As venture capital investors, we are constantly looking for positive fat tails, companies that have the potential to generate extreme positive outcomes.

At the same time, not all fat tails are positive. There are negative fat tails. And as we look towards 2016 and beyond, it’s important to think about the risks. While there are many potential risks to consider, the following list of five fat tails focuses just on finance and economics because I don’t have the time to write a book this month.

To be clear, these are not predictions. In fact, the world may be better off if none of the following fat tails happen in 2016. But at least we should be prepared and resilient, just in case.
 

1. US dollar squeezes dramatically higher

 
If the US dollar rises steadily, that would not be a fat tail. But if it rallies sharply higher, that would fall into the category of fat tails. Why would that be negative? Historically, a strong US dollar is associated with tighter liquidity conditions globally. And so if we see a sharply stronger US dollar, that will be a clear warning sign of potential risks ahead. Currencies are typically the first financial markets to move. They lead bond markets, equity markets and private markets. As an early warning indicator, keep an eye on the US dollar. If it squeezes higher, get ready for more fat tails.
 

2. Unexpected rise in interest rates

 
The last interest rate increase by the Fed was in the summer of 2006. At that time, Facebook was only open to students, the iPhone had not launched and Tesla was an early stage startup. An entire generation of young people has grown up without understanding what happens when interest rates rise. An entire generation of old people has forgotten what happens when interest rates rise. It’s highly possible that we’ll finally find out in 2016. Historically, rising interest rates could not be called a fat tail event because this was a normal cyclical process. But if there is an unexpected rise in interest rates during 2016, it is best to approach this as a fat tail event because we really cannot predict how the results will play out.
 

3. Unicorn contagion

 
In every cycle, certain ideas capture the essence in a single word. In the current cycle, Aileen Lee’s concept of unicorns is that word. Now that some of these companies have started to show signs of being less than perfect, their connection as unicorns creates the risk of contagion within the group. More broadly, it’s still unclear what weakness within the group would mean for the broader startup and financial ecosystem. Perhaps nothing. Perhaps they are a leading indicator. At the very least, it’s worth keeping an eye on sentiment around unicorns.
 

4. Crowdfunding backlash

 
Crowdfunding is a transformational and positive idea overall. Like any transformational idea, markets have a habit of taking things too far. We’re now seeing new crowdfunding sites pop up weekly and some of the players are using very aggressive marketing tactics. There will inevitably be fraud, so the only question is the magnitude and the level of backlash. The fat tail event would be a larger than expected level of fraud, which would then lead to a strong backlash. This could impact both crowdfunding itself and also fintech generally. Compliance is already one of the fastest growing job in the finance sector. Unfortunately, a fat tail event in crowdfunding could accelerate this trend.
 

5. The Euro breaks up

 
Politically, it seems unthinkable. To be clear, this is not expected to happen in 2016, but it needs to be considered as a fat tail risk. If the Euro were to break up in some fashion, that would be the unwinding of a trend not simply going to the start of the Euro itself, but many decades earlier. The impact would be felt by everyone and while financial markets would take a back seat to the social issues, there would clearly be a massive impact on financial markets as part of the process.
 

The paradoxes of fat tails

 
Fat tails are full of paradoxes. The good news is that, individually, each of these events are unlikely to happen in 2016. The bad new is that fat tails are not independent. A stronger US dollar may actually happen along with an unexpected rise in interest rates and this in turn could trigger a unicorn contagion, a crowdfunding backlash and even a Euro break-up. And so, rather than thinking about them as five separate fat tails, we need to be aware of the possibility that they could cascade into one giant fat tail.

Fat tail events are almost impossible to predict. The only consistent prediction is if you can stay resilient during negative fat tail events, you’ll be around to take advantage of the remaining positive fat tail opportunities.

No one talks about how important it is for your CTO to learn the business side of things. That needs to change. If you’re a co-founder or senior executive at a startup or growth stage company, you need to be more than just an expert in your area. I know that’s asking a lot. Becoming an expert is a massive task. But it’s not enough. Each senior leader needs to be familiar with engineering, marketing, sales, and accounting if you want to maximize your chance for success.

 This concept has been popularized for non-technical founders for some time, through efforts like Mayor Bloomberg’s Learn to Code and Business Week’s magnum opus What is Code. But I’ll wager if you’re a CEO, you suck at social media. You probably don’t understand it, even though it’s the future of customer engagement. That needs to change. And this change needs to extend beyond giving non-technical founders technical skills. We need to help CTOs get business savvy.

