Seed Fund Investing Values

April 20, 2013

I had the honor of meeting scores of passionate education entrepreneurs this week at the ASU/GSV Education Innovation Summit. There were a lot of investors at the conference too, trying to better understand the education technology landscape and potential areas for investment. I was reminded of how unique NewSchools Seed Fund is amongst edtech investors. We are a not-for-profit and therefore don’t aim to maximize returns for a limited partner base. Our donors entrust us to support companies with the potential to transform education.

All of our portfolio companies have social missions to improve education or solve a challenging education problem. They are touching different parts of the education system since, as we all know, there is no one solution that will inspire our children and make our school system equitable, competitive internationally and aligned with the needs of the new economy. Yet, like the instruments in an orchestra, we need solutions to work together in harmony, marching forward with common goals.

When Wayee and I launched the Seed Fund in late 2011, we started with this set of investment principles to guide our evaluation process though realizing that every company is unique and early stage investing is not a precise science.I’d like to share these principles in an effort to make the investing process more open and transparent.   

This venture has potential to disrupt existing, entrenched systems; transform the economics of education and/or elevate student achievement, ultimately impacting underserved student populations.  

The product or service is unique (via technology, partnerships or approach) in the marketplace giving it a competitive advantage.

The founder has infectious passion and is intensely driven to solve a problem. The founding team is “hybrid” and possesses appropriate multi-discipline expertise to execute the project. The founder has a demonstrated ability to attract talent and their team is fast-moving. 

The market has been clearly defined, sizable and growing. A bottoms-up market analysis reveals overall potential market with staged, customer acquisition. Federal or state categorical funding possibilities have been researched and figured into model.

We invest early but want to see success on a micro-scale. Data from pilots or early adopters shows that the product is solving a problem. The venture may be developing customer partnerships or already has paying customers.

Funding Visibility
This venture is aligned with a category of potential follow-on investors (i.e. Foundation MDI, VC, Angels, strategics) and may even be considered a pipeline investment for this particular group. 

Capital Efficiency
The venture is capital efficient in both approach and business model. The venture has already demonstrated exceptional capital efficiency through an iterative and agile approach to building their product/service. Their burn rate is kept low as they engage with users/environment to validate impact. Their business model leverages commodity technology with minimal customization between customers in order to enable a capital efficient product/service and sales model. Capital needs to reach sustainability or profitability may be low.

Integration with NSVF Portfolio Companies
The venture “fits” with the existing portfolio and may even have the potential to accelerate growth within portfolio companies.

On occasion there is overlap with traditional sources of capital. In Mark Zuckerberg’s IPO letter he stated: “we don’t build services to make money; we make money to build better services.” Turns out, it’s a great business too. Our portfolio companies have social missions and some require strong economic engines in order to get the best technology tools into the hands of teachers, schools and districts. We’re supportive when this happens because this additional capital can help the company grow more quickly to reach a broader market but as our values demonstrate, we don’t favor this approach.