The whole reason I am in India is to assist with recruitment and operations of a business accelerator, “Edupreneurs” for education entrepreneurs whose target market is low income students in India. To understand the accelerator a bit more, take a look at this video:
The lion’s share of this post will be interesting to entrepreneurs and people working in social enterprise and impact investing. For those of you interested in the companies we’ve selected, stay tuned for upcoming blog posts.
It turned out to be a very selective program. We received over 120 applications from quality education startups, but could only select fifteen for our program. The selection committee incorporated a number of different perspectives and backgrounds- important so we don’t miss anything, but difficult because in the end, we all needed to agree or compromise. There was often tension between an entrepreneur having a great education solution, and that solution being investable. After all, we do need to see a return on our investment in a “patient capital” timeline.
How Did We Select our Fifteen Companies?
We considered each company against a set of six criteria that Village Capital identifies as critical to success. Village Capital has run over fifteen of these accelerators, developing their selection process, curriculum and expertise over four years. Since the $75,000 seed stage investments are pre-committed, we had to make sure that we would be happy investing in any of the companies we selected to participate.
The Six Criteria:
1. Customer Discovery/ Development
Who are the customers? How does the company know that the customer wants the product? It is one thing to provide a solution, but if no one wants that solution, or if the company is marketing to the wrong customers, then they are less competitive. We want to see that a company has done sufficient research and pilots to verify or discover their target market. This even applies to companies with founders who have substantial experience in the sector. “Knowing” the target market isn’t enough, we want proof to back up sound logic.
How strong is the management team? Are there any knowledge or experience gaps in the team? What is the plan to fill the gaps? With early stage investing, it is often said that you are investing in the entrepreneur, not the company. This is because there isn’t much due diligence to be done when a company hasn’t been around long enough to generate data and expose weaknesses. We want to see founders and executives with substantial sectorial and target market experience, combined someone who knows how to get things done. We want to see companies that recognize gaps and have plans to fill them. Don’t tell me that you are ready to scale when your company is a group of silent-warrior tech dudes- who is going to get out there and build the relationships critical to growth?
3. Product Refinement
How was the product developed? How many versions were tested with customers? We want to see a stellar product that was tested extensively with target-market customers, incorporating their feedback into new versions. We want to see that the company focused on what they do best in order to go to market.
This is where things are tricky because in early stage enterprises, most of the numbers are theoretical. Entrepreneurs will predictably inflate their projections- it’s great that you think you’ll have a million customers after just one year of operation…but you probably won’t. We want to know what the cost of production is, what the price point is, where the breakeven is, and how much funding is needed to sustain and grow the company. It is also important for us to know how you arrived at the price point. A business can’t say something is ten dollars because that’s what is needed to recoup costs plus profits. It needs to be ten dollars because a market study said that’s what customers will pay. All the other projections must be based on realistic logic and as much data as possible. We love data.
5. Scaling and Impact
What is the plan for scaling and what are the targets? What positive social impact will the enterprise have? How will that impact be measured? Is the impact built into the business model? We want to see that the business can scale. A model that depends heavily upon specific individuals, or too much skilled labor may not be scalable fast enough or large enough even for patient capital.
Scale doesn’t stand alone for impact investors- as the name indicates, we need to see measured impact. This is often overlooked, especially in the education sector. We want to see a product that has built in, measureable impact, preferably with back-end analytics. For example, in a low cost private school, are the students regularly tested, if so, against what standards? How do these measurement results affect change in teaching methods? It is also important to consider how the impact is built into the business model. Is the customer the beneficiary? If not, is the business structured in a way that mission drift won’t become a problem? Cross- subsidization models are often difficult because it is so easy to concentrate on the higher-end market at the expense of the lower-end market where the impact actually happens.
6. Exit Strategy
How will an investor get their money back? Early stage companies often haven’t thought much about this, but we want to know the options or the vision. Don’t tell me you’re going to have a successful IPO, because you probably won’t. If a company doesn’t know, we just want a walkthrough of what’s been considered or ruled out and why.