they asked me to speak about was the economics of running an accelerator program. So if you ever want to know what keeps us up at night, here’s your chance:
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
“You need to sell painkillers, not vitamins.”
I’m sure you’ve heard that one before. Vitamins are nice-to-have; painkillers are must-haves. Vitamins are hard to sell; painkillers are (relatively) easy to sell.
But have you ever really stopped to consider what pain is? It’s not as simple as it sounds. In fact, there are at least three dimensions of pain you should understand.
The first dimension is intensity. Is it a hangnail or did you just smash your thumb with the hammer? Because fixing a hangnail is never going to make your customers’ top 5 priority list. And given how time-starved we all are and how many excruciating problems we might have, most of us will never make it to item #6.
Most home automation solutions I see fall into this bucket. Turning your bedroom lights off from your office just isn’t a pain point for most people. The same goes for adaptive lighting solutions that vary brightness and color to fit our circadian rhythms better. While the health benefits are real, for most of us, a cup of coffee in the morning and manually turning down the dimmer at night seem to do the trick just fine.
One of the reasons Twist is so compelling is that it hijacks a real pain point with its wireless speaker embedded light bulbs. Wireless speakers rarely are genuinely wireless – you still need electricity – but Twist solves that problem by screwing right into a light fixture and gives you healthy lightning and the backbone of a home automation system as the cherry on top.
The second dimension of pain is prevalence. How widespread is this pain point? Many founders I meet are passionate about the problems they solve because they lived it themselves. This means they are intimately close to their customers… except when they are the outlier. If the pain isn’t shared widely, your market size deflates like a leaky balloon.
Find-a-roommate apps generally fall into this bucket. For young founders in cities like New York & San Francisco, this can be a real problem but it’s irrelevant to married couples and in most cities where the cost of living makes renting your own place affordable. Plus, most singles have friends so finding a compatible stranger isn’t necessary. ** It is a testament to how valuable intent to move data is that these apps get any attention despite the limited prevalence of the pain point.
** I wonder if founders who gravitate to these kinds of apps tend to be less socially connected?
Most of the civic engagement solutions I see also fall short on this axis. The founders are often very engaged in their local communities and don’t want to miss out on pubic hearings about zoning, municipal services, etc. Most of us just don’t care. The vast majority of citizens cannot even be bothered to vote in local elections.
What made PublicStuff and New York City’s 311 call-in service (now an app as well) successful was that they found local issuers that we all actually care about – fixing the pothole on my block, seeing if I can leave my car where it is because alternate side of the street parking is suspended due to some holiday I’d never heard of (but now suddenly love). These are prevalent civic problems.
The third dimension of pain is frequency. The classic edtech example is finding the right college. A near universal, massively intense pain point with lifelong repercussions… but it only happens once in a lifetime.
In real estate, the equivalent is services that make buying or selling your home more efficient or that help you get a better price. Selling a home is incredibly stressful and one of the largest financial transactions in most people’s lives, this is an 8 or 9 on prevalence and takes intensity to 11 but it only happens a few times in your life. The implication is that finding the customer will either be difficult, expensive, or both. This is why real estate brokers can pay over $100 per click to Zillow for leads on clients in prime zip codes.
So if your startup fails on frequency, you’d better have creative, scalable ways to acquire customers or ways to monetize those customers so much better than your competition that you can afford to outbid them.
Ideally, your startup scores high on all three dimensions. At worst, you score very high on two and have a sound plan to get around the headwinds caused by the one you are missing. But if you don’t, please do yourself a favor and go back to the drawing board. You’ll be saving yourself a world of hurt.