6 things we look for when investing

 

1. Obsessed with a problem

For starters, we look for entrepreneurs who are obsessed about the problem they’re trying to solve. Since entrepreneurship is difficult and smart founders have many options for how to invest their professional time, we want to back founders who are obsessed with solving a problem and won’t give up until they accomplish it. More often than not, the founders we fund have some personal experience with the problem and develop some unique insight into how best to solve it.

2. Solving overlooked problems

We’re also looking for founders who are solving problems that have been overlooked by others. Typically, they’re in markets where few entrepreneurs are chasing a solution to the problem. When few entrepreneurs chase the problem, there’s usually more room for innovation and differentiation. With more differentiation, founders create competitive moats around their startups.

3. Capable of $50M+ in revenues

In the K12 space, we find a number of problems that have been overlooked by entrepreneurs in $500M+ markets. While this market size might seem small for investors with large funds, it works for us. Investing as early as we do, we’re not looking to back unicorns (although that would be nice!). Instead, we’re looking for teams that are capable of building companies that are $50M+ in revenues. In other words, they have a shot of capturing at least 10% of a $500M+ market.

The companies we back don’t have to be winner-take-all. In a $500M+ market, there can be a couple of winners that achieve $50M+ in revenues. We’d like them to do it efficiently as well. Ideally, it takes less than $1 of invested capital to create $1 of ARR over time. I’ve found that investments work out well for both founders and investors when businesses can be built with this kind of efficiency. It’s when this ratio gets too out of whack that there are investment winners and losers.

4. Ability to scale distribution

The ability to scale distribution is also critical. We expect founders to be able to do the work of finding initial product/market fit, a working business model, and initial customer traction. In general, we believe that the first few hundred thousand in Annual Recurring Revenue (ARR) falls on the shoulders of the founders. After securing a few hundred thousand in ARR, the company could be ready to scale distribution by bring on additional sales and marketing talent.

We look for founding teams that are thoughtful about how they’re approaching scaled distribution. Taking steps towards scaled distribution, such as hiring, training, and onboarding a first successful salesperson or a VP of Sales with a successful track record is an important milestone.

5. Validated CAC and LTV

We also think it’s important that assumptions around customer acquisition cost(CAC) and lifetime customer value (LCV) have been tested and validated. It’s reasonable to assume that there are still assumptions to be tested, but the key assumptions around these unit economics need to be backed by evidence.

6. Demonstrated impact

Finally, demonstrating impact is important. Impact is not just doing social good, but also doing well financially. Our thesis in K12 education is that, in order for businesses to sustain their growth over time, they need to deliver measurable, lasting outcomes for students, teachers, or administrators in some pioneering way. Incremental improvements are not enough. Pioneering improvements are what it takes to create a sustainable, venture-backed business.

The makeup of the founding team is also super-important, but is a blogpost by itself. If you’re a K12 founder and meet these six criteria, we’d love to hear from you.