Why We Aren’t Looking for Venture Investors for CodeLesson

On the heels of Kirsten’s excellent post summarizing the state of venture investing for education startups, I had a few thoughts. (OK, I actually had many thoughts.)

In Kirsten’s post, she provides four main reasons why educational technology investments aren’t happening at the same pace as investments for other kinds of startups:

  • The cost of doing a startup is low and continues to decline. I agree with this; however, this factor isn’t unique to education startups. And in some respects education may have higher costs than advertising-driven products, particularly once the business matures (see below for an example). Also, the cost of entrepreneurs’ time remains fixed, which suggests an obvious optimization for entrepreneurs: don’t waste your time by meeting with VCs.

  • Edtech founder teams tend to work on “small ideas.” Sure, although there’s certainly no shortage of small ideas in social or ecommerce, and very often the ideas that seem smallest turn out to be the biggest businesses. I think the “small ideas” notion is really a bias against the fundability of a content-driven business; it misjudges the effort required to develop a minimum viable product versus the amount of time it takes to develop a minimum viable curriculum. The amount of effort it takes to develop a minimum viable product is necessarily limited. The amount of time it takes to develop a minimum viable curriculum is potentially unlimited.

  • The rise of edtech incubators. I actually think it’s too soon to see much of an impact here. It’s true there are certainly a lot of incubators now, but we may be confusing activity with results; I don’t know of any incubated companies that have gone on to raise a Series A (although I’m sure Kirsten will correct me here). Also, the vast majority of edtech incubators seem to be focusing on K-12, which is a much tougher row to hoe from a business and traction perspective. Like most incubators I think that 90% of the effort here will (unfortunately) go nowhere.

  • Investors moving into their child-rearing years and prioritizing education (at least K-12 education) as a result of this. Maybe, sure, although you don’t see investors invest in nursing homes and catheter factories just because they’re starting to get old.

One of the ironies that I noticed when I was taking meetings with investors is that a typical venture investor who lists “education” as one of the industry categories he’ll invest in will actually invest in between zero and one actual education companies. I talked to several investors who wouldn’t invest in more than one education company because of the perception that the two companies would be competitive or otherwise conflict. This situation persists even though investors who fund ecommerce or social companies will add dozens of ecommerce and social companies to their portfolios.

(Related: more than 90% of the VCs I spoke with when I was doing VC meetings reacted with surprise when I told them that education is the #2 industry in the US. Really? You have an MBA from an elite school and you don’t know what the #2 industry is? Hmm.)

The cost issue is an interesting one, although it affects every tech startup. The cost of doing an education startup may be lower than the cost of other kinds of startups, at least in the beginning, but I’m not sure that will continue to be case for the life of the business. At their core, most education startups (including my own, CodeLesson) encapsulate some kind of custom content management system. These aren’t too difficult to build (we didn’t even build our own — to get to market quickly we used an existing open-source learning management system). We are currently in the process of replacing this with our own system (or, to use the Sand Hill Road catch phrase, some “original intellectual property”).

But there are costs, particularly in K-12 and higher education sectors, that other startups don’t have to incur. For example, it’s very challenging to rely upon traditional web-based distribution models (either organic or paid) for K-12 or higher-ed products. Teachers adopt products based mostly on recommendations from other teachers, and students adopt products that are given to them by teachers.

One way for ed-tech companies to get around this is to act like a traditional enterprise software company and hire a national sales team. Sales teams are expensive to start up, which is one reason why the cost of running an education startup could diverge greatly from other kinds of startups.

It may seem like insanity to spin up a national sales team for a company that essentially sells content, but the fact remains that there is one and only one home-run success in venture funding for professional education this year, and it’s Lynda.com, which took a $103 million investment earlier this year. Outside observers of the company credit its simple, subscription-based business model and high-quality video content, but I’m not sure these are actually the main factors in Lynda’s success. Just from looking at Lynda’s penetration into higher ed (which is substantial, and almost certainly did not occur organically), I have no doubt that a large part of Lynda’s traction came because they spent the last decade using feet on the street to sell their product on a site-license basis to hundreds (if not thousands) of universities and businesses across North America.

For us, there are a lot of risks to dealing with unqualified prospective investors. This can be expressed in terms of wasted time and opportunity costs, but also in terms of psychic costs; getting up at 4am to have some dick on a conference call tell me my business can’t possibly scale is not what I’d call life-affirming. CodeLesson has been bootstrapped (and ramen-profitable-ish) since we launched it. We have big plans for expanding the service, adding new subject areas, and growing over time. But it’s my expectation that we won’t pursue any meetings with investors for CodeLesson through the end of this year, at least. If we can’t quickly attract an investment that’s 1) greater than what we can earn bootstrapping or 2) at least as big as investments that comparable companies in our space are attracting, there’s no sensible investment deal to be made, at least from our perspective. It would be insane for us to bring a plastic knife to a bazooka fight; much better to live under a rock for a while until our better-heeled competitors with wayward business models run out of money.

(I should mention that the other reason we won’t talk to investors this year is that the work we’re doing on the site now should make a material difference in our traction and it wouldn’t make sense for us to deal with investors until we can demonstrate that traction. But even then, since we’re a paid service, if we do achieve greater traction, we still may not need investors, because to us, more traction equals more money, and it’s far more appealing to fund business operations from recurring customer revenues rather than one-time investments.)

So, to Kristen’s four reasons for lack of investment in ed-tech, I’d add two more:

  • There simply hasn’t been a Google-esque home run in the educational technology space yet. If lack of past large exits is indeed a deterrent to ed-tech investment as I suspect it is, that means that investors are actually more concerned about potential returns than startup costs. And this seems natural to me, particularly if you’re forced to invest on a 3-5 year timeline. It’s easy for an investor to see why Contextual Advertising Network #945 is worth funding because other contextual advertising networks have done well in the past. But it’s not easy to see how Video-Based Learning Site #945 is going to do since there haven’t been any billion-dollar exits in video-based learning yet. (The word “yet” at the end of the sentence is key.)

  • The perception that education startups can’t get to an exit on a timeline that venture investors are comfortable with (which is to say, 5-10 years). The gold standard here is, once again, Lynda.com, which took 12 years just to go from bootstrap to series A. That means that their current investors will be waiting another 5-10 years (at least) to see a return their $103 million. The number of venture investors who have the patience to bet on this situation is, unfortunately, small, particularly when they feel they could do as well or better in a 3-5 year timeline betting on Contextual Advertising Network #945.

So. We aren’t looking for venture money right now and we won’t be pursuing any anytime soon. We’re more or less content to bootstrap indefinitely. I’ve been coding since I was a teenager and teaching professionals to code for 20 years. It’s my expectation that I’ll continue to do this for another 20 years, with CodeLesson as my vehicle. You can follow us on AngelList if you want, but don’t expect us to post another up-and-to-the-right chart there until next year at the earliest.

In closing I should mention that I’ve used Lynda.com is an example for a number of points I’ve made here. I’m not critical of them at all; I’m a great admirer of their business and their success, and I think they’re worth emulating (particularly the part where they didn’t take an investment until they’d been around for 12 years). I also consider their business to be complimentary, rather than competitive, to that of CodeLesson (since Lynda sells pre-recorded videos while we sell access to expert instructors who interact with students).