It’s no secret that it’s more challenging to raise funding for an edtech startup than it was just a year or two ago. Venture capital in the sector is down significantly over its peak in 2021. I believe that early-stage fundraising (pre-seed, seed, Series A) in edtech is still relatively active and has been impacted far less than growth or late-stage fundraising (Series B+). In fact, as an early-stage K12 edtech investor, I’ve been more active over the last six months or so than I was in 2021 or 2022. I continue to meet incredible founders and evaluate some amazing investment opportunities even in the midst of the current downturn.
As fundraising has gotten more challenging, one question I’m getting from founders is, “what metrics or milestones should I achieve to be fundable in the early stages at pre-seed, seed, and Series A?” This post is an effort to provide some context for what investors in general and what Edovate, in particular, likes to see at the various stages. We invest primarily in seed investments, but have also initiated investments at the pre-seed and Series A stages.
At the pre-seed stage, metrics play a minimal role in a fundraising narrative. For investors, key indicators to support an investment include a sound idea, an MVP (minimum viable product), a great and experienced founding team, and early signs of traction and the potential for revenue. Since there isn’t a business to evaluate at the pre-seed stage, the capabilities of the founding team are at the center of any investor evaluation at this stage. Founders who are well networked or who were successful with a previous venture have an easier time fundraising at this stage. With pre-seed startups, funds are typically provided by the founders themselves, friends and family, and angel investors. Incubators and accelerators like Y Combinator or Techstars are valuable sources and, perhaps, a few micro edtech VCs. Bootstrappers raise funds from early paying customers, which is the best way to raise early-stage funding.
At Edovate, we’ve invested a few times in founders who a) we’ve worked with in the past or b) founders who we believe are extraordinarily well suited to build the company they founded.
At the seed stage, metrics are more important and investors expect data, although many uncertainties and risks remain to the business being successful. Chief among investor inquiries are questions related to product-market fit. Some important questions to address with data include:
- Are users active and highly engaged with the product? For example, how many monthly, weekly, or daily active users do you have?
- What kinds of retention rates are you achieving with your users and/or paying customers? If you’re selling to schools and districts, strong answers are less than 10% churn on a unit basis and negative churn on a dollar basis.
- What’s your monthly recurring revenue (MRR) or annual recurring revenue (ARR) and what’s your growth rate? MRR of $10K-$100K or ARR of $100K to $1M is common at the seed stage. For SaaS growth, I’m a fan of the T2D3 approach for early stage SaaS growth, which has startups tripling their revenues in their first two years, then doubling their revenues for the next three years.
- What’s your market size (based on a bottom-up analysis) and do you understand the nuances of the different market segments you’re selling to? Many smaller investors look for addressable markets in the hundreds of millions at a minimum, but larger funds will look for addressable markets greater than $1B in order for the investment to be worthwhile for their fund.
- What’s your burn rate? (e.g., how many months of cash will the fundraise give you?). This should be 18–24 months at a minimum.
- What’s your vision for the company and the product? Investors are looking for how you can gain a strategic advantage against competitors and how you might create a defensible moat around your startup.
There are more nuanced questions that you’ll get from investors at this stage, but knowing the answers to the questions above are table-stakes for having credible conversations with institutional investors, many of which are active at the seed stage. As for Edovate, some of the other things we look for include strong PMF (Product Market Fit) Survey scores or NPS (Net Promoter Score) for your product (i.e., do you have product love from customers?), accessing reliable K12 revenue streams for customers to pay for your product, and founder honesty and transparency when it comes to discussing the key risks that face their startup. When Edovate invests at the seed stage, we understand that significant risks and uncertainties remain as to whether or not the startup will ultimately be successful, but we need to understand the risks well and have conviction that they can be mitigated with the seed funding round. We support founders in managing these risks and in putting the pieces in place that position them for a Series A round. We’ve been fortunate that about 80% of our pre-seed and seed investments to date have gone on to raise Series A and beyond.
In Series A funding, key metrics take center stage in an investor evaluation of whether or not to fund a startup. The business is still in the early phases, so experienced investors will respect that the data you have is a work in progress. The more rock solid the data, the more validation you have for the assumptions you’ve made in your startup’s path to successful growth. The less data you have, the more investors will have to use their pattern matching skills and experience to make a determination about your model assumptions. Here are important metrics for you to know along with benchmark measures that will provide you with standards that you’ll want to achieve to optimize your Series A fundraise.
The numbers above are annual numbers since most B2B edtech SaaS providers sign annual contracts with their institutional customers. If you sign monthly contracts with your customers then your churn rates will likely be higher (1–3% monthly churn) and your MRR retention numbers will likely be lower (there’s typically more churn with monthly than annual contracts), but the rest of the benchmarks above should apply to your startup.
One clear takeaway from the scorecard is that you’ll want to achieve more results that are on the right side of the graphic to improve not only your odds of raising a Series A, but getting the most optimal outcome from your fundraising round.
For Edovate, bonus points go to founders who have strong PMF survey scores (40%+) or high customer NPS (70+) and who also track culture data for their organization, such as employee NPS. We’re also interested in your ability to recruit and attract top talent to your startup. One good proxy for this is looking for at least one outstanding VP that you’ve hired and retained.
With all the turmoil that’s taken place in fundraising over the last 12–18 months, the metrics you need to measure and milestones you need to reach at the early stages (pre-seed, seed, and Series A) have not changed as dramatically as the shake up to growth and late-stage funding rounds (Series B+). By the time you raise Series B, your fundraising success will be largely predicated on the data you can provide to investors who are evaluating your business. By putting a data model in place early on in the life of your startup, you’ll be improving your chances of success should you decide to raise a growth round in the future. Hopefully, by the time you’re ready to raise a growth round such as a Series B, the funding environment will have improved dramatically. I’m a strong believer in economic cycles and that it’s just a matter of when, not if, things will improve again for growth-stage startups. In the meantime, stay focused on building your early-stage business and measure the things that matter if you’re interested in raising venture rounds.