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It is now a consensus view that early stage startups can be highly capital efficient, one of the key ideas behind lean startups. It is also a consensus view that scaling startups is capital intensive in order to reach the status of a unicorn. But do lean unicorns exist?

Press articles regularly show lists of startups who have received the most funding, apparently as a badge of honor. They forget to mention that many of the startups on these lists have not yet proven their unit economics and the dilution on the cap table also happens to be extreme.

Conversely, capital efficient startups are sometimes described as lacking ambition. The implicit message given is that the entrepreneurs are not thinking big enough, or that they are not willing to sacrifice enough of their personal lives.

What if there was a startup that only raised US$2M in outside funding before its IPO, and the IPO itself was triggered not by a need for cash but because of the number of shareholders? What if that startup led to the creation of several billionaires and many more millionaires? What if one of those people went on to become the richest person in the world? That lean unicorn exists in real life and it is named Microsoft.

Of course, Microsoft is an outlier. It was even started before the term lean startup. But, then again, all successful startups are outliers. Average statistics about startups are not helpful because they fundamentally misunderstand that successful outliers reflect power laws. Is Microsoft the only lean unicorn? Was this something that only happened for software startups from the 1980s? Hardly. A list of recent capital efficient exits shows that lean unicorns continue to be seen in real life.

So what are the lessons from history about capital efficiency? Of course, a capital efficient approach is not the only way to build a successful business. However, scaling a large company does not automatically have to be capital intensive. Capital efficiency at scale is possible, and the upside is tremendous. Lean unicorns do exit.

Sources:

http://www.lannigan.org/pdf/Microsoft_prospectus.pdf

http://techcrunch.com/2014/06/14/sand-hill-roads-consiglieres-august-capital/

https://www.cbinsights.com/blog/capital-efficient-tech-exits-top-25/

Startups do not have many ways to build a strong competitive advantage in the early days. But startup hiring is one area where this is possible because the hiring process at most large companies is broken. If your startup can build a superior hiring process, this will be a strong competitive edge.

Don’t Outsource Hiring
Hiring top talent is a core skill that startups need to possess and core skills should not be outsourced. That means allocating enough time during the week for actual hiring. If hiring is a top priority, which is usually the case in every startup, then a minimum of 25% of at least one senior person’s time should be spent on hiring. This can include online research, content marketing and in person activities but there is no way to avoid having to invest significant time into hiring if you want to do it right.

Poach, Don’t Wait
The best people are usually not aggressively looking for new jobs. They are probably being paid well, and almost always very busy, although perhaps somewhat discontented in their current role. Posting on job boards, creating recruitment ads and evaluating the applications that come to you will severely limit the quality of potential hires. You have to identify the best possible candidates and then proactively poach them. That means selling them on why they should join your company.

Build a Funnel
Just like a customer funnel improves sales, a talent funnel improves hiring. Identify potential candidates before you need them urgently so that you have enough time to get to know them. Ideally, you will be able to identify specific hiring sources who have strong training programs well suited for your company. This may include universities for fresh graduates or large companies with a commitment to employee training. Stable sources creates a positive feedback loop because your employees will be alumni and in a strong position to identify the best future candidates from their previous home.

Be on a Mission
Startups cannot compete on salary. But the best people are not obsessed with maximizing their yearly income. Instead, they appreciate the value of learning and a meaningful job. This is much easier to accomplish if your company is on a mission to change the world. To be clear, this does not mean lying about what you have currently accomplished. Be up front about all the challenges and problems that are still left unsolved because potential employees will see how and why they really can make a difference.

Use Self-Selection
Once you have identified a candidate and started to communicate, be transparent with your priorities and let them decide if the fit is correct. This requires that you take the time to identify your priorities. Prevention is the best way to deal with bad hires. Of course, not every hire will be a perfect fit. If someone joins and is obviously not working out, you need to understand why quickly and, if needed, make some tough choices. If you have to fire someone quickly, that is a sign your hiring process is faulty and so you need to re-evaluate and adjust your process when this happens more than once in a while.

