I often hear the education investment market compared to the Wild, Wild West. That may come partly from the fact that education represents a whopping 9% of the US economy and its market cap is a scant .3%. Or it may come from the belief that education technology is growing so quickly that speculative investing is a pretty good call. But even though education is a unique industry, successful venture fund principals are quick to point out that the time-honored rules of investment still apply.
The ARC Capital Development Story
Kevin Custer is one of the Founding Principals of Arc Capital Development. For 20 years, he and his partner Rita Ferrandino have built or been the primary architects of nine companies, generating aggregate revenues of more than $500 million. For seven of these companies, they have acted as senior executives leading the shareholder exit process, with shareholder returns from 4 to 25 times initial investment. Kevin has helped more than 85 companies grow and he and Rita have invested in more than twenty of those. While that sounds like a lot, you could fill a couple dozen legal pads with the names of the companies that Kevin didn’t fund. According to Kevin, “The success we’ve seen can be directly traced to the three criteria we use in looking at deals. We differ from most early stage or seed round investors, which focus on the management team, the product, and the market position. In Arc’s experience, we’ve seen that those aspects can be adapted readily. So what really matters to us?
We only invest in companies with a very worthy mission, coupled with an economically sustainable opportunity. As a social impact-driven organization, we don’t accept subpar returns; we operate under the idea that a company with a solid mission is very valuable to its customers, and will become economically sustainable.
One example of marrying mission to market opportunity is our portfolio company Tippy Talk. Created by the father of a non-verbal daughter with autism, the company’s app allows those with verbal disabilities to communicate by translating pictures into text messages sent to family members or caregivers’ phones. Not only is this a mission-drive venture, the extensive market of hundreds of thousands of people makes this economically viable.
We look for markets exceeding $200 million in opportunity, with the possibility of a 20% market share for our company. Too often, we see great ideas limited by their markets. In one instance, a Fortune 500 company spent $1 million developing a $2,000 product, only to discover that the domestic total market was less than 10,000 people — a $20 million ceiling.
Ultimately, the companies we choose to invest in could succeed without us, but we’ve found our calling in accelerating their success. We work to put best practices into place, and leverage what we’ve learned (through our more-than-fair share of mistakes) so that companies don’t have to repeat those errors and can build on what we already know works. We bring the right people to the table so that companies driven by strong missions can bring their products to a marketplace that is searching for solutions — rather than limiting our companies, and ourselves, as investors who only search for the bottom line.”
The Edovate Capital Story
Edovate Capital founder and managing director Graham Forman has been an early-stage investor and entrepreneur since 2001. For the last fifteen years, he led sales, marketing, and business development for three early-stage, high-growth Software as a Service businesses, selling to the education market. His firm, Edovate Capital, is a seed and early stage venture capital company whose leadership invests in companies that lead innovation in the education market. Like Kevin Custer, Graham may evaluate hundreds of companies in any given year, only to select three or four to invest in. Graham says “I was trained as an education entrepreneur over a 15-year career in three EdTech software startups. So, when I evaluate education technology companies and teams, I first look at the opportunity through the lens of an entrepreneur and then as an investor. I focus on understanding the team first and I’m enthusiastic when I find a team with deep knowledge of the problem and an obsession with solving it. I’m also looking for good chemistry among senior team members and a track record of working together through the ups and downs of startup life. I think it’s important that they’re self-aware and know their strengths and weaknesses and can attract talent that fills those skill gaps. Finally, I want to see evidence that they can execute their plans. I’m looking for teams that do what they say they’re going to do so it’s important that I get to know them over time so that I can measure their progress. In addition, I look for $500 million+ markets and a solution that is a pioneering approach to solving the market problem.”
