Editor’s Note from Christopher Nyren (@cnyren):  In my initial years after founding Educated Ventures, there was such a paucity of venture funds interested in EdTech that I encouraged even the earliest stage start-ups to cultivate potential investors.  The thinking was that an entrepreneur could at least begin to court an investment, keeping investors apprised through regular update emails and meetings along the sidelines of conferences.  However, I have now reversed course.  There have never been so many investors for Series A rounds in EdTech and with all the noise of this deal flow, there is far less time and enthusiasm for wide-eyed founders — and even less for the weary founder who can’t take no for an answer (and yes, investors do retain their meeting notes to take note of divergence from your initially shared plans).  I have known our guest author John Knific since investing in Decision Desk in 2014 and greatly appreciate his unique insight into a far wiser fund raising path: capital efficient traction. 

 

There are many positives for the rise of incubators, university entrepreneurship programs, and the general awareness of early stage technology companies. This is especially true within the EdTech sector, which is still relatively specialized. One negative, however, is the over glorification of “the pitch”. It places an overemphasis on the importance of CEOs raising capital, as opposed to nailing product-market fit and getting in front of customers.

Experiencing the lesson before fully comprehending it

This lesson, one of my best lessons learned as an entrepreneur, happened to me accidentally. Two years into my first company, (then named) CitizenGroove, our founding team was at its wit’s end. We had built a social network for creative professionals, and had minimal user adoption. We were 21 years old, and this was the heyday of early Facebook hype (2007), so we thought it would be interesting to restrict networks to universities. My Co-founder and I were double majors at Case Western Reserve University and the Cleveland Institute of Music (CIM), which we leveraged to get a meeting with the Dean of CIM. The Director of Admission happened to attend. After seeing a demo of our video profiles, he asked “Could we use this to screen applicants?” To which I replied (eagerly), “well, sure, what’s the value of an applicant”. He explained that they charged applicants $20 to submit a DVD audition, then physically processed them for faculty. I asked if $10 per applicant seemed fair, to ‘digitize and manage’ that process…unknowingly, we booked our first 5-figure ARR deal. We had recurring revenue and a real customer.

More importantly, we took what we learned in that meeting, made a 10-slide sales deck of mostly wireframes, and sold it to 12 universities! And oh man, were these some ‘homegrown’ mockups.

Fast forwarding 10 years, this stuck with me as one of the best moves I made as a young entrepreneur. Here’s why…

A great educator providing context

My wife and I were fortunate to join a table at a Harvard Business School entrepreneurship program, called the Dively Awards, thanks to the invitation of one of my advisors.  In one of the evening’s presentations, Professor Thomas Eisenmann, walked through an analysis of failed startups who he has coached through the years. He pulled up a slide with the diagram appearing to the left.

He articulated a concept that’s served as one of my ‘gut checks’, very elegantly. You have Product-Market Fit, Cash, and Team. You fail with only 1, can solve for the equation if you have 2, and thrive if you have all 3.

What this means to young founders

Taking a microscope to this structure, most early stage startups with young founding teams are fighting the odds – they are very inexperienced, and rarely have cash. Without experience, they lack the client relationships and insights to secure non-dilutive client funding (i.e. pre-orders or custom dev projects) and without much prior work experience (or exits), they lack personal investment capital or seed investor relationships to get equity funding.  What they do have is time, through sweat equity, which serves as a temporary substitute for cash. Young founders sweat harder and don’t have the overhead of a seasoned operator. (My wife and I now have a child and a mortgage, so I can attest to this).

So where should a founder focus? I see so many young founders get sucked into the vortex of networking events, pitch competitions and later stage investor “relationship building”, prior to having real investable traction, let alone true product-market fit. Gaining product-market fit is not easy, it’s not sexy, and it’s a grind. But it’s the only true, and sustainable foundation, to building a business. Raising capital ahead of building a business is more than a crapshoot; its extremely time consuming and ultimately, futile. Get ready to be ghosted or, at best, wake up to a breakup email that reads something like: 

We love the concept, the [insert breakup reason – if any] just isn’t quite a fit for [fund name], but we’d love to stay in touch ahead of the next round [i.e., if investors sexier than us want to invest]. 

The only real reason to attempt to raise capital is if you have evidence that your addressable market is large enough to support accelerated growth, at a rate unattainable organically, while still generating the kind of 100% incremental returns sought by investors.

There is a long-held misconception as to where venture capital funds and even angels invest. These investors do not fund wireframes for you to quit your job and pursue your initial go-to-market strategy.  90% of investors interested in the education sector have very little real insight into working with schools, so they rely upon the entrepreneur to already have a product with a proven use case and value.  Capital is rocket fuel. It will blast you in a direction, regardless if you are pointed in the right direction. Or like my favorite fake startup of all time, Entertainment 720, you’ll just torch cash and go nowhere.

Through identifying product-market fit, you will actually understand if:

1. Raising capital makes sense (including, is it even possible)
2. Have real evidence to back up your vision and
3. Have a better sense of where to focus your raise efforts

You said something about hamburgers!?

Right! Here’s a fun analogy. In high school, I had an English teacher who made us write “hamburger essays”. A hamburger in that the “top bun” represents the introduction, the “meat” stands in for your arguments, and the “bottom bun” is your conclusion.

Aside from the occasional pretzel bun, burgers aren’t celebrated for how awesome the bread is.

That analogy holds true for a good venture pitch, and maps nicely to the “magic slides” which have circulated across the broader tech ecosystem for a few years now (link). The introduction, team, and vision slides serve as the top bun. Your ask is the bottom bun. Traction is the meat.

Ask yourself…what are you selling investors? A weak turnpike drive-through burger, or a badass Fat Doug Burger from B-Spot (I am an unapologetic Clevelander, and Michael Symon fan).

Unfortunately for entrepreneurs, the Series A has moved upstream, and with it, seed rounds. Thus, the Seed rounds of today look a lot more like the small Series A’s of yesterday. This is especially true in EdTech, where now-experienced investors know that industry exits average around $50 million and capital efficient bootstrapping is paramount (heres an article on bootstrapping in K-12). It takes more traction early on to get favorable terms. Founders may slap me for saying this…but I honestly don’t think that’s a terrible thing.

But I need cash to hire developers to build my minimum viable product, and can’t get customers without it

Stop it!  

This is an extremely popular non-technical founder concern. But, there are so many great approaches to finding product market fit for a nontechnical founder.

The Lesson Comes Full Circle

A decade after my original story of CitizenGroove (now DecisionDesk), I find myself at Wisr.io, where my co-founder Kate Volzer, has a vision that every student should have a personal board of advisor to guide them. With a ten slide wireframe deck, some elbow grease, and a few new tricks (for a later post), we pre-booked six-figures in contracts prior to paying for a single line of code.

Its been just six months, but our product is now real (see actual screen shots at www.getwisr.com), funded, and driving value for our pilot customers. We would not have dared to raise a single penny if our customers weren’t clamoring for our product. Nor would we have taken the risk of launching a new company with having those fantastic development partners to guide product-market fit.

John Knific is the Co-Founder and President of Wisr.io and the former Co-founder and CEO of DecisionDesk.  He was named a Bloomberg BusinessWeek Top 25 Young Entrepreneurs and continues to coach early stage start-up founders, especially those involved with the entrepreneurship program at Oberlin College.