Most companies have a traditional hiring process. Startups have an opportunity to build a strong competitive advantage by hiring differently. Although successful startup hiring requires investment of significant time and energy, it is definitely worth the effort.

2014 marked the largest year ever for investment in education technology. With over US$2.3 billion invested in the space last year, it is certainly an exciting time to be sitting at the intersection of the learning and the digital world. However, after five consecutive years of unprecedented amount of capital being poured into the space, some are starting to wonder, what’s next?

From where we sit, it is overwhelmingly clear that Asia will be fueling the next leg of growth in ed tech. Whether you are an entrepreneur, investor, employee, or simply watching from the sidelines, here’s why right now is the best time in history to be in ed tech in Asia.

1. Massive market size. The numbers speak for themselves.

• There are 600 million K-12 students in Asia, 10x that of the United States.
• The average Asian family spends >40% of their income on education related products and services.
• By 2020, China’s college-educated talent pool is expected to number 195 million people, more than the entire U.S. labor force that year.
• There are 300 million people learning English in China. That’s more than the entire English speaking population of the United states.

2. Large amounts of capital. Investors in Asia are leading later stage funding rounds for start ups in both the US and in Asia.

• In 2013, only 10% of the total capital invested in ed tech went to companies operating in China. In 2014, that number increased to 24%. Given the market size and opportunity set (see point number one), we expect this number to continue to grow.
• China-based tech giant, Alibaba, alongside Singaporean VC fund Temasek led a stunning US$100 million Series B round for Tutor Group last year.
• Together with two other Chinese investors, TAL Education took the lead on Minerva Project’s US$70 million dollar Series B late last year.
• Other corporate venture arms have allocated US$100mln+ to follow suit. These include New Oriental, Qualcomm, NetEase, Bertelsmann, McGraw Hill, Benessee, just to name a few.

3. Exit opportunities. Whether they are in the business of traditional education, software, gaming, or social, companies in Asia have explicitly stated that they are hungry to acquire new talent, technology, and content in order to gain an edge over their competitors.

• Education technology exits +200% in 2014, mostly in the form of M&A. The largest acquisition, that of Skillsoft, was over US$2.3billion.
• Tech giants care about diversifying their product offerings and getting access to users at younger and younger ages. These include: Baidu, Alibaba, and Tencent.
• Publishers want to acquire digital technologies and education platforms to navigate the impending digitisation of the textbook industry: Pearson, Benessee, and McGraw-Hill.
• Social networks such as YY, Jiayuan, RenRen, Kaixin want to reach new users and keep their existing users engaged.
• Gaming companies like NetDragon and Sohu have established their desire enter the education technology market as they want to increase their subscriber base and increase their content offerings.

Indeed, these are exciting times. No matter where you fall on the map, you should start paying attention to the potential of education technology in Asia. From both a financial and an impact perspective, we could not be more thrilled to be part of the rapid acceleration of innovation and value creation in education.

Sources:

http://www.globenewswire.com/news-release/2015/01/16/697961/10115837/en/Global-Edtech-Investment-Swells-to-a-Record-2-3-Billion-in-2014.html

http://www.ambientinsight.com/Resources/Documents/ AmbientInsight_2014_Global_Learning_Technology_Investment_Patterns.pdf

http://www.ednetinsight.com/news-alerts/voice-from-the-industry/the-global-english-language-learning–ell–market.html

http://elearninginfographics.com/elearning-market-report-infographic/Target market

Understanding where we may be in an investment cycle is difficult but worth the effort. Trying to time an investment cycle, however, is nearly impossible. For early stage investing in particular, there are some important points to consider when thinking about the investment cycle.

Timing a moving target
While markets move up and down, each cycle is different. In particular, people are usually responding to what happened in the previous cycle. This includes both market participants, who tend to overweight recent events, and the regulators, who make rules to deal with the problems of the previous cycle. As a whole, markets are complex adaptive systems and timing the cycle is inherently difficult because of the constant change in underlying market structure.