Graham is keenly aware of the differences between corporate and education market investments. According to Graham, “Education has its share of challenges that are similar to other industries, but I do think there are some characteristics of the industry that make it different from other business sectors. For example, government involvement in the education industry is more prominent than any other sector, except perhaps healthcare. With heavy government involvement in education, high compliance requirements are the norm. Compliance is a drag on innovation and makes it more challenging to implement ideas that provide a straightforward return-on-investment or return on education. Selling in education is more challenging because there are many masters to serve – employees, students, parents, and even the broader community. Providing solutions that serve such a diverse set of stakeholders is more complex than serving just a single stakeholder. Successful solutions often balance the different needs of these various stakeholders, but it’s hard to do.”
Both Kevin and Graham are heavily hands-on with their portfolio companies. Both are steeped in the education business and have the ability to advise their clients well, avoiding pitfalls and maximizing opportunities. Graham takes an active role in the governance and management of his investments. “I meet with more than 500 entrepreneurs a year and typically make just four investments. For those in whom I invest, I serve as a board member, advisory board member, and adhoc advisor as needed. I’m at the service of the entrepreneurs and often work with them on figuring out how to grow from a few initial customers to serving hundreds or thousands of customers at scale, which is my background as an entrepreneur and one of the biggest challenges facing any education business. For the other 99% that I meet with, I can’t invest in them so I try to relate to them as a fellow entrepreneur and be a resource for them. Perhaps, I can be a sounding board for an idea they’re considering, or I can provide them with guidance on how to grow, or I can make an introduction to someone in my network that can be helpful to the entrepreneur. I work hard to be valuable to everyone I meet, so that I can continue to build my brand and reputation in the EdTech industry.”
From The Client’s Perspective
Karl Rectanus is the CEO and co-founder of Lea(R)n. Originally an educator and administrator in the US and abroad, he wanted to give educators a voice and their organizations the insights to know which learning technologies are best for their classrooms. Karl has started and led multiple education innovation organizations, and currently advises districts, states and foundations.
In Karl’s earlier entrepreneurial experiences, he chose not to accept investor funding. In his current company, however, he made the decision to grow the business using equity investors. According to Karl, “Because I am originally a teacher and administrator, I am wired to bootstrap — to succeed with just the resources available. Since leaving the classroom to become a four-time education entrepreneur (to create solutions to the challenges I was running into as an educator and administrator), my first three successful organizations were either bootstrapped or grant supported. However, as we incubated LearnPlatform, a technology management and analytics SaaS for educators and their organizations to improve instruction, purchasing and outcomes for students, we realized the best path was equity investment from smart, connected leaders who understood the rapidly growing market.
Edovate Capital and our other strategic investors understood our service is a “platform” that serves a significant market need at scale. LearnPlatform not only helps individual school districts, colleges and states understand which education technologies are working best in their own organizations, but provides safe ways for those organizations to share what’s working with each other. Our model of rapid, broad and diverse growth drives massively increased value, which is difficult to achieve in traditional “lean” models of proving in one or two locations before pursuing incremental or scaled growth.
For us, it’s about what’s best for the company’s success, and it is working — our early “smart money” investors understood our market, and helped us grow more than 354% last year, with more than 100,000 educators on LearnPlatform impacting nearly three million students.”
Smart Money
Arc Capital Development’s Kevin Custer, like Edovate Capital’s Graham Forman, has managed to find success for his company through the success of his clients. Both firms are heavily involved in the companies in which they invest, and both are intimately familiar with the education industry. With the sheer number of education companies each investment firm vets before pulling the trigger, the odds may be in their favor. But even by panning the top 1% of EdTech companies, there is no guarantee that they’ll strike gold. The education market is a fickle beast, often unruly and steeped in government red tape. Add to that, the fact that identifying an education decision-maker is often difficult, and may differ from district to district and even from school to school within a district, and the challenges can very often outweigh the rewards. Much has been written about the incredible amount of EdTech investment that is projected in coming years. Capital investment in education technology is now measured in the billions, and VC’s and nonprofits are lining up to be a part of the next big thing. But the price of success is always paid in full and always in advance. And smart money always gets that way by paying the price through experience and hard work. Like Kevin and Graham. Very smart money and schooled in education.