Perform a Self Assessment

 If you had to take over any of your company’s functional roles (marketing, sales, etc.) for a short period, would you be able to lead effectively? If the answer’s yes, great. Proceed. But if not, you’ve identified a major need.

Things happen, and you need to prepare for contingencies. Not only that, how can you screen and hire the right person if you can’t speak the same language?

Non-technical CEO’s should code so they can:

• Understand how the sausage gets made
• Talk to their team with the right vocabulary (i.e. Agile, Scrum, and Kanban)  

If you’re the CTO, don’t you want to be relevant in business meetings? You won’t be as strong in marketing as your CMO, but you can add value and influence decisions.

If you outsource business decisions to your non-technical co-founder, there will be consequences. Best case scenario? You disengage from the business side.

Worst case: your disengagement leaves your CEO to feel lonely and stressed. And then one day, you wake up to a phone call from that person saying, “Hey, we’re out of money.”

Don’t let that happen to you.

Jump into the Business Side

 I love founding teams comprised of engineers because:

• Less technical risk
• Solve their own problems
• Shared background with me

I’ve been a CTO many times in my career, and I’ve exited multiple companies. But heading back to grab my MBA still made me a better CTO.

I don’t think all developers should get an MBA even though, unlike many of my peers, I think there’s value in one. Instead, I’d suggest creating your self-study MBA.

Design Your Personal MBA

Here are my suggestions for a practical education that will make you a better leader in every functional area.

Accounting

 All techies should read The Essentials of Finance and Accounting for Nonfinancial Managers by Edward Fields (who was my Accounting professor in business school).

It’s not exactly A Song of Ice and Fire, but you shouldn’t want to put this book down. You’ll get familiar with:

• Balance sheets
• Income statements
• Cash flow statements
• Budgets and forecasts
• Annual statements

I know. It’s dry. But the book is so necessary.

If you want to supplement it, take an online accounting and finance crash-course like this one at Udemy.

Marketing

 Al Ries and Jack Trout wrote The 22 Immutable Laws of Marketing. The book was published over two decades ago, but it’s still essential. Learn from real world case-studies.

And remember this lesson: if people don’t read your website or emails, they’ll never buy your stuff.

To improve your copywriting, try the great Gary Halbert’s Boron Letters.

Sales

 Sales makes the world go round. Here are two great books:

• He may have been a little corny, but Zig Ziglar’s Secrets of Closing the Sale is excellent. He knows objection handling better than most.
• Then there’s The Little Red Book of Sales. It’s short, sweet, and to the point. It’s a great reference book.

And finally, for our non-developer friends who’ve stuck through this:

Engineering

 Read the Bloomberg article What Is Code that I mentioned before. It’s an interactive history lesson that walks through everything developer and even delves a little into philosophy.

At the very least, you should get familiar with HTML & CSS so you don’t need to bother your developers on trivial tasks. Brush up over at Codecademy.

  You’re never going to be an expert in all of these roles. But at a minimum, you need to be conversational.

Have a bias for action and carve some time out for learning. Let me know how it goes.

* Image by Flickr user foam 

There’s more than US$2.1 trillion in offshore cash held by US companies looking to buy startups.

A Bloomberg report analyzed the details and concluded tech companies are leading the way:

“Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas, according to a Bloomberg News review of the securities filings of 304 corporations.”

Earlier in 2015, I wrote about a cash funnel starting with low interest rates and ending with more tech M&A. Here’s the section that discusses why:

“Why are these tech giants expanding their already gigantic cash reserves?

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.”

This week, we saw another example with Activision Blizzard announcing a US$5.9 billion acquisition of King, the company behind the hit game Candy Crush. Not surprisingly, there were some questions around the valuation, summarized best by this tweet from Sean Rose:

Activision acquires Candy Crush maker King Digital Entertainment for $5.9B in the largest accidental in-app purchase in history.

— sean rose (@sean_a_rose) November 3, 2015

But there’s a twist.

Activision is a US company and is using offshore cash to buy a non-US company. This point was made by Shakil Khan in a tweet that was the catalyst for this post:

@tytusm interesting to see that Activision used their offshore cash pile and debt for the purchase.

— Shakil Khan (@shak) November 5, 2015

Looking deeper into the numbers, another Bloomberg report concluded that Activision was able to save US$1 billion in taxes by using offshore cash. That’s a big number for any company.

