Growing your edtech venture: How to invest in faster growth
By a show of hands, how many edtech entrepreneurs want to grow more quickly? Okay, everybody. How many edtech entrepreneurs want to be able to invest more in growth? Okay, I believe everybody raised their hands again. If you’re building an edtech venture, these are given desires, but it’s challenging to grow more quickly, especially if access to capital is limited or not accessible. For most entrepreneurs, a limited amount of capital, especially in the early stages of a business is reality.
These two ideas of growing more quickly and investing more in growth are interdependent. In order to grow more quickly you want to invest more in growth, and in order to attract more growth capital you need to show you can grow more quickly. So how do we create more growth without access to more growth capital? The short answer is that you’ve got to be able to do more with what you’ve got. Here are several lessons I’ve picked up over the years as a growth leader in education-focused ventures and now as an edtech investor about doing more with what you’ve got.
1. Start by knowing your business drivers and key metrics.
In B2B edtech businesses, there are multiple ways to drive more growth. They include selling new products and services, entering new markets, and adding more resources to marketing and sales. In the early stages of a business, everything feels risky, but I’d argue that building too many products and entering too many markets are major risks of diluting focus and resources before your venture gets traction with any one product and market. I think it’s best to focus resources on a single product (maybe two) and market (maybe two) where you can get your startup footing and develop some customer and revenue traction. Once you’ve found a product and market niche, you can more effectively invest in sales and marketing.
Before you increase investment in sales and marketing, you need to nail down a few key milestones and metrics in your sales process. Sales processes vary across edtech companies, but I’d argue we can boil them down to a few simple milestones they all have in common: marketing qualified leads (MQLs), sales qualified leads (SQLs), and closed won/lost. Once you determine those key milestones, you need to determine what you’re willing to invest to achieve those milestones. Is each MQL worth a $500 investment or $1000? Is an SQL worth $1000 or $2000? It depends on a number of factors including contract size, margins, and customer lifetime value (CLTV). It takes some work to come up with these numbers and it’s not an exact science. You may not be able to pin down exact numbers early in your venture, but you want to come up with estimates. One way to approach this is to come up with an estimated range and then go with the low end of the range for a conservative estimate that includes some margin of safety. Developing good estimates for what to invest in each of these milestones is the first key to unlocking more growth. For background on these simple metrics, how to think about efficiency and effectiveness of your growth engine, and measuring return on investment (ROI), check out this deeper dive on the topic.
There’s an old adage that says, “What gets measured gets managed. What gets measured get done.” We must first know what we’re measuring before we consider what we invest in and learn how to grow faster with what we’ve got.
2. Invest in what yields results, cut away what doesn’t.
Once you’re clear about your business drivers and key metrics, you can shift your attention to understanding what works and managing it better. Typically, this involves doing more of what delivers the desired return on investment (ROI) and doing away with what doesn’t. For example, if you’ve determined that your target number is $500 or less per MQL, then managing investment in various marketing channels becomes relatively straightforward. If a conference yields 10 MQLs at a total cost of $4,000, you’ve got a cost of $400 per MQL. Since your MQL cost for this conference is below your target cost of $500, you’re going to want to invest more in conferences like it. On the other hand, if a digital marketing initiative costs $5,000 and yields 2 MQLs, you’ve got a cost of $2,500 per MQL. This is way above your target cost of $500, so you’re definitely not going to want to repeat that digital marketing initiative.
The discipline to measure and manage initiatives in this way provides context for how to make better management decisions. In our example, you’ll want to seriously consider shifting resources away from your digital marketing effort and towards more conferences or events. Apply this type of analysis to all of your marketing channels to size up investment and ROI of each. This is a simple exercise, but an important one in terms of optimizing your investments in what yields the results you need to grow.
3. Shift more resources towards effective growth
At first glance, this one seems obvious. After all, once you start measuring and managing various sales and marketing initiatives and you discover activities that yield the desired ROI or greater, it makes sense to shift more resources towards growth when growth is paying off. But as we look deeper, carving out more resources for sales and marketing gets more complicated. All startups have limited resources (assuming capital is scarce) and there are competing priorities including product development, customer support, and operations that need to be funded. Furthermore, you can argue that investing in product development, customer support, and operations are necessary in order to sell more. After all, if the product isn’t improving and current customers aren’t being supported well, it’s going to be more difficult to sign new customers. It’s a bit of a quandary, but I think there are a few things to consider that will help you sort out what to do and where to invest your resources.
First, how much you invest in marketing and sales depends on how quickly you’re trying to grow your venture. We don’t address realistic growth goals in this post, but that’s something we could explore in a future post. In general, the faster you want to grow, the more you need to invest. In my experience, if you’re trying to grow from $1M in annual recurring revenue (ARR) to $3M in ARR in a year and you’re investing 20% of your revenues (~$200K) in growth, your odds of achieving that level of growth are slim unless you’re super-efficient and effective in selling. Established businesses struggle with being this efficient and effective, let alone startup teams who have so much to learn. For most companies trying to grow this quickly, 40–50% of revenues invested in marketing and sales will significantly increase your chances of attaining this high rate of growth.
Second, focusing your resources around a single product and market puts you in a much stronger position to increase your marketing and sales investment. I see many startup teams build too much product and tackle too many markets before they get the flywheel going with any one product or market. Now, I’m not suggesting that you eliminate low-cost, low-effort experiments with new products and markets at the early stage. Those are great opportunities to learn and to perhaps find a better path to building a viable business. But be extremely cautious about spreading your resources in serious pursuit of multiple products and markets. Product and market adoption are like building a snowball. It takes time and effort to get traction and if you start too many snowballs none of them will get enough mass quickly enough to become a big snowball.
Third, if you’re building product features and capabilities, only build product that’s been validated by customers who will buy. Be careful not to build in the hopes that people will buy, but be rigorous about validating the feature set with paying customers and prospective buyers. Before building, create a solid business case that the new feature set will quickly lead you to adding five or ten new customers who’ve sat on the sidelines only because you didn’t have the desired capabilities. This is hard to do, but developing this kind of discipline will enable you to accomplish more with less.
4. If you have to discount or give away something, do it with one-time items.
One of the tools at your disposal to drive demand and activate more customers is price. In my experience, I’ve found that price is often not the limiting factor in getting K12 buyers to move forward with a purchase. It’s often a reason they give, but more often than not there’s another reason behind it (that they may or may not offer) that keeps them from buying.
In some instances, buyers do want some financial consideration to help get them over the finish line. This is especially true in highly competitive markets where buyers have been trained to expect discounts. For those buyers, circumstances may require that you offer some price break to close the deal. Recurring revenues are what you want to build a sustainable business and should be the last revenue source you tap to offer a discount. They fuel your growth year after year not unlike how compound interest works. Start a recurring revenue stream and watch it grow as customers renew (and perhaps expand) year after year. If you offer one-time services such as training or consulting services, I suggest you tap them first as the preferred place to provide a discount. Guard the recurring revenues as if your life (and business) depends on them for growth because it does!
Once you’re on a path to faster growth, a virtuous cycle is attainable. Faster growth can lead to a) a shorter path to profitability where you don’t need additional capital or b) more interest from capital providers who will give you the additional growth capital you seek. In a capital constrained environment, the ability to grow organically and reach profitability is the key to controlling your own destiny as an edtech entrepreneur. Achieving this nirvana will free you from the fickle tendencies of investors.
Have you figured out how to grow faster without having to rely on additional growth capital? Do you have other ideas for how to do more with the capital you’ve got? If so, I’d love to hear about it.