Great companies are built through a cycle
Given the long term nature of early stage investing, most great companies require at least one cycle to create significant value. Therefore, no matter when you invest, the company will have to deal with the challenges of the full cycle in order to succeed. Near the top of a cycle, raising money is easy for companies but getting the best talent and resources is difficult because of too much competition. Near the bottom of the cycle, raising money is difficult for companies but there is less competition for the best talent and resources. Understanding these dynamics is important for every company that wants to thrive over time.

Successful investors invest through a cycle
While it is true that valuations at the bottom of a cycle are lower, early stage investment is about the best companies, not the lowest valuation. Sometimes the best companies are first started near the top of the cycle, so an approach of timing the cycle would miss out on investing in these companies. In addition, by investing through a cycle, investor valuation will include cycle highs and cycle lows with the final result being somewhere in the middle on a blended portfolio basis.

Exits are when the cycle matters most
Both entrepreneurs and investors need to consider cycles most when evaluating exit opportunities. In particular, there can be a 10x or more difference in exit valuations for similar businesses depending on the cycle. During cyclical downturns, M&A exits are rare and it is tempting to say yes to discounted offers, especially after a hard fight to simply survive the downturn. But if the company has finally found a sweet spot in terms of growth, then it is much better to wait and focus on building value internally. The cycle will bump up valuations significantly. As an upcycle matures, valuations will continue to increase and this means that companies may have more choices around exit opportunities. But there is no point in getting distracted by trying to time the top of the cycle for an exit. The right time to exit is when the offer is simply too attractive for the entrepreneurs and investors compared to the option of staying independent.

Exit currency is as important as market cycle
Cashing out at the top of a cycle is meaningless if you receive equity that is locked up and then proceeds to fall 99% in the next 6 months, which can happen at the top of the cycle. Therefore, rather than worrying exclusively about timing the cycle, it is important to understand the overall context and exit currency is one of the key factors to consider. While cash is an attractive alternative to overvalued equity, it is not always the best choice. Near the bottom of a cycle, receiving equity in a high growth private company may be much more valuable than cash. Thus, even though the cycle timing of the exit may be less attractive, the final result may be better. When evaluating exits, consider all factors, not simply trying to time the cycle.

Timing the cycle seems like a superficially attractive idea for startup entrepreneurs and investors. In reality, however, building great companies takes effort regardless of the cycle. The best time to start is always now and the best time to exit is after considering all the issues, not simply the cycle.

When it comes to education, there are a lot of arbitrary lines that are drawn. Dividing neighbourhoods to determine who can go to which public school. The difference between 3rd grade and 4th grade. Income levels for receiving financial aid. GPAs. While I acknowledge that some of these delineations are necessary evils to create a system that scales, their often cruelly random nature can do more harm than good. As a result, I am naturally wary of capricious classifications when people ask, “How do you qualify your education technology investments? The problems in education are so complex, shouldn’t you narrow your focus to just K-12 products, or language learning, or educational gaming?”

I appreciate the need for focus and clarity in mission, but I prefer to work in the business of solving problems, not drawing lines. That’s why we do not qualify education entrepreneurs by their end users (children, teachers, adults), their target markets (K-12, higher education, corporate), or their business models (enterprise, consumer, advertising, data analysis). Instead, we remain driven by our mission of scaling impact in education. As a result, we classify edtech start ups based on the problem they are solving.

To be clear, there are four key problem areas where we believe technology can meaningfully transform education.

1. Limited access to content

In a world where over three billion people have access to the internet and there are almost as many cell phone subscriptions (6.8 billion) as there are people in the world (seven billion), the concept that high quality educational content is a scarce commodity no longer applies.¹

2. Inefficient infrastructure

In the United States and other developed countries, it is estimated that teachers still spend over 50% of their day grading papers. Given there are over 100 billion emails sent and received every day, ask any other business person how much of their day they spend handwriting letters and they will laugh you out the door.²

3. High dropout rates

Rigid pedagogy and a one size fits all system fails to account for different types and speeds of learning. As a result, 30-40% of primary and secondary school students around the world drop out or fail to graduate on schedule.³ Higher and adult education similarly struggle with low engagement and completion rates.³