The natural follow up question is:

How many startups can the US$2.1 trillion in cash held by US companies offshore actually buy?

If the average acquisition is US$5.9 billion, then that would be 356 companies.

But we know that most startup acquisitions are smaller. What if the average was US$300 million? That would be 7,000 non-US companies that could be purchased with just the cash sitting offshore on the balance sheet of US companies.

It’s true that there are a lot of startups right now. But it’s also true that trillions of dollars have a crush on this startup candy.

I recently recommended a friend for a PM job at a hot Silicon Valley startup run by another friend. The startup recently raised a big Series A and was looking to scale. I know the risk of linking up two friends in an employment scenario, however, my friend was more than qualified for this job and my founder friend really needed the position filled.   

While my friend was more than qualified, interviewed well, and the team loved him, etc, the founder decided to pass on my friend. The reason:  another candidate with the same skills and experience came along that they hired. The difference between the hired candidate and my friend? The candidate that was hired had the same PM experience but all at big companies like Facebook, Amazon, and Google. My friend has spend his entire career at startups.

My question is: was this the right move? If you had the choice between nearly two identical candidates and one had all their experience at big successful companies and one had their experience at successful startups, isn’t it safe to choose the candidate that worked at the bigger companies? 

Put yourself in the founder’s shoes. You just raised a big Series A. You are being pressured by your investors to “go big or go home.” You have aspirations to be a big company. This is Silicon Valley, shouldn’t you hire the absolute best talent we can find? Shouldn’t you hire people who worked at Facebook and Amazon since you want your company to be big like them one day? 

PMs that only worked at companies such as Facebook and Amazon are super qualified PMs. Huge plus. They also know next to nothing about building a startup. Huge negative. People from larger companies bring the bigger company process, procedure, and culture with them. This leads to premature scaling of your business. The problem is that your startup is not a smaller version of a bigger company. As Steve Blank says, a startup is an experiment looking for a business model, not a smaller version of a larger company. Facebook as over 10,000 employees and billions in profits.  My friend’s company has less than 15 employees and no profits. Hire people comfortable working in that environment, who know how to bring a company from 15 people to 150 people. When your startup has 1000 employees and is super profitable you should start to hire PMs from Facebook. In between, you have to hire people who can not only do the job, but also help you grow the business, shape the culture, and constantly evolve the process. 

I made this mistake several times at my past startups. At one startup we realized that we needed an HR manager. Since we had plans to “go big” we wanted to hire an HR manager who came from a big company. Big mistake. We were a team of 12 but all of a sudden we were doing 360 reviews and had to fill out a form in order to take a day off. At another startup we wanted to enter the “enterprise” space, so we hired some “enterprise” software people from a large enterprise software company and gave them fancy titles. The problem is that people who work as executives at big companies usually don’t roll up their sleeves and build a product. Nor do they know how to scale a company, they know how to keep a big company big, but don’t know how to build a big company. In addition they wanted to fly business class and have personal assistants, things that did not jive with our startup culture.

Avoid premature scaling at your company and hire not only the candidates with the best skill set, but also with experience in working at and building a startup. Later on when you are bigger and more mature should you hire the people with bigger company experience. 

What are the secrets to a venture capital career path? Some people think operating experience. Others believe it’s all about the right connections.

My path to venture capital started as a waiter. 

It was my second year of university and the lessons learned from having worked as a waiter have been surprisingly relevant to venture capital. To me, these lessons are the real secrets to becoming a VC.

Great service never goes out of style
In any business, service is important, but especially where the business itself is a service. A waiter and a VC are both ultimately supporting someone else who is the primary decision maker. In the case of a waiter, it’s the customers sitting at the table. In the case of venture capital, it’s the founders building the companies. 

But it doesn’t end there. As a waiter, you have to work with bussers, kitchen staff and other servers. As a VC, you must build strong relationships with dealflow sources, limited partners and co-investors. That doesn’t mean you have to be a pushover to everyone. Of course you have to stand your ground for important principles. But it does mean that you should think about the service you provide to everyone. Create value for others and you get more in return.

Know your customers and customize
The best business relationships transcend the first transaction. For a waiter, that means repeat customers who return and ask for you by name. To build that relationship, you have to go beyond the basics and get to know their individual food preferences. You need to know the who loves extra cheese and who has a dairy allergy. 

