The venture funding forecast is calling for a bigger windfall in the education technology industry. Entrepreneurs already raised $1.6 billion during the first half of 2015, and now there’s even more capital within their “reach.”
With a $53 million fund, Reach Capital, based in Palo Alto, CA, plans on investing in 30 or so edtech companies over the next five years. It will contribute roughly $400,000 in seed rounds and up to $3 million in Series A and B deals.
Reach may be the latest name on the growing list of education investment funds. But its founders are not rookies to the game by any means.
In January 2012, Jennifer Carolan and Wayee Chu, then at the nonprofit NewSchools Venture Fund, launched the Seed Fund to invest in early-stage edtech startups. What began as a skunkworks project soon became a vital source of support for many entrepreneurs, especially at a time when many investors were still lukewarm about the industry. Over the next two years, the Seed Fund put nearly $12 million in 39 startups and four nonprofits. All 43 organizations are still operating—including the three that have been acquired.
In January 2015, NewSchools Venture Fund spun off the Seed Fund as a separate entity. Carolan and Chu brought two colleagues from NewSchools—Shauntel Poulson and Esteban Sosnik—as partners at Reach Capital. Operating as an independent, for-profit fund gave the team better access to capital and a greater ability to support maturing companies.
Of the $53 million in the fund, $4.5 million has already been invested across nine companies: BetterLesson, ClassDojo, eSpark, Nearpod, Newsela, Schoolzilla, Tynker, WriteLab and Zeal.
The Reach team, of course, wants to see the dollars reach more than just entrepreneurs. The driving goal, they say, is to “improve opportunity and access in education by helping to bring the best technology to those supporting the next generation.” In an email interview, Carolan, Chu, Poulson and Sosnik elaborated on this vision.
EdSurge: What’s a statistic that captures the problem that Reach is trying to address?
Carolan: In a recent Pew survey, Americans cited inequality as the greatest threat. Inequality is rising while social mobility is declining, creating a destructive combination that runs counter to the founding ethos of our country.
Those are big problems, and a skeptic might ask: “How will an app fix education when the problems are so deep and entrenched?” The answer is that technology is not the end point—it’s a means to an end. Our team has always believed this.
Here’s what technology CAN do: It is uniquely able to distribute ideas in a fast and frictionless manner; it can connect us—in our own languages and reading levels—to mentors; and it can transcend the physical by making new ideas and resources accessible to those isolated by poverty or geography.
These three things have the power to improve opportunity for children and provide more access points to a high-quality, inspirational education.
Reach is arguably the most diverse venture capital team in Silicon Valley. Was that purposeful?
Poulson: This was purposeful. We value a diverse team that can source a variety of opportunities and bring unique perspectives to our investment work. To make impact on a large scale in education, it is important that our team reflects the changing demographics of the public school students that our portfolio companies intend to serve. We’re also just great friends, and we’ve known each other for many years.
How are the challenges in the education market today different than those three years ago?
Poulson: Fund sizes have doubled, and so have startup valuations. The challenge this creates is that the growth and return expectations for companies are higher while many of the challenges of operating within a fragmented education market remain the same.
Chu: Many of the larger edtech companies are converging and overlapping into similar product lines and vying for very similar constituencies. For example, many edtech consumer plays look to potentially monetize from parents, and several companies have built out or focused on communication tools that reach and engage this group. As investors (and parents ourselves), differentiating which strategies will be the most effective and have the greatest reach and impact is an important question for us.
What business models seem to be working for education technology companies?
Poulson: What we call the “freemium institutional” business model is showing early signs of success as measured by user growth and revenue generation. We are seeing companies that effectively leverage strong teacher adoption of a free product to upsell premium features to schools and districts.
When should education entrepreneurs NOT try to raise outside capital?
Sosnik: It is apparent in pitch meetings when entrepreneurs are not confident that they have a product that solves a real problem that others (not just themselves) experience. This leads to a lot of wasted time that could be used to improve the product. If a team has enough cash flow for 18 months, I would recommend focusing on building the company and not raising—even if there are offers. Having more capital and higher valuations can lead to decisions that may not benefit the company in the long term.
Chu: Typically my advice to entrepreneurs is to raise what you need and if the funding environment is ripe, to get a little bit of cushion. But don’t over-raise, which can only lead to less disciplined decision making. I am a big believer in the importance of working within a constrained environment. Resource constraints, financial or otherwise, have great potential to drive innovation, creativity and more thoughtful decision making.
What’s the most misunderstood part about being a for-profit edtech investor?
Sosnik: We still do not have great visibility into exits and valuations so there is a great amount of uncertainty on the potential returns of this market. When it comes to technology adoption, education seems to be about three to five years behind the rest of the economy. So the impressive traction we are seeing now in most of our companies is just the tip of the iceberg.
We need to be comfortable with taking risks, but we’re confident that the returns will go to the most sophisticated, value-added and knowledgeable investors in the space.