Can a Small Fund Called Dunce Capital Make Smart Bets in Education?


Can a Small Fund Called Dunce Capital Make Smart Bets in Education?

By Tony Wan     Feb 3, 2020

Can a Small Fund Called Dunce Capital Make Smart Bets in Education?

Dunce Capital doesn’t sound like a name that a company would want on its cap table, especially one that’s in the business of making people smarter. Yet there are eight education technology startups that currently list the firm as an investor.

The irony of the name—a play on the dunce cap—is not lost on its managing director, John Danner.

While the term today is often associated with stupidity, that was not always the case, he points out. As Danner puts it, it encapsulates the kind of entrepreneurs he likes: “Dunces are often the kids who don’t fit in with the rest of class, and those are my favorite group of founders.”

Dunce Capital, he adds, “is a name that causes those kinds of misfit kids to like me, and everyone else to dismiss me. And that’s fine.”

That contrarian streak is core to Dunce Capital, a $3.5 million fund that Danner and a partner (who he declined to name) launched in 2019, with their own money, to make angel investments in education companies. Its check sizes range from $50,000 to $250,000.

Alongside that ethos of supporting misfits, the small fund has backed education startups offering ambitious alternatives to traditional schooling. There’s Prenda, which is building a national network of neighborhood-based “micro-schools,” each serving no more than 10 students. There’s Galileo, an online school for “modern active families who want a self-directed education for their children,” according to its website. And there’s Sora Schools, an online, project-based high school that connects students with work-study opportunities offered by businesses.

The portfolio also has vocational training companies, like SV Academy, which offers an online bootcamp for careers in sales and business development.

The connecting thesis across Dunce Capital’s portfolio is Danner’s belief that the internet has made knowledge abundant, and so “the future of learning will be organized around the student, making learning convenient and equally available” to everyone, he states. Because online technologies can deliver educational content in myriad forms and formats, people should be able to learn whatever, whenever and however they want.

Danner has been a prolific investor. Prior to forming Dunce Capital, he estimates he’s made small personal investments in roughly 50 companies, many of them in the media and consumer technology sector. In 2018, he focused on education, backing nine such startups. The highest profile of them is Lambda School, the online coding bootcamp.

At $3.5 million, Dunce Capital’s fund may seem tiny in today’s age of “megafunds.” (See: Softbank). But it wants to support early-stage entrepreneurs who aren’t seeking—or yet worthy of—multimillion-dollar checks. This kind of capital isn’t always in abundance. As venture firms raise bigger funds for bigger deals, the number of angel and seed deals across all venture capital activity has actually declined over the past five years, according to Pitchbook.

“There is a gap, especially in education, in pre-seed funding,” says Jennifer Carolan, a general partner at Reach Capital, an education investment firm.

Getting Schooled

Danner says his interest spans across the board, from early childhood to K-12 and postsecondary landscape. But there’s one area he is hesitant to touch.

“I really don’t invest in companies that sell to schools,” he says. “I’ve had a very hard time figuring out how you get venture capital scale returns on those.”

His skepticism about formal education cuts even deeper: “I’m somewhat cynical that current school systems will be the answer to how students get ahead in the world over the next 20 years.”

That sentiment about education is common—and by now even cliché—among typical Silicon Valley techie-types with a predisposition toward “disrupting” the establishment. That’s the kind of culture Danner hails from. A software engineer by trade, he worked at Oracle in the 1980’s before co-founding an internet advertising company that sold for $750 million in 1999—right before the dot-com bust.

Still, his pessimism is surprising given what he did afterwards.

After selling the company, Danner got a master’s degree in education and taught in Nashville Public Schools for three years. In 2005, he helped start Rocketship Education, a charter network based in the San Francisco Bay Area that embraced online technology and the “blended learning” lab model. Rocketship established itself as a testbed for piloting instructional software built by startups and established companies alike.

It was there that Danner learned about the difficulties of the K-12 market, from entrepreneurs who shared with him their struggles selling to other schools. He penned a series of blog posts discouraging edtech startups from that approach. “You have a 24 month sales cycle, anti-tech culture, small budgets and price sensitivity, quality insensitivity, a desire for monolithic solutions, and you are competing against large professional sales forces” from big publishers, he wrote.

But ever the contrarian, Danner didn’t take his own advice. After leaving Rocketship in 2013, he launched his own education startup, Zeal. The product pivoted several times, from a small-group assessment tool to an online math tutoring service that he tried to sell for about $30 per student each year.

Schools found it too expensive. Teachers weren’t comfortable with online tutors in their classroom. “I invested millions, way too much,” he laments. “I lost a lot of money.”

Among the lessons he’s learned from Zeal: “you have to find a pretty strong product-market fit within six to nine months, otherwise you’re not doing something right.”

While that failure shaped Danner’s reluctance to bet on companies that sell to schools, he’s made a handful of exceptions in the past. Prior to Dunce Capital, he personally invested in Swing Education, which connects K-12 districts and substitute teachers, and Revolution Foods, which provides healthier school lunches.

And just as he’s learned hard lessons from Zeal, Danner says he’s had a tough learning curve from investing as well, after his first 10 bets delivered no returns. (But overall, he says he’s made “really high” returns across all his investments.)

“Don’t invest in a market you don’t really understand, just because somebody who you thought was smart referred some founder to you,” Danner advises.

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