In venture capital, putting entrepreneurs through a factory style assembly line process is not the answer. Every company is different and, more importantly, every founder is unique. You have to go beyond standard founder/investor sound bytes to truly understand individual motivations. You need to know who loves aggressive debate and who prefers open ended questions.

Be a T-shaped person
As a waiter, of course you have to understand your restaurant and the food it serves. That’s your area of expertise. But to be truly successful, you need to know a little bit about everything. Sometimes that means being a tour guide to visitors. Sometimes that means being entertainer to large groups. Sometimes that means simply being a good listener who asks thoughtful questions. Fortunately, these are all skills which are generally useful and not specific to being a waiter.

There is a similar situation in venture capital. The basic area of expertise is understanding the unique dynamics of venture investment and returns. But to be truly successful, that’s not enough. You need to understand technology and the impact it has on people. You need to be able to discuss legal issues in depth with lawyers. You need to have the soft skills to find the best teams and deal with a wide range of personalities. A T-shaped person has both depth and breadth.

Align incentives for performance
Intrinsic motivation is ultimately the key to sustained long-term performance in anything. But incentives help. For many waiters, tips from customers can make more than 50% of total compensation. This additional upside beyond the base aligns incentives for better service for customers.

In venture capital, the numbers are bigger but the basic concept is the same. The classic VC structure means management fees as the base and performance fees as the true upside. If the fund size and management fees are excessively large, that is precisely when investors in the fund start to wonder if incentives are truly aligned. 

Find gaps in the market
There is no shortage of restaurants in the world and people who think they can serve food. Yet some restaurants remain empty while a few have lines around the block. The difference is that the successful ones have filled a real gap in the market. Filling a gap may be as simple as emphasizing family friendly service to attract children, who then bring their parents along. Or maybe you prefer to focus on serving the best tempura in your city. Find the gap and fill the market demand.

There is no shortage of money in the world. At its core, venture capital is a service of pooling and allocating money, so the only way to stand out is do something different. It may be as simple as focusing on companies in a specific city, like startups based in Vancouver. Or it may be as ambitious as building the bridge between startup ecoystems globally. Find the gaps and you will find the opportunities.

The road to a venture capital career
Venture capital is fundamentally a service industry. Although there is no conventional career highway to venture capital, there are many unconventional ones. If you want to learn about venture capital, a good place to start is working anywhere in the service industry. 

Forget the rigid highway, follow the winding pathway.

It’s fantastic to change the world with a startup and the experience can be intoxicating, especially if there is growth.

But this creates the temptation to ignore details like startup finance, which can then lead to the startup graveyard. Before changing the world, first a company has to survive. And survival requires an understanding of basic startup finance.

Some people believe that this means using large and complicated spreadsheets and a team of financial experts. But these supposedly sophisticated approaches can result in more confusion than clarity.

Forget spreadsheets, think napkins. Better to focus on the basics, the ABCs of startup finance:

A is for Accruals
B is for Balance Sheet
C is for Cash Flow

A is for Accruals

If you are running a software as a service company with a customer who prepays a one year contract for US$1,200, that’s great for your cash flow. Your revenue, however, is US$100 for that first month because revenue can only be recognized in line with the business services provided.

This example highlights the essence of accruals, which match revenues with costs when calculating profits. This is the core idea underlying the income statement, otherwise known as the P&L (you can technically use a cash based P&L but very quickly you will run into the need to understand accrual based accounting, so better to start sooner rather than later).

Because accrual profits are not exactly cash, the P&L is like a movie based on a true story. The core message of the P&L is usually similar to the underlying reality of what happened, but typically the details are changed for the sake of maintaining the story. At the extreme, even the core message can be distorted to the point where the P&L does not represent reality in any way. It is possible to be a profitable company and still run out of cash.

B is for Balance Sheet

A startup with a cash position of US$50 million may appear healthy at first glance when looking at the balance sheet. If, however, that cash was generated solely from selling equity to investors, then the cash by itself does not actually give much context about the level of health.

Thus, although the most important number on a balance sheet for an early stage startup is the cash balance, it is only the starting point for thinking about the company’s financial position. Cash must be placed in context as part of the overall balance sheet and also cash flow changes over time.

If the P&L is like a movie based on a true story, then the balance sheet is like a photo. The star of this photo is the cash balance but the balance sheet also captures many other details, some more important than others, at a specific point in time. Moreover, to truly understand a business, these snapshots in time needed to be connected together.