4. Lack of job relevant outcomes

In spite of the exclusivity and competitive nature of attending higher eduction, it is still largely not translating into job outcomes. Youth unemployment is a global issue and yet 36% of employers worldwide struggle to find candidates with suitable skills. This is even worse in Asia – 81% Japanese employers cite difficulty hiring⁴. It won’t be getting any easier either. The U.S. Department of Labor estimates that 65% of school children will be employed in jobs that don’t yet exist.⁵

Our analysis of edtech start ups then involves the exact same filters for people, product, capital efficiency, scalability that we use for other sectors. We find that this approach is not only empowering to the entrepreneurs and their businesses, it also leaves room for truly innovative solutions to expand beyond their initial applications in classrooms. It’s not surprising that these challenges exist in other environments, too, and the most exciting investment opportunities in education often involve businesses that can be applied in multiple verticals. If we or our teams are arbitrarily forced classify their business as “K-12” or “hardware”, we’d be thinking way too small. Drawing lines tends to do that, and we are in the business of thinking big.

Sources:

¹ http://unpan3.un.org/egovkb/Portals/egovkb/Documents/un/2014-Survey/E-Gov_Complete_Survey-2014.pdf

² http://www.radicati.com/wp/wp-content/uploads/2013/04/Email-Statistics-Report-2013-2017-Executive-Summary.pdf

³http://www.ilo.org/global/research/global-reports/global-employment-/lang–en/index.html

⁴http://www.hrmagazine.co.uk/hro/news/1145247/global-skills-shortage-hits-seven

⁵http://www.dol.gov/dol/aboutdol/history/herman/reports/futurework/execsum.htm

Twenty years ago I quit the only “real” job that I ever had and started my first business. It was a pretty modest five-person software development shop writing database-driven applications and charging by the hour. My first exposure to venture capital and the high tech startup ecosystem was a few years later when the .com era was in full swing. My consulting company wrote a ton of software for startups in exchange for equity. Then one offered to hire us full time; we accepted and I became CTO and my team of developers came with me. Then I flew out to Silicon Valley to raise Venture Capital on Sand Hill Road: Something I did not know anything about, but found exciting.

We raised the money, built a business, and I never looked back. The startup I joined didn’t go public as we had planned, but we did eventually have the “exit.” It was 2002 and I had my first taste of the entrepreneurship bug. Over the next 13 years I got to be the co-founder or very early employee of 4 more venture-backed startups, all lucky enough to have an exit as well.

Over the past few years I had the opportunity to be part of the entrepreneur support system by doing a few angel investments of my own, sitting on some startup boards, mentoring startups at various accelerators, and co-founding and running an accelerator. It felt good to help entrepreneurs. As Telerik’s acquisition started to move from a discussion to a reality, I started to think about what would come next for me. As I talked with my friends and colleagues, they all gave me similar advice: Jump right into another startup. Apparently they all think that I’m good at it. I started to think about what kind of startups I can start or join.

Then one day this past summer, I went up to San Francisco and had breakfast with a partner at SOS Ventures, then met up for lunch with Peter Thiel and a bunch of the 20 under 20 fellows (I’m a mentor there), then made it back down to Palo Alto and had dinner with a friend who is a partner at a fund on Sand Hill Road. The next day it hit me; I literally had breakfast, lunch, and dinner with a different VC. I decided then that I had to change my seat at the table so to speak and move from being an entrepreneur to an investor. The experiences that I had over the past 20 years of being an entrepreneur could be put to use over a larger surface area than just one startup.

I couldn’t go work for just any old VC, I needed to find a fund that had the same values as me: entrepreneur-friendly, international, and diverse. I also needed the fund to be a bit of a startup itself: I like to build things. Lastly, I needed to really like the people I would be partners with. After I thought about it in those terms, it was obvious to me that joining Fresco Capital was the right choice for me.

