Five paradigms for Edtech Founders to navigate through this investment winter

In an EdStart Networking event organized by AWS for Edtech founders and investors, I shared the following five paradigms for Founders to lead their startups through this investment winter that could last way into 2024. 

1. Don’t Build to get to the market

2. Think Revenue above all

3. Act Laterally

4. Debt isn’t necessarily a bad thing

5. Review product-market-fit to evaluate next steps

Don’t Build to get to the market

Instead of building our own tech, platforms, network, channels, etc. find ways to borrow, partner, alliance with other players, individuals or companies to enlarge our reach. We may find new ways to do business with what we have in our companies while saving a whole lot of money to last us through this winter and growing at the same time.

Think Revenue above all

Several years ago in my ex-venture, one of my ex-investors famously advised me that “Revenue Solves All Problems”. He is right. With revenue, it suggests that what we have is something that people want, to the extent that they are prepared to reach for their wallets to pay for it. It means that our product hypothesis may turn out to be quite true, and it gives investors confidence in the narrative we have for our business. Thus, in all of the ventures we work with, our Founders demand of their team to be quite singular in generating revenue in the shortest possible time with an MVP to cement the unit economics and lend support to the assumptions on any financial model we build. Plus, with revenue, there is money in the bank, and that puts us in a very good position with potential investors.

Act Laterally

It is tempting to be linear in assuming how revenue growth may take place by simply thinking about growing user numbers and working through indicators like conversion, price per user, number of users. Quite often, we may find ways to increase the Lifetime Value of the user without the user paying us for our service. Or, sometimes we may find that revenue could be generated from different streams, with different players because we have something in hand that we have overlooked as a powerful revenue-generating engine. Regardless, we could start looking at other industries and borrow a thing or two on how they make money from their businesses and adapt it to our business. In doing so, we may inadvertently discover a blue ocean through a varied business model, in a red ocean sector. When times are good and money is in abundance, we may be tempted to be ‘focused’ — to build the best product, to gain market share, to ‘grow’. The pull-back situation like what we are seeing now presents an excellent opportunity to correct those thinking and focus on what really matters, which is to profitably (aka sustainably) grow our business on strong fundamentals.

Debt isn’t necessarily a bad thing, especially if it’s venture debt

Venture Debt, unlike the typical unsecured debt, is often backed by debt investors who demand that the borrower demonstrates plausible growth potential, indicated by solid metrics and venture investors on the cap table. Thus, to be able to raise venture debt actually bodes well for the enterprise. Further, it doesn’t dilute the Founders further, and in these times when equity rounds are expensive, it may be a good idea to consider taking a mix of equity and debt financing. Of course, in all matters, do our math carefully to ensure that we can pay back the debt in due course, since practically all debts come with a string of guarantees, often personal ones and the Founders must be prudent.

Use product-market-fit to evaluate next steps

With the little we may have left in our war-chest, where should we put our money? Is it in building the sales force, buying traffic, building and augmenting our current system etc.? With the mass layoff of tech professionals worldwide, is it a good time to go deep, invest big, and set up a solid team of tech developers? Our panelists shared that we need to take an honest look at what we have in cash and see if the investment could shorten our runway to a level that burns us out prematurely. Sales force, especially B2B sales, can be expensive too. One way to answer these questions is to look at data to evaluate just how mature is our product-to-market fit. And these data points to look at can be quite different from business to business. For example, in a B2C business, we may want to look at the NPS, retention / churn rates, and assuming the numbers look good, suggesting stickiness and potential virality, but other numbers like user growth do not look great, then we we could double down to find the right partners (point 1) to bring us deeper into our target market and bring in more revenue, instead of just building or enlarging the (sales) team and doing the same thing more.

I also shared that despite the investment climate looking dire, there is still a fair bit of dry powder out there, especially for new ventures or startups (not so much for growth stage companies, unless the metrics are looking solid and the fundamentals are solid).  So, imagine having startup that:

• Has a powerful business model that others don’t seem to have noticed and already

• Generating promising revenue to demonstrate market receptivity of its solution;

• Has a solid set of partners to enable it to move and even pivot quickly to capture new opportunities at low cost, giving it good gross profit numbers;

• Is able to show datapoints that suggest that its product is progressively fitting into the target market.

Would this company be investable? I like to think so.

I am a venture builder. I work closely with founders with a relentless determination for real growth and an open mind for things done differently to boost the value of their enterprises. And because of this, I only work with ventures whose businesses I can understand and am able to think through a growth narrative that excites the team and potential funders.

I invite Founders and Funders to connect with me as we explore this whole new world of entrepreneurship.