Sand Hill Road is Silicon Valley’s Yellow Brick Road. Many wistful entrepreneurs long for the venture capital and connections that the street’s residents—including Kleiner Perkins Caufield & Byers, Andreessen Horowitz and Sequoia Capital—have to offer.
Occasionally new firms, like Social Capital, move into the neighborhood. Started by Facebook alum Chamath Palihapitiya and colleagues in 2011, Social Capital’s vision statement lays out a clear modus operandi: “We try to live by a stringent and unapologetic set of values...[that] may not be for everyone, but they are for us and form the foundation of everything we do.” According to its website, these range from being “aggressive and competitive” to “eclectic and quirky.” Today, the firm has $1.2 billion under management and invests across several verticals—healthcare, financial services, enterprise and education.
Social Capital’s education portfolio includes Brilliant, CreativeLive, Descomplica, Remind, Treehouse and Practice (formerly Apprenet). Another investment—InstaEDU—was acquired by Chegg.
Many of these deals were reviewed by Social Capital’s co-founder and board partner, Brigette Lau. In an interview with EdSurge, she spoke about what makes edtech investing different from other industries and what Social Capital looks for in edtech entrepreneurs. This interview is an extended and edited version of a Q&A that was first published on Chapter 2 of EdSurge’s State of Edtech report.
What’s the theses behind the fund? And how much do you typically invest?
Our mission at Social Capital is to advance humanity, and we do this by focusing on companies that develop technology to solve the world’s hardest problems. We do invest across multiple categories including healthcare, financial services, enterprise, as well as education. We have about $1.2 billion under management across three funds.
What’s different about investing in edtech than other areas?
I believe we need more patience in education investing. There’s such a massive impact of education on our society and our economy, but we do need to view it with a different lens. Being in the Valley, we’ve seen the rise of “unicorns”...That sets the bar for all entrepreneurs including edtech entrepreneurs, who have set their eyes on that goal.
But the nature of edtech is that you’re selling into schools, so you have a slower sales cycle. You have to educate a population or cohort of people that need more education and understanding of how technology can improve their work and the lives of their students. That’s much harder—when we see growth in edtech, we won’t see the rocketships that we expect in consumer businesses… Of course, we do have companies like Remind that look more like a consumer model and have had tremendous growth. We’re really excited about their path, but they’re only one of many education startups today.
What are three things you look for when reviewing prospective investments?
Right now I am focused more on early stage deals. My focus is really on market and team. I’m interested in companies that expand the market, versus being a derivative of some technology and then trying to apply it specifically to education.
A second thing that I look for is coachability of the teams. It’s very important to understand how entrepreneurs are processing and developing their thesis. Generally, I like to dig into their motivation and tie it back to our mission.
Third, as we all know, the startup life is extremely hard and there are a lot of sacrifices. I am truly looking for leaders who can solve a significant problem and also lead an organization, or at a minimum have the potential to do that.
What “nixes” a deal for you?
There are a lot of nuances here. There is a balance between being passionate about solving a problem, but also having the sensibility to execute and be a successful entrepreneur. When I evaluate companies, that is top of mind and if I see a company that lacks one or the other, it’s a quick pass for me.
What are benchmarks of success that you watch for in your companies (say, in advance of any exits)?
We’ve created and developed a Growth Team and Data Science Team… We’ve productized and open-sourced [the Data Science Team’s approach]—it’s called the “ Magic 8-Ball.” [Social Capital’s Magic 8-Ball sifts through a company’s data on its customers and analyzes trends to measure the health of the startup.] We ingest data from companies all over the web. This allows us to see whether startups have product-market fit. Then we can [use that data to] benchmark our own portfolio companies. We occasionally ask companies who want to pitch us to go through this exercise because it allows us to see if there’s something unique about their business that we can use to compare against our high flyers.
How are education companies affected by the overall market slowdown that we’ve seen this year?
I give all my portfolio companies the same advice, which is—In this moment in time, we have to focus on operational excellence. It means making smart bets. It’s about iterating, but it’s also about getting enough data so that you can 1) decide to step on the gas, or 2) stop, because it’s just not working. Since capital is harder to find, you need to make the dollar last longer.
How do you compare your education companies against companies in other verticals?
Because we invest in multiple categories, when education companies come in for a Series A, we are actually comparing them with companies across all industries. It sets the bar a lot higher, I would say.
What misconceptions are edtech entrepreneurs coming in with when they walk in your door?
In education, I believe we cannot not be mission driven. We have to have a point of view of the world in which we live and understand that some things are completely out of our control. So when I see entrepreneurs, I can empathize and know that they are so passionate about their focus and their business, but sometimes it’s just not the right fit. Entrepreneurs really put their hearts on the table.
Listen to the full interview with Brigette Lau.