Over the past few years I’ve had the opportunity to work with hundreds of early stage companies looking for funding. They all seem to approach fundraising the same way: make a big list of investors, ping their network for warm intros, and take every meeting with any VC that replies. Unfortunately this is not an efficient way of doing things.

Instead, I advise startups to filter the list of potential investors by three critical criteria and only meet with an investor that matches all three. If an investor meets only one or two of the criteria, you are wasting your (but potentially not the investor’s) time. So what are these three criteria?

Size of Check

Perhaps the most important criteria, and also the most overlooked by a founder, is the typical size of check written by the investor. For example, let’s say your startup is looking to raise a seed round of a $1.5m convertable note. The typical scenario is that you have 3-4 investors, one lead at half the round at $750k and the other 3 investors in at $200k – $300k each. If this is the amount of money you are looking for, don’t seek out Angels who are only going to put in $25k-50k at a time or don’t seek out VCs that typically invest $25m or $75m in a round. The size of the check that they typically write won’t match up with what you are looking for. 

Domain

Another common mistake is to hit up an investor who matches your check size, but doesn’t invest in your domain space. For example, let’s say you are a hard core B2B business and you approach an investor who only invests in consumer mobile apps, looking for the next Instagram. Big waste of time. What if you just finished your Kickstarter campaign on the next awesome IoT breakthrough and you approach an investor who has never made a hardware investment before. If they were even willing to invest, why would you want their money, they have no expertise in hardware? Instead filter only investors who actively invest in the space that you are in. They will add the most value since they understand your domain. In addition, they will have the most patience since by definition they are a believer in your space.

Location

Location is often is overlooked as a third matching criteria. I don’t mean your physical location, which is important to some investors-particually in Silicon Valley or a government backed fund, but rather the location of your target market and customers. If you are a startup targeting the Indian market, find an investor that is comfortable with that market and has an expertise there. You don’t necessarily have to find an Indian investor, but one where you are located that understands the Indian market and is not frightened by it and can connect you with the local ecosystem. 

After you have applied your three criteria filters to your list of investors, now it is time to reach out and get those warm intros. Only then will the meeting be productive. Often times I get pushback from founders saying that they are meeting with Investor XYZ that meets two of the three criteria. I tell them that the investor is wasting your time. What they are doing is taking the meeting to learn about your domain or target market without having to invest. For example if Investor XYZ never invested in Africa and your target market is Africa, they may take the meeting to see what is going on in Africa and report back to their partners. For them a one hour meeting in their office hearing your pitch is a worthwhile use of their time to get educated for free.

Same if an investor typically writes larger checks, say $25-50m average, but also has a new “seed” fund. Avoid those investors at the early stage. You get very little synergy from the brand name and will never meet the famous partners. In addition, if it really is a seed fund and there is no avenue for follow on pro-rata, you are back to square one when you are pitching the “main” fund. Also, in some instances the “seed” fund at a larger fund is typically the “B” team-young partners recently hired who are thrown into the seed fund without any real influence at the senior partner level.

One of the obvious consequences of the current low interest rate and bond yield environment is how it impacts the cost of capital for companies. As a result, large tech companies are aggressively growing their cash reserves.

Apple closed its most recent quarter with US$178 billion in cash. Yet the company just raised US$1.35 billion of debt at a cost of 0.28% to 0.74% per year. Not to be outdone, Microsoft just issued the largest bond offering in its history as a company, raising a total of US$10.75 billion to add to its existing cash position of US$90 billion.

US companies are not the only ones getting aggressive. Tencent recently raised US$2 billion in bonds and Alibaba issued US$8 billion of bonds at the end of 2014. Of course, the Alibaba bond issuance came soon after the company’s record US$25 billion IPO, so companies are also raising equity in public markets.

1. Low cost of capital. This is the most obvious reasons. If you could raise US$1.35 billion at a cost of less than 1% per year, you would certainly not hesitate.

2. Balance sheet envy. US$90 billion seems like a very comfortable cash balance at first glance, but it feels a lot less comfortable when compared to your key competitor having US$178 billion.

3. Competition via acquisition. The outlet for competition among these companies is startup investment and M&A. Microsoft buying Minecraft for US$2.5 billion, Alibaba acquiring UCWeb for at least US$1.9 billion, Apple buying Beats for US$3 billion, and the list goes on.

Regardless of what happens to financial markets, one constant over the coming months and years is that this funnel of cash will be used by the tech giants for even more aggressive investment and M&A activity, which is good news for both entrepreneurs and investors in terms of future startup exits.

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.

Your competitors are growing 3,000% year on year. Your classmates from university are serial entrepreneurs on their 5th startup. A pop singer is running a venture capital fund in her spare time.

Everyday is full of headlines from the hype cycle. Why is it hype? Because attention is so scarce that the lowest common denominator is not the truth, but anything to get you to click. That 3,000% growth rate is growing from 1 user to 30. The serial entrepreneurs have 4 failed projects that they call startups. The pop singer hired her brother to run the venture capital fund and will lose all the money.

Why is this important? Because the hype cycle makes you feel the need to catch up with your own hype, throwing out useless vanity metrics to grab attention. Which simply perpetuates the cycle.

Does that mean you should stay in a cave, ignoring the outside world, focused only on improving your product? Of course not. You need to engage with the outside world and the hype cycle. If a story is really important for you to understand, dig deeper to ensure that all numbers are supported by reality and all quotes are taken in context. If you want to find out what is really going on behind the scenes, build a network of trusted contacts.

How about your public announcements? Yes, you need to make them interesting to get attention, so have a point of view and be willing to share your successes. But don’t make up facts and stories just to convince others, and yourself, that you are successful.

During the good times, people who focus too much on the hype cycle do well. But, during the bad times, they forget to adapt precisely because they have been fooled by their own hype. Don’t fool others. Don’t fool yourself. Focus on reality, not the hype cycle, and you can make progress through good times and bad.

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

As investors in scalable businesses, we love the benefits of technology, which helps to create massive positive impact at scale. We appreciate how software can personalize our experience and even learn over time. We are also active investors in companies using connected devices and so understand the benefits of how atoms work with bits. But your company, as an entire entity, is not a machine.

The idea of a company as machine dates back to the industrial economy and it did not disappear as we transitioned to a service economy. There is a reason why customer experiences in service industries as diverse as banks and airlines are generally terrible. The companies view themselves as machines with employees as cogs and customers as throughput. Even our education and healthcare systems are still struggling to evolve past the outdated view of churning through people like widgets.

One would think that modern technology companies would be different given the need to attract younger employees and customers. But many of these companies actually forget that technology is supposed to support people rather than people supporting technology. The emphasis is still on factories, engines and processes even though the technology is different. While these may only be words, words build habits and habits create lasting outcomes.

So what should the vocabulary be instead? Clearly the network is the defining structure of the information economy, replacing the factory. Whereas the factory worked through engines and processes, the network works via emergence and relationships. Ultimately, a human focused perspective works best. People first.

The bad news for society is that a people first approach is still rare. The good news for you is that a people first approach is a competitive advantage precisely because it is rare. So forget the tired industrial economy metaphors and make sure your company has a human focused perspective. It’s good for you and good for society.

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.