Where are the startups disrupting education?

Now is the time for startups to shake the obsolete education market with technology solutions. That statement is not new, as people have been saying this for decades. Many companies were started in this space and most of them struggled to create a meaningful impact. What has changed?

1. Freemium business models change the nature of the game. Solutions don't need to be designed to meet all the requirements of the IT departments and School Districts, which basically try to fit new solutions into old paradigms, hampering innovation. New solutions should be designed for the end user, either student or employee, and the end user adopts them and spreads them virally, IT departments will join the game and integrate them with other platforms.
2. Social networks are great ecosystems to solve one of the key problems of first generation solutions: engagement. Employees and students are already engaged in multiple social networks, so new education technologies should become a layer on top of these existing networks, leveraging interactions and thus increasing engagement.
3. Mobile devices enable true anywhere and anytime. In first generations solutions, people were expected to use their desktop, which required setting aside the time to do it. Mobile devices are able to display highly interactive and socially connected content, unleashing the power of just in time learning (vs. just in case).
4. Cloud infrastructure allows for faster and more iterative development cycles. Traditional monolithic development projects are dead. New education platforms should release, measure impact, and iterate fast.

These are some of the key factors that set the landscape for big companies to be created. I'm excited by these opportunities and expect to see a lot more innovation in the Edutech space within the next 12-18 months. Think of a Yammer for education... Would that be great?

Venture capitalists have started to see this trend and investments in education-technology companies tripled in the last decade to $430M in 2011 up from $145M in 2002.

This is just the beginning of a trend and more education enabling companies will leverage technology to disrupt a multi-billion dollar industry that is not going away.

How to make things happen

I’ve been observing an interesting way of getting things done in the last few months but I haven’t been able to formalize it until we had our second Kauffman Fellows Program module a couple of weeks ago.

I’m talking about something we do almost on a daily basis: group decision making. Many times we present our ideas or proposals to a group and expect everyone to draw the same conclusions and agree on the spot. To get there it takes more work.

One-on-one interactions are critical to get things done. It sounds obvious but many times we skip them as they are time consuming.

Spending time with the key decision makers that are going to be at the table where the final decision is going to be made is probably the most important thing to do. In those one-on-one interactions you usually have the opportunity to learn what the key concerns each individual has, so that you can address them one by one and get to the general meeting with an implicit agreement.

Where do I think these one-on-one meetings should be used more? Basically in most cases! If you are entrepreneur trying to get your Board to agree to something, take the time to meet with them individually before the Board Meeting. If you want your co-workers to support your idea, once again, take the time to share with and listen to individuals. It is definitely worth it!

The Repeated Game Nature of Venture Capital

I was talking to a friend who decided to become an entrepreneur and he told me he has been working on this great idea for quite some time now, investing heavily out of his pocket. When I asked him where he was getting inputs to come up with a solution that the market would adopt he paused and almost secretively told me he hasn’t told anyone about his idea because he was too afraid they would steal it from him. After that, I paused…

Venture Capital is probably one of those industries in which reputation is built over long periods of time, and destroyed with just one wrong move. Individuals and firms in the VC community work hard to build long term relationships as they understand the non-zero sum nature of the game. Success, both for VCs and entrepreneurs, comes after relatively long periods of nourishing key constituents.

If you think about the Prisoner’s Dilemma, the only way to get to the optimum solution is by collaborating, and the only way for individuals to collaborate is by playing the game multiple times.

The repeated game nature of Venture Capital is the main reason why most VCs don’t sign NDAs. If you are an entrepreneur you should be aware that VCs have a lot more to lose if they ever break the “rules of engagement”. Today, with social media tools the word-of-mouth is even more powerful to enforce these social rules.

Moreover, not discussing a business ideas with potential customers is another key mistake, as you might end up climbing a mountain, making a huge effort, only to realize that you’ve climbed the wrong mountain. I’ve recently heard Promod Haque, Managing Partner at NVP and one of the top dealmakers on the annual Forbes Midas List for the past eight years, say that innovation happens in collaboration and close proximity to early adopters. After thinking about this concept I realized it makes a lot of sense, as interactions with those early adopters and multiple iterations are key to crafting the solution the market is willing to consume.

Ideas keep on being a dime a dozen, so my recommendation for entrepreneurs is not to keep those ideas for themselves and share them with people they trust in order to forge a better business solution. Make sure your innovations are not just great technologies but also significant bridges for gaps either in the consumer or enterprise markets.

Geolocation Conference in San Francisco: The Futures & Trends of Location-Based Services (LBS)

I attended the Geoloco conference in San Francisco on July 22nd 2010 and it was great to see how early we are in this new wave. There was even a big debate about geolocation being a feautre or a business... Anyway, I'll share my key takeaways.

Summary

The underlying trend discussed in the conference was the evolution of search into social and now into local. Altavista was one of the first movers in the search chapter, Myspace in the social and now Foursquare in local, meaning we still are going to see lots of changes in local. Given the early stage of this opportunity not even consumers are seeing a lot of value (except with navigation). The challenge, both for business and consumers, is to find applications that exist only because of local, generating real value. Data and privacy are the key components for new startups to leverage. The privacy issue affects consumers and the data element is the key for businesses (think of the first navigation devices where data was stored in the GPS box vs. the new Google map-style models where data flows back and forth constantly between the device and the server). Another interesting aspect to think about is how the location stack will look in 2-4 years: what is going to be a commodity and what will be monetized. Currently companies are blocking access to their data, generating silo solutions (an app for restaurants, foursquare, tripit, etc.). The question is how and when are we going to get over those contractual rules and build solutions that are more comprehensive.