C is for Cash Flow

Accounting can get very complicated but at the end of the day everything is related to cash flow. A fast growing company with US$1 billion in revenues may actually have negative cash flow because of high working capital needs.

There are different categories of cash flow, and it is important to not get confused by things which sound like cash flow but are not. EBITDA, EBITA and other acronyms are not cash flow, even though some people refer to them by that name. True cash flow includes all cash in and cash out, with no exceptions.

If the P&L is like a movie based on a true story and the balance sheet is like a photo, then the cash flow statement is like a documentary. It’s raw and messy, which means that sometimes it can be difficult to keep track of the key themes. At its core, however, the cash flow statement usually does the best job of capturing the reality of a company.

Connecting the ABCs

Accruals, balance sheet and cash flow are not independent of one another; they are fundamentally connected. Changes in the P&L are reflected in each balance sheet and the cash flow statement can be reconciled by comparing the P&L to changes in the balance sheet.

The typical approach to accounting is to start with the details and ignore the underlying structure, which results in an incomplete understanding. Instead, take a holistic approach, being with the key concepts, and then the details will naturally become easier to appreciate.

Start with the ABCs and then, once you understand them, you can move on to other metrics.

Here in Silicon Valley, it is commonly said that it is “easy” to $1m in seed funding and $100m in Series C/D growth funding, but impossible to raise the $5-7m in Series A funding. This has been called the Series A Gap, or the lack of funds for startups looking to break out of angel and seed funding. 

There is no Series A Gap

Over the past year as a VC in Silicon Valley, I’ve worked with Fresco’s portfolio companies and met countless other startups looking for funding. I’ve seen good companies left for dead when trying to raise a Series A and some raise a Series A in just a few weeks. I’ve rolled up my sleeves and worked with the founders on their deck, valuation, strategy, and ultimately their pitch. Along the way in the trenches of Series A fundraising, I’ve learned something: there is no Series A Gap.

Pitchbook and other sources have confirmed what my gut has been saying for the past year: there has been a modest rise of Series A capital over the past few years, but there is a glut of seed funding in the market today-as much as 4x higher in the past 5 years. So it is comparatively easy to raise a Seed round creating more and more startups looking for the same amount of Series A funding. 

Startups have little problem raising seed funds these days. They string together $500k-$2m from many different people on an open source convertible note, typically $100k at a time. (AKA the “Party Round.”) Then they go out and try to find the right product-market fit and business model. Some make it and go on to raise a Series A pretty quickly. Most do not.

The Rise of the Second Seed Round 

The companies that don’t find the product market fit or develop their business model try for a Series A and fail. Typically they are competing against companies that have already found their business model and are executing against it. Eventually they run out of money. 

If you run out of money during your seed round and you can’t raise a Series A, in the past you had three choices:

1. Fold the business
2. Raise a “down” round
3. Keep struggling along on nights and weekends

Now what founders are doing is going out and getting a second seed round. Typically more money than the first seed and almost always at a much higher valuation. Some people call these rounds “pre-A” and “super seed.” I’ve seen a ton of them, some that should be a down round but have a crazy high valuation. (I’ve walked away from two of them in the past month alone.) 

For example consider this funding for startup NewCo;

• Angel funding $200k @ $2m cap
• Seed funding $1.3m @ $7m cap
• Seed funding II $2.2m @ $12m cap

NewCo now has 20 or more note holders and an insane valuation. If you have a $12m cap on your convertible note and you raised $2.2m on it, chances are your valuation at the Series A will be near $30m. The problem is that now your revenue and growth trends have to justify that $30m valuation. Unless the business model is really strong and the company is progressing nicely, raising a Series A will be all but impossible. There is no Series A Gap, but rather a glut of seed funding and a self-inflicted wound of raising too many seed rounds with little or no growth to show for it.

What to Do?

Founders are better off trying to raise one larger seed (with a lead!) and using the round to focus like a laser beam on finding the right product market fit while keeping the burn low. If you need a second seed round, try to keep the valuation under control and have very specific metrics as what you want to accomplish in order to position yourself for an A. 

Innovation is a goal across the startup, corporate and non-profit worlds. But our education system and work environments have trained us to pass tests, follow orders and respond to requests. No wonder true innovation is still rare.

Fortunately, we all at some point in our lives experienced curiosity, which is the first step of innovation. The next steps are simply to observe, ask questions and experiment. But what should people be looking for when observing? Which questions lead to insight? How can experiments be most helpful?