I’m happy to announce that starting on Monday, January 19th, I’ll be officially joining Tytus and Allison as part of the Fresco Capital team. I’ll be involved in all aspects of investment and operations with a specific focus on enterprise and IoT. Being based in Silicon Valley with two partners in Hong Kong reminds me of my last gig. I guess old habits die hard…

Globalization is not a new trend. It has become increasingly pervasive every decade. But early stage startups have historically been very local. Local teams and local investors.

There are still investors who will only invest within a 1 mile radius of where they live and only when the entire team is based locally. This is not an accident. Early stage startups are hard, and being physically close allows teams to iterate quickly and build a strong shared culture. But there are also several ways in which having a global perspective can benefit startups.

Customers
Competition for customers is global and, once an idea takes off, there are now countless competitors willing and able to clone or localize business models. Being the first to prove a business model is not enough, you need to be the first to scale a business model.

Talent
The fight for talent is similarly global. Instead of being forced to compete in a local market, which is typically a startup hub, it is a competitive advantage if your company can source and manage a global talent pool. Anti-immigration policies are a real issue and, beyond regulations, many people simply do not want to move. Of course managing distributed talent is hard and not everyone can do it successfully, but enough companies have done it to conclude that this is a repeatable process rather than pure luck.

Suppliers and service providers
For software, this is obvious and has already happened. For hardware, large companies figured this out a long time ago but the global hardware supply chain is just starting to adapt to working with startups. For other services, like legal and financial, the change is less obvious but it is starting. Part of this trend is the productization of services which have previously been manual. Part of this trend is the best service providers becoming more global, increasing competition in previously local oligopoly markets.

Information and transparency
One of the biggest challenges historically has simply been a lack of information about other markets. Local players captured significant value simply by controlling access to information. This will not change overnight but the trend is clearly towards more information being available so that startups can make more informed decisions about both strategy and tactics.

Capital
Capital across public markets and late stage private markets has been global for a long time. This process is finally starting to change in early stage private markets. Does that replace the need for local investors? No. It is always helpful to have a local investor who is physically close, but global investors are a fantastic complement.

Beyond sum of parts
Importantly, thinking global across one area can have positive impact across other areas. Global investors can add value across talent, markets and information. Global talent can lead to global customers. Larger market opportunities result in higher valuations from future investors.

The inflection point has arrived for startups to think global from the early days. Companies that understand this shift have the opportunity to create significantly more value than in the past and startups investors with a cross-border perspective have a particularly important role in adding value during this process.

Someone recently asked me about red flags for investing in early stage companies. Particularly when it comes to education, a red flag for me is anyone promising that their product or service will “revolutionise education” or “disrupt the educational system as we know it.” We all know entrepreneurs are prone to hyperboles, and I certainly appreciate a bold vision, but (always with exceptions), I find these type of statements to be overly dramatic, simplistic, and short-sighted. In fact, by believing that you are single handedly revolutionising education, you’re missing the potential for revolution entirely.

I have been thinking about this concept quite a bit, and have been mulling over how to write about it for way too long, so I was delighted when I was looped into a conversation around this video, “What will revolutionise education?” by Veritasium. The author posits an interesting point that many technologies have promised to “revolutionise” education, yet none have. At one time, Thomas Edison was so excited about the potential for motion pictures to revolutionise education, he is quoted as saying, “Books will soon be obsolete in schools… scholars will soon be instructed through the eye. Our school system will be completely changed within ten years.” That was in 1913. So, what went wrong?

Veritasium points out that the motion picture did not successfully revolutionise education, and neither has any technology since, because when it comes to education no technology is inherently better than the other. I don’t disagree entirely but I would add a qualifying factor that no technology is inherently better than the other at scale. For certain concepts, for certain students, some technologies are actually better than others. Everyone learns differently. For me, I remember pictures much better than moving images. I remember words that I see much better than words that I hear. (Fun fact, I had a grade school teacher who thought I had a photographic memory. I don’t, though that would be awesome.) In any case, each person is different, which makes a revolution nearly impossible given each person wants and needs different things when it comes to their education (I mean that on micro, macro, and meta levels). So the what we need to do would be figuring out a system that allows for scalable individualisation, mass customisation of content, delivery, trajectory, and motivation. Clearly, no silver bullets here.

