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.
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Like most entrepreneurs, I wasn’t CEO of my first startup. While I had a fair share of the company, I owned far less than the CEO who, in addition to having had the concept, also initially bankrolled us.
For the most part, this didn’t matter. Like most good founding teams, we had complimentary skill sets and mutual respect so decisions were by consensus. This worked fine until one of us wanted to sell.
For context, the company effectively started in early 2000. We were hit hard by the dot com crash and one of the lesser casualties of September 11 was our term sheet. So we stopped taking even meager salaries and bootstrapped to profitability in 2002.
The next few years, we lived the dream. Ridiculously high growth, increasing revenue per customer as we upsold new modules, competitors folding. Fun times.
Nevertheless, by 2006 I wanted to sell. Six years was a long time but my decision was mostly about the trends. Our growth rate, while still high, had started to come down and the vibe at trade shows was that we were past the early adopters; still plenty of prospects but slower to sign. At the same time, our competition was trying to lure our best customers away by undercutting us. We were doing the same, of course, but once a steal becomes an attractive trade off relative to greenfield prospects, something fundamental has changed.
That said, our growth was still really, really good and the market was *hot*. On the numbers, we could have got 6-8x times earnings. Plus, we had a good chance to attract strategic buyers and their valuations can get crazy (in a good way).
The CEO wasn’t interested. He believed that our new products would fix growth so we could get the same multiples on a higher base in another year or two. Knowing what we knew then, he might have been right.
But he wasn’t. Next year growth was a bit lower. Still really high but now we had two years declining growth. Uh oh.
So he agreed to shop the company. Unfortunately, the banker we brought in now thought we could get 4-6x earnings from a financial buyer but there were still strategics….
After a year leaving no stone unturned, the best offer we got was… 5.5x. No strategics. Between the market cooling, taking time to digest their previous acquisitions, and our growth slipping, they didn’t bite.
The CEO didn’t want to sell. I knew it would be years before he shopped the company again and, even when he did, the odds of getting a better offer hinged on an increasingly unlikely turnaround so I still wanted out. But I didn’t have a large enough equity stake to force it.
So I told the CEO that, if the prior offer was too low, he should be thrilled to buy me out at that price. I also told him that I was ready to move on even regardless. Ultimately, he agreed to buy me out in exchange for my finding and gradually training a replacement.
I got my final check on Jan 2, 2009. He looked me in the eye and said, “Maybe I should have sold.” Fast forward seven years, still no sale.
This clearly wouldn’t have been possible without the cash. Plus, were I not a core team member, he might simply have wished me well. Ironically, it wouldn’t have worked had I had more shares – another cofounder with more shares couldn’t exit for this very reason! Not enough cash to buy out his stake.
- For your first startup, a solid double or triple in a few years often beats holding out for the home run that may never happen. Life is a lot easier with a win under your belt.
- Use inside information. If you’re seeing the road getting bumpy, act on it.
- Don’t fill an inside straight. The irrational optimism that got you this far has no place here.
- Respect the market. It may be hot now but it can change at any time. You wait on it; it does not wait on you.
- Respect the market. (Yeah, I know…) Barring #2 above and filtering any of that through #3, if you ran a good process, the price you get is likely fair.
- Governance matters. Understand who can stop or force a sale under various scenarios. You may not be able to change this, but you don’t want to be surprised.
- Be creative. Not all exit doors are clearly marked.
- Recognize your leverage – in some cases, weakness can be strength – and be willing to use it.
Now go be awesome.
Note: A version of this post appeared in Fortune Magazine
You want to know the best way to tell an investor that they should not, under any circumstances, invest in your startup? Here are the magic words:
“We have no competition.”
There are many ways that sentence can backfire on you:
There are large competitors that you are unaware of
If this happens, shame on you. We see a lot of startups at Dreamit, many of which are tiny and under the radar. So I’m fine if an entrepreneur misses a small startup or two, but when they miss a major competitor, the founder has lost all credibility with me and probably has no business building a startup in this space.
You are defining the space far too narrowly
So you’re the only marketplace for left-handed stirring straws. Who cares? What’s wrong with using a right-handed stirring straw? You have just shown the investor that you don’t understand the customer. After all, when it comes to making a purchase, it’s the customer’s decision that matters, not what you have in mind.
You don’t understand the baseline
This one is more subtle. There are, from time to time, concepts that are revolutionary enough that the startup truly doesn’t have any direct competitors, but that doesn’t mean that people aren’t somehow meeting the underlying need. Before Uber came along, people didn’t just sit outside their caves moaning, “Gee, I wish there were some way I could get to the mammoth hunt.” We drove, took taxis or buses, or just plain walked. We found a way.
Whatever unmet need you are addressing, people are somehow dealing with it right now. They might be using telephones, Microsoft Excel, Post-it notes, walking down to the corner store—somehow, life goes on. As an investor, I want to know how they currently cope so I can assess whether your solution is a quantum leap forward or an incremental improvement—and I don’t invest in incremental improvements.
And if you truly have a startup that has no direct competitors, no indirect competitors, and your potential customers do not have workarounds in place, then your startup is likely addressing a problem that is so trivial, no one cares.