Key trends to watch

1. Likely: Geodata will be free with mapping data from OpenStreetMap and other crowd-driven sources eclipsing commercial vendors
2. Very likely: Location-awareness will be an integral part of practically every mobile app where location is relevant and can add value - while users will have control (e.g. the ability to turn location disclosure on or off), location awareness will no longer be an exception or an "option" for developers of mobile app
3. Likely: More than half of all mobile advertising will be location-based
4. Very likely: Virtually any user-generated content (e.g. Tweets, Facebook updates, photos uploaded to Flickr, Yelp, etc.) can be automatically geotagged, allowing users to append location effortlessly. With automatic geotagging, users will routinely add "location" to their social data, resulting in an exponential increase in the volume of location-specific information"
5. Likely: Proximity will become a critical filter for mobile users, routinely and widely used to discover, view and act on news, alerts, nearby deals and other content relevant not just to their interests but also "near" (as defined by the user) their location
6. Likely: Mobile devices capable of scanning QR codes and barcodes will revolutionize the way in which individuals obtain information, shop and generally experience places. As businesses rapidly embrace and deploy the technology, scanning and retrieving information and offers via barcodes and QR codes will be as easy and commonplace as reading a brochure or package
7. Very likely: LBS will be integrated with social networks, enabling users to share their real-time location with the appropriate people. For example, family members (spouse, kids, parents) will be able to view my location at any time; co-workers will know my location during work hours; friends in my inner networks (the people I connect with the most) will be alerted if I travel to their city; etc.
8. Likely: Location will enable and foster better communication, stronger ties and interactions among individuals and their communities - e.g., neighborhoods (citizens, news sources, government, etc.), local merchants, cities, hyperlocal news, etc. The equivalent of a "local"worlds wide web will emerge
9. Likely: While location is an integral features of mobile apps, consumers will be reluctant to pay for any location-based services - they expect location to be a "free" value-added feature. However, where location is relevant, consumers will strongly prefer apps and content that are location-aware over those that are unaware
10. Likely: Nearly one in two consumers will remain skeptical, even reluctant to disclose their location, due in part to highly publicized incidents resulting from location-sharing apps (including a series of robberies, homicides, kidnappings)

Interesting data

• 20% of Google Searches are geo based (Mark Silva, Real Branding)
• Where.com
o 3M users
o launched hyperlocal ad network earlier this year and they are up to 1B impressions
o working directly with publishers to extend reach from 3M to 50M as advertisers care about reach
• Yelp
o 2.5M uniques on their mobile app (vs. 35M uniques on Yelp.com)
o 1/3 of total searches (including mobile and fixed) are coming from iPhone, but Android is growing faster
o 1M clicks per month, 500k calls ==> they are still not monetizing
• Jiwire
o seeing 6 figure deals every month for brands interested in a very targeted audience based on location data
• 14% of mobile users in the US accessed maps on their devices in April (34M people according to Comscore)
• Foursquare has 800k active users (2.1M registered) and 100k-200k active in any given day ==> 1M check-ins per day

Fundraising? Intrigued about valuations? Understand how VCs do their math!

If you are in the process of raising funds from VCs you need to understand how they will look at your company’s valuation. VCs are not evil (at least reputable ones…) and don’t want to take a large piece of your company just because. They have commitments and thresholds, and their LPs are watching…

I’m going to talk now about valuations for early stage technology companies, where the application of a DCF model will render useless. When VCs look at these companies they generally use three lenses and combine the results in different ways according to their gut feeling and the market conditions.

1. Starting with the exit valuation and working backwards: the easiest way to get to a valuation is to start with the expected exit value. Let’s say the expected exit value is $80mm (which can be calculated using a weighted average of different scenarios). Now let’s assume that the cash-on-cash hurdle is 5x, then the post money valuation should be around $16mm (post money = expected exit value / cash-on-cash hurdle). Finally, if the investment is $5mm, then the pre-money valuation should be around $11mm (pre money = post money – investment). This method has many shortcomings, as it doesn’t take into account the time to exit which will definitely affect your IRR.
2. Target ownership: if the initial target ownership is 25% and the amount invested $5mm, then the post money valuation should be around $20mm, making the  pre money valuation around $15mm.
3. Comparables: this final method takes into consideration the temperature of the market, public and M&A transactions deals, and precedent transactions within the VC’s portfolio. These transactions will include a diverse basket measuring TTM revenues, EBITDA, subscribers and other metrics depending on your company’s industry. It is not easy to find private comparables as this information isn’t generally disclosed, but looking at public comps and M&A activity can give you a sense of where the market is. VC’s might even have pre defined ranges for their own Series A, Series B and Series C.

Even though these methods should be used as general frameworks, adjustments need to me made for different scenarios. For example, the cash-on-cash hurdle will be higher for seed and series A rounds than for series C and growth equity rounds. Target ownerships will also vary across stages and across funds.

Valuations have always been and will continue to be a topic for discussion as even though there is some math behind it, there are also many softer components. VC’s personal style and gut feeling will always play a critical role.