The following six paths have worked in the past, sometimes spectacularly well. They all start with curiosity and end with innovation but each path is different.

Innovation Path 1: Connections
When the iPhone was first introduced, it was presented as combining phone + music + Internet. All of those individual components had existed before the iPhone. Nokia was one of the world’s largest companies serving mass market phones, Apple itself had a thriving iPod music player business at the time and Internet access was widespread in other forms. The combined value of making connections is non-linear, with the biggest benefits typically emerging as surprises. The app store was not mentioned in the original press release, and yet apps became the defining idea of the iPhone.

Innovation Path 2: Outliers
In 1988, Christian Sommer was snorkeling on the coast of Italy collecting sea creatures for further study. He collected hundreds of these and observed them in his petri dishes, recording their life cycle. One rare species, Turritopsis dohrnii, did something very strange: it appeared to age in reverse, getting younger until reaching its earliest stage of development, and then reversing and starting to age again. This process contradicted a basic law of nature, that life progress forward until death, an outlier of huge magnitude. Sommer, to his credit, did not ignore the observation. Even decades later, we still do not know much about what is really going on in this case, but this jellyfish may hold the secret to immortality.

Innovation Path 3: Patterns
Imagine spending some time tutoring your cousin in math over the phone. Things go surprisingly well and so you also start tutoring the cousin’s brothers. Word spreads, a few more people ask to be tutored. Since scheduling becomes a real challenge because you have a full time job, you start posting videos online. More and more people keep watching. This is the pattern that Sal Khan experienced starting in August 2004 and it led to the formation of Khan Academy, impacting millions of lives and resulting in more than one billion questions answered. Humans are natural pattern spotters and so the challenge is to remain objective enough to separate true patterns from the ones we wish would appear.

Innovation Path 4: Gaps
Seeing what’s missing is just as important as seeing what’s there. These missing pieces are gaps. The most direct opportunities related to gaps come from problems and frustrations encountered in everyday life, seemingly obvious and yet undiscovered. Sara Blakely identified a gap in the market for undergarments. Rather than simply forget about it or complain, she found a solution. Then, she went through the process of filing a patent on her idea and continued on the journey of turning the solution into a very successful business, Spanx. The company has evolved to include multiple products based on the original foundation of seeing what’s missing and filling the gaps.

Innovation Path 5: New applications
Sometimes, existing constraints help the creative process. When creating a new game for students to play in the winter, PE teacher James Naismith re-purposed what already existed. A ball was important, but rather than kicking the ball or running with hit, he focused on passing the ball and then throwing it at a target. The target was also a new application for an existing object, a peach basket. Combining the two key components gave the new sport its name: basketball. The score in the first game was 1-0. Clearly, the game has evolved over time while having a tremendous impact on society. But at the origin, there were no grand plans of creating an empire, just a simple goal of creating a new sport to play in the winter using existing tools.

Innovation Path 6: First principles
In order to build SpaceX and Tesla, Elon Musk used a first principles approach. Rather than relying on analogy and observing what other people were already doing, he focused on truly understanding limitations at a physical level. Pushing those limitations created the opportunity to simultaneously create new performance standards and reduce costs by up to a factor of 50x. This is not an easy approach to take and patience is definitely required, but the potential upside from breakthroughs is substantial as the examples of both SpaceX and Tesla have proven.

Every one of these paths to innovation starts with curiosity but each approach is unique. Understanding the core idea underlying each approach is helpful as a rough guide. Of course, the biggest innovations usually require going completely off any path and into the unknown.

Over the past few years, I have had the privilege of observing and participating in education and technology ecosystems all around the world. Whether I am traveling from, to, or currently in any given city, I am frequently asked, “What do you think of the startup scene there? Are there even any edtech entrepreneurs?” This led me to wonder, what exactly makes an edtech ecosystem possible? From Silicon Valley to New York, Hong Kong, Beijing, Manila, Tokyo, Australia, and beyond, where in the world are we most likely to find the next innovative technology solutions for education?

Indeed, just as a painter cannot create a masterpiece with a canvas, paint, and brushes, a technology entrepreneur cannot meaningfully transform education without a few key ingredients. When we’re evaluating opportunities around the world for both ourselves as investors and on behalf of our portfolio companies as businesses, I have noticed there are three key ingredients that, when present, make it truly possible for an edtech ecosystem to thrive.

