Navigating Capital Raising

Navigating Capital Raising

The Melbourne EdTech Summit 2020 brought together seven of Australia’s premier thought leaders in EdTech and capital raising in education for a discussion.

In this wide-ranging discussion from the Melbourne EdTech Summit 2020, an expert panel of thought leaders from around Australia discuss the ins and outs of raising capital in EdTech, attracting investors, expanding outside of Australia, and much more.

In the first session, Robert Gregory, National Education Leader at Maddocks, discusses the trials and travails of navigating capital raising alongside his two guests:

  • Tim Praill, CEO of Faethm AI
  • Genevieve Gregor, Partner at Colinton Capital

In the second session, Patrick Brothers, Co-Founder of HolonIQ, moderates a discussion on EdTech investment alongside three EdTech investments professionals:

  • Srdjan Dangubic, Partner at Five V Capital
  • Cheyne Tan, Operating Partner at Potentia
  • Karen Bohm, Founding Partner at Pangea Impact Investments

The highlights of their conversations as well as the full transcripts follow below:

The education sector, present and future

Teams in all sectors seek outside funding to grow and expand their business. Tim and Genevieve explore what is unique about the education sector and what brings investors to it:

  • An advantage to the education sector is a very large addressable market, especially as the online mode expands.
  • The total addressable market for education globally is estimated to be 11 trillion, expanding to 18 trillion by 2030.
  • Within education, labor and public education, specifically, are growing at a rapid pace and present an attractive opportunity to investors.

Karen, from the investment panel adds that:

  • More now than ever, education is becoming jobs and workforce-oriented.
  • The demand for reskilling opportunities as people enter their 30’s and 40’s is growing, but the education sector has not expanded to match that need.
  • EdTechs and investors can look into this space to take advantage of its growth.

Although education brings with it some unique elements, such as significant amounts of government funding and a growing global audience, Tim reminds us that the education sector actually has more similarities to other sectors than differences.

  • Education businesses receive funding from the same sources as other industries: angel investors, venture capital, and private equity.
  • Investors choose education business because they will get a return on their investment, just like any other industry.
  • Technology is broadening and changing the sector. Disruptive innovations will attract significant investment.
“Every sector believes that they’re uniquely different. But in reality, they’re probably not.”
Tim Praill, Faethm AI
EduGrowth Cross Border Partnerships to Drive Outcomes - Warwick Freeland featured image

Growth in education

The education sector, like others, has experienced growth and change over the past several years. Genevieve and Tim explore a few of the specific changes and their causes:

  • More education opportunities are opening worldwide thanks to the digital medium, and the number of learners is growing rapidly.
  • Venture Capital is becoming increasingly interested in education and private equity is becoming increasingly interested in scale up businesses.
  • Education is transitioning from receiving largely impact and social investment to now seeing much more mainstream investment, as capital sources are beginning to notice education’s potential and ability to return well on investment.

Srdjan, in session two, adds that:

  • Many EdTechs have had to transition from trying to source more users to now managing an excess of users.
  • Although COVID-19 and the resulting changes have put great pressure onto EdTechs, they have also revealed great opportunities.
“In quite an unfortunate global scenario, the one positive is awareness has increased, adoption has increased, and that’s an exciting phase because we should be able to capitalise on that even more aggressively in the coming years.”
Srdjan Dangubic, Five V Capital

Attractive features of EdTechs to investors

Sources of capital are necessarily very discerning about where they expend their resources. In order to secure funding, an EdTech needs to distinguish itself from the competition and convince fund managers that it is worth investing in. Tim and Genevieve discuss what makes an EdTech attractive to investors.

  • Attractive EdTechs are those that have a “good reason to exist”, whether by providing a public good, returning significant capital, or by catalysing distinct innovation in the sector.
  • When the founder has an intimate knowledge of what he or she wants to achieve, investment managers are able to feel more confident about allocating capital to the business.
  • Displaying a clear ability to scale will impress upon investors the ability for the EdTech to increase revenue year-over-year for many years to come.

Put simply, investors want to know that the capital they contribute will be put to good use and will provide adequate returns in the years to come. Giving fund teams clear answers and reasons to believe in the product will significantly improve an EdTech’s chances of receiving funding.

