What Investors Look for in an EdTech Startup

Want to Find Your Own EdTech Startup?

If you ‘re considering founding your own EdTech startup, it ‘s because you believe that you ‘ve found the solution to a huge problem that desperately needs to be addressed. Like any successful business, it all begins with a great idea and a compelling set of arguments as to why your solution is more effective than what is currently available on the market. To provide you with an EdTech-specific example, the problem you intend to solve may be the prevalence of poor reading skills in young children in the United States, and the solution may be an assisted reading app available on iPad.

What many aspiring entrepreneurs fail to do, however, is look beyond the idea itself and think about the execution of a said idea. After all, most of us come up with dozens of ideas throughout the course of the day, yet never make them reality due to lacking the means of execution (i.e. low funding, skills, experience, know-how, etc.) And, as Scott Adams famously said, “Ideas are worthless. Execution is everything.” This may seem quite harsh on the surface, but every entrepreneur must face this reality sooner or later if they intend to seek funding. Therefore, it ‘s better to begin your entrepreneurial journey with this knowledge in hand.

Tip #1: Investors don ‘t bet on “great ideas.” They bet on viable business models and proven traction.

So, if investors look for execution instead of ideas, what kind of evidence could you provide to prove that your EdTech startup does have a chance at future success? At this point, your idea has yet to be realized and there is no way to tell “for sure” that your startup will become a unicorn. Since we ‘ve dispelled the myth that startups exchange nothing more than ideas for capital, we must recognize that there is another factor that investors look for in a startup: the past.

While it may seem awfully deterministic, the greatest indicator of your future success is your past success. For this reason, a viable business model and proven traction will serve you well when seeking to raise capital for your startup. To illustrate, think of Snapchat, one of the world’s largest social media apps. When the app first launched, the concept was laughable to many investors. That is until the user base grew from just a few hundred to a few hundred thousand users in less than a year. Snapchat also learned how to monetize their business while keeping it free for users. In the case of Snapchat, it wasn ‘t the idea itself that grabbed the attention of investors but rather the traction and the viability of the business model.

Tip #2: Investors also bet on the founder(s).

When it comes to startups, the management experience of the founder is another key factor used to determine future success. Take DuoLingo for example, a free EdTech app with over 300 million users and a valuation of $700 million. DuoLingo ‘s founder, Luis von Ahn, didn ‘t just start this multi-million-dollar company without any previous experience. Prior to DuoLingo, von Ahn had received the MacArthur “genius grant” and the Lemelson-MIT Prize for inventors. He had also developed both Captcha and ReCaptcha, the first being given away for free and the latter being sold to Google for tens of millions of dollars. By the time he sought funding for DuoLingo, von Ahn already had a history of personal success under his belt, not to mention a viable business model and plenty of traction. When seeking funds from investors, don ‘t forget to mention any applicable experience or past successes that would give them more confidence in you.

Tip #3: Investors won ‘t pay for you to “figure it out.”

Benjamin Graham, a personal mentor to Warren Buffet and an investor widely known as “the father of value investing,” once said, “the essence of investment management is the management of risk, not the management of returns.” The majority of today’s investors would agree with this statement, choosing a more secure investment with a lower ROI over a risky investment with a higher ROI. While angel investors and venture capitalists are known for taking higher risks than most, they still seek to manage or mitigate risk to the best of their abilities.

For this reason, it’s highly unlikely that an investor will fork over $100k or $1M+ for you to begin your first-time entrepreneurial learning process. Even a university won’t give you a full-ride scholarship to learn if you haven’t shown a history of excellent academic performance. Instead, investors tend to invest in businesses that are already moving in the right direction and that have many people jumping on board. The fundraising process usually gets easier every time that a business successfully raises a round (e.g. raising a Series C round is easier than a Series B, etc.)

Conclusion

Contrary to popular belief, ideas alone are actually the least important factor for determining the success of your EdTech startup. When it comes to raising funds, there are three main factors that investors look for: your past success as an entrepreneur, the viability of your business model, and the traction (or adoption) of your business. In addition, investors look for signals from their peers to determine the risk of investing in your startup. For example, if you have already raised a seed round or Series A, there ‘s a higher chance of raising successive funds for your business. However, if you have a great idea and are struggling to find funding for your EdTech startup, don ‘t give up hope! Seek to build your user base, refine your business model, and develop yourself as an entrepreneur. With enough time and effort, your chances of founding the next EdTech unicorn will greatly increase.