Suspending our disbelief for a second, let’s say there were some silver bullet technology that could “fix education” — scaling it to any sort of “revolutionary” level requires cooperation of a diverse group of people and systems, which is exceedingly difficult. When people are so different, how can we convince them that any one thing is the answer? In fact, the comments section of this Youtube video embody this challenge. Let me share some highlights:

• Everyday, millions of children march to school with drudgery and resistance.
• It is the teachers job to try to inspire their students, but let’s be honest, they don’t. Most don’t try or fail miserably at it.
• Kids are without homes, and without clothes. Teach these first and you will revolutionise education with full stomachs.
• For you to personally accuse me of thinking I’m better than them just shows how irrelevant your train of thought is.
• Stop wasting your time criticising my ideas when you could be thinking of your own. Get a grip.
• Everyone is being a total bitch?

Clearly, it is all too easy for a productive conversation around education to devolve into a virtual pissing contest. My point is that the challenges with education are incredible, astonishing, diverse, far reaching, and incredibly complex. Given all of these competing factors (egos included), it is all too easy to throw our hands up in the air and say, “Forget it! It’s impossible!”

But here’s a thought. Maybe the truly revolutionary concept is simply embracing that there is no revolutionary concept. By acknowledging that there is no “one size fits all” solution, no single technology that will change the system forever, we are liberated to pursue a multitude of different strategies that solve different problems for different learners in different markets around the world. We will never have the answer because there is no one answer. That’s not discouraging, either. It’s incredibly empowering. It frees us to stop talking and start creating solutions (or in my case, investing in them). That’s why I truly believe that empowering engaged and passionate entrepreneurs with the resources and networks they need to succeed is the only thing that even comes close to a silver bullet in education.

Average is intuitive. Almost every news summary, scientific paper and business report looks at an average. Average is a short-form summary of the normal distribution. In more depth, the normal distribution is described by deviations from the average, with larger deviations being less frequent.

Even the words average and normal provide an aura of comfort and safety. But that aura is false because the most important opportunities and risks in the world do not operate according to average, they follow power laws.

When we think of extreme outcomes, the initial ideas that spring to mind are negative: things like health problems, financial crashes and natural disasters. Although any single extreme negative event is unlikely, the probability of extreme negative events in general is actually very high because there are so many. Some, like financial crashes, are more cyclical in nature and happen with regular but unpredictable timing. Others, like health problems, are tied to a combination of complex genetic and environmental factors in a structural way: they typically get worse over time if left alone.

Although we struggle to predict individual negative outliers, we must build resilience into our lives in order to withstand them in general because something negative is inevitable. This means sacrificing efficiency and creating a drag on short-term performance. It does not matter how efficient you are currently if you cannot survive the next negative shock.

Power laws are not only negative. We can also find opportunities that follow extreme positive power laws. In healthcare, new discoveries are able to change millions of lives. In education, we are starting to make progress at scalable impact. In business, network effects are becoming more common. While individual positive extreme outcomes are difficult to predict in advance, they occur with enough frequency to believe that they can continue regularly under the right circumstances.

When evaluating opportunities, it is therefore extremely important to understand the upside potential of power laws. Any individual attempt at an extreme positive breakthrough seems unlikely, but having several different attempts increases the probability of success significantly. Importantly, the potential positive impact of that success is exponentially larger due to the inherent nature of power laws. This means that society and organizations should be aggressive in encouraging extreme breakthroughs even though the probability of a single breakthrough succeeding may be small.

So is there a paradox of power laws? People who focus on resilience tend to be conservative by nature. They are less excited by breakthroughs with a low probability of success. People who focus on breakthroughs tend to be aggressive by nature. They tend to worry less about resilience.

Although difficult, the ideal strategy is to combine resilience with breakthroughs. Focusing on resilience helps to protect against the inevitable downsides of power laws while focusing on breakthroughs helps to capture the upside potential of power laws.

Forget average because power laws are the real driver of risks and opportunities in the world.