“Get a good understanding of what the investment mandate is, who the investment leaders are, because ultimately if they’re going to be lending, then they’ll probably sit on your board.”
Genevieve Gregor, Colinton Capital
EduGrowth Cross Border Partnerships to Drive Outcomes - Ravneet Pawha speaking

From the panel, Karen adds that:

  • The ability to quantifiably show your product’s efficacy is crucial. Schools, institutions, and investors all respond to numbers. If your numbers look good, you will be seen as successful and a good investment.
  • The macro goal of much of EdTech has pivoted from working to replace the teacher to trying to make the teacher more effective.
  • Schools and businesses are basing their purchase decisions on what products have demonstrated impact.
“We actually find that really good impact education businesses are automatic or are naturally intertwined. The social impact and the financial growth should be intertwined, and just self-support.”
Karen Bohm, Pangea Impact Investments

Sources of capital

A number of funding sources exist for startups, but they may become involved at different points along the EdTech’s life.

  • Oftentimes stage 1 and stage 2 capital raising will rely heavily on friends and family.
  • Once an EdTech has grown to a respectable size, requiring investment inflows of 25 million dollars or more, then venture capital or private equity might consider coming onboard.
  • Venture capital and angel investors typically have a higher risk tolerance than private equity and may contribute more while the business is still cash flow negative.

Navigating each stage of capital raising will require knowledge and tact from the founders of any organization. Nonetheless, Genevieve and Tim both stress the importance of learning how to simply and succinctly describe one’s business. With confidence, insight, and an easy presentation, most investors at any level will be encouraged to support your business.

EduGrowth Cross Border Partnerships to Drive Outcomes - Ravneet Pawha speaking
“Succinctly explain what your business does, why it’s unique, and how it operates. If you can’t do that in 10 minutes you often will lose the capital provider’s attention.”
Genevieve Gregor, Colinton Capital

The Australian education sector

Due to the size of the sector, the Australian market displays some distinct differences from its counterparts overseas in Europe and the US. Generally speaking:

  • The Australian market has a larger microcap sector than other similar regions.
  • Startups in Australia feel a great pressure to enter a break-even phase, so they may not expand aggressively or globally in the beginning.
  • US companies are capable of operating with negative cash flow for longer because they have more access to funding from venture capital and other high-risk tolerant funds.
  • In Australia in particular, brand, and especially the higher ed brand, is very powerful and can be leveraged for funding and expansion.

All of these features feed in to the tendency for Australian EdTechs to expand throughout Australia and New Zealand but resist expansion into Europe and the US. Cheyne adds that with the education sector in Australia being as small as it is, it is often difficult to find dedicated funds to education unless businesses look to government or foreign sources of capital.

“So the challenge of the Australian market is really a challenge of small numbers, and often you’ll find that that’s manifested in a lot of really small and often sub-scale applications or solutions that try to fight out for what is on a global level, or a relatively small market.”
Cheyne Tan, Potentia
EduGrowth Cross Border Partnerships to Drive Outcomes - Ravneet Pawha speaking

Australian EdTechs going global

Australian EdTechs tend to stay grounded in Australia. However, Tim Praill offers the observation that, among those that have gone global, they have often started tapping international markets very early on.

  • Australian businesses that have managed to succeed globally often do not have an overreliance on government funding. Their product is viable enough to receive significant private funding and see widespread adoption outside of Australia.
  • If an EdTech intends to expand globally, it is to their advantage to begin entering international markets early on rather than waiting for local success first.
  • Australian EdTechs that have global reach often also have global funding.

Since it can be difficult to break out of Australia and New Zealand, it often helps to have an international vision from the very start of the organization and to seek international opportunities early and often.

Srdjan and Karen both caution that, while the US market is attractive in a number of ways, rolling out a product closer to home, either in Asia or New Zealand, is often a more viable step forward.

“In order for a business to become internationally relevant, you have to understand the international markets and start to make international plays relatively early. That’s easier to do in some sectors where you can directly access students than others where you have to work through an intermediary, like a university for example.”
Tim Praill, Faethm AI

Advisors

For their parting comments, Tim and Genevieve weigh-in on the role of advisors in the EdTech startup space:

  • True innovation is rare in EdTech. Advisors can often help in the early stages by directing the company toward what will work.
  • Use advisors to your advantage, but do not rely on them to the point that you cannot function independent of them.
“If you become over reliant on advisors early, then you don’t pick up the skills required to have these conversations at critical points in time. I’ve seen some great businesses outsource thinking and outsource network building to a third party, and that is I think pretty dangerous.”
Tim Praill, Faethm AI
EduGrowth Cross Border Partnerships to Drive Outcomes - Ravneet Pawha speaking

Advice for entrepreneurs

All guests