1) People — with experience in both education and technology.

This means there should be both an existing start up ecosystem, and a mechanism by which digital natives are spending time in traditional education environments. Teach for All programs are a prime example of a community mechanism that takes ambitious individuals who have grown up with technology integrated into their everyday lives (Facebook, mobile, e-mail, etc) and places them inside of underserved, largely analog education environments, where they are in a position to directly witness the ways in which technology can make learning more efficient and effective.

2) Connectivity — to the internet.

Technology cannot impact education if individuals do not have access to the internet. For years, even some of the most technologically advanced economies in the world have not had reliable internet connectivity in schools and homes. This has been even worse in the developing world where a complete lack of infrastructure has prevented individuals from getting online. However, with now more mobile phones than people in the world, individuals even in third world countries have access to the internet. This means people can access unlimited information through their own devices, without relying on government bureaucracy to build the necessary infrastructure. As BYOD becomes more of a reality, it will be interesting to see the ways which innovation from the developing world may potentially leapfrog the US and other more developed ecosystems.

3) Capital — dedicated to the edtech sector.

A healthy ecosystem requires sophisticated capital that understands the risks and challenges of investing in technology for education. Investors must have enough experience in the sector to ask the right questions, but not so much experience that they think they know all the answers. They must be motivated by both returns and scalable impact so that capital will flow to the right teams and opportunities. Without funders and founders that can see beyond the alluring “let’s help children” and “do good” phraseology traditionally used to draw capital into the nonprofit education sector, entrepreneurs will not be forced to develop truly viable and innovative solutions.

Just like artists, education entrepreneurs are everywhere. However, without a few key elements in their surrounding environment, their talent may forever go untapped. Part of our goal as global investors is to not just observe these ingredients at work in ecosystems of varying levels of maturity all around the world, but to also play an active role in connecting the dots across ecosystems so they can benefit from each other’s unique strengths and weaknesses. That way, innovation in education can truly occur anywhere, and everywhere.

Being an early stage investor, I see a lot of MVPs. I mean a lot. The problem is that most people don’t build real MVPs, but descend into building a prototype, then beta, then an actual product and still call it an MVP. Remember an MVP is your most important Customer Development tool. It is an experiment designed to test your value proposition’s assumptions by measuring a behavior and learning from the results. MVPs should be used for a short while in order to validate your learning and then help you develop the plan for the actual product. After you have built a few MVPs and measured the results, what are the top three signs that you are done with your MVP and can start building your real product?

Sign #1 That You’re Done With Your MVP: You are getting diminishing returns on your learning

 Typically when you start doing the Customer Development/MVP process, it is pretty brutal. Your ideas are shattered when they come into contact with real people. It can be long, hard, and painful at times. But when you stick with it you usually go through three stages of MVPing:

• Shattered expectations
• Hearing the same thing over and over
• Diminishing returns

Usually after your first round of MVPs, you go back to the drawing board a little and make adjustments to your Business Model Canvas and test your new assumptions. Typically you get into a zone where everyone is saying the same thing: this is good. After a while you adjust the MVP some more based on that feedback and the feedback and behavior you are measuring is only giving you a very small incremental gain. This is when it is time to stop MVPing and build an actual product. 

 Sign #2 That You’re Done With Your MVP: You’ve been doing customer development for a really long time

 I’ve met countless startups that were working on their MVPs for months or years. Typically a single MVP should last a few hours or a day. After that time, you process the data, apply the learnings, and then make another MVP that should only last a short time as well. In a perfect world, you would only be MVPing for a month or two at most since the results of all of your MVP experiments gave you enough data to build a product. 

 If you have been MVPing on the same idea for over six months, you need to reevaluate what are doing. Some startups clearly have a product (see #3) and some clearly do not. If you have not seen traction in a long time and have been grinding away on the same idea for several months, it is time to ask yourself some hard questions.  

 Sign #3 That You’re Done With Your MVP: You are actually making money

Sometimes I’ve seen startups that are still MVPing when they are actually making money on their product or service. Typically the startup doesn’t have a clear indication of what the pricing model should be or what the right customer segment is.  Once you have enough “validating revenue” (typically around $250k ARR), stop MVPing and start A/B testing and using other tools (typically sales tricks) to figure out the best pricing and customer segmentation.

 As you start your next venture, think about these three tips when you start your Customer Development so you do it effectively, but don’t do it too long. Good luck!