Seed Funding 101 at SXSWedu Helps Early Stage EdTech Startups Learn How to Build Capital
In what is always a hot button issue for edtech entrepreneurs, SXSWedu hosted a “Seed Funding 101” panel at the start of their annual three-day confab this year on Monday, March 6.
From this author’s perspective, seed funding is a particular pain point in edtech given:
A) Many entrepreneurs are relatively under-resourced/non venture-savvy former educators or students.
B) Most traditional startup investors are scared away by the significant time and complexity required to monetize institutional school and college sales models.
C) The handful of education industry-focused investors (“impact” or otherwise) are focused on Series A or later stage. (This given the particularly long seed stages of most start-ups in this space, as well as the fact that most of the LPS in this space are massive education foundations seeking to put tens of millions of dollars to work in their affiliated funds).
While this panel only had one angel investor (the inimitable angel Graham Forman of Edovate Capital), the panel was moderated by Mark Phillips of HireEducation, an industry recruiter, and also featured two early-stage founders, Sabari Raja of Nepris and Carol Barsh of Story2, both of whom drew from their own recent experiences in raising seed rounds.
Graham opened the panel speaking to the decision founders face in bootstrapping (i.e. securing customer funding) versus trying to raise pre-seed funding (i.e., $150,000 from friends and family), with the next step typically being a seed round of say $500,000 to $1.5 million from super angels and seed funds.
On the website for my not-for-profit meetup group Educelerate, we recently posted an article from two-time edtech founder John Knific on the importance — and opportunity — to get customer funding before raising capital. In an earlier article, we also shared some bootstrapping advice for K-12 founders. Graham echoes some of these points as in his own evaluation of any potential seed investments he focuses on real business with real customers, addressing a real problem…with passion!
As is fairly typical within this industry, Graham expects any potential investment to have already achieved initial client contracts generating as much as $100k in Annual Recurring Revenue (or $10-15k per month).
The entrepreneurs Sabari and Carol spoke to the particular importance of “pre-seeding” any eventual seed raise by building a network many months in advance of an actual raise. Sabari noted that pre-funding, a start-up obviously lacks board members, but can still secure such support through an informal board of advisors. She has found many industry-experienced leaders are happy to share their experience and insights and serve as mentors.
Graham reiterated this point with a parable, “If you ask for investment, you are probably going to get advice. If you ask for advice, you might just get an investment.”
He finds some advisory roles an authentic way for entrepreneurs to engage and build a relationship with a potential investor or partner. Graham himself likes to build a relationship at least six months before considering any investment. His investment ultimately largely comes down to the entrepreneur and their rapport as well as “do they know what they know and can they attract a talented team, as at some point you only know so much.”
Sabari described her own experience doing exactly this. Months before seeking any seed funding, she sat down with investors like New Schools asking what they seek in potential investments. Now as Nepris seeks to raise a larger Series A round, none of their investor conversations represent new connections.
Part of being a CEO, she described, is to build relationships and always keep them warm.
“You don’t just wake up one day and raise money,” says Sabari.
Sabari and Carol were further asked about raising capital as female founders. Carol quickly responded that she does not “raise money as a woman; [she] raises money as a CEO.” That being said, she called out how just 19% of pre-seed funding goes to female founders, and barely 0.2% goes to African American female founders.
Sabari built on this point in sharing a personal anecdote: one of her (female) mentors raised this data and its implications that male founders have a higher success rate of raising funds. So, she recommended Sabari bring a male co-founder to her meetings, even if he never spoke. Sabari refused, rejecting the thought of taking investment from someone who might have only invested because there was a male presence.
In the end, perhaps the best advice was Graham’s closing note that the best time for raising funding is when you don’t need it.
A Chicagoan with 15 years of strategic investment experience in the education markets, Christopher Nyren (@cnyren) is the founder of both Educated Ventures, an education industry-focused advisory and seed investment firm, and Educelerate, a not-for-profit network to foster startup ventures focused on education technology and innovation. When not sharing his expertise on edtech investment, Christopher enjoys plane-hopping and collecting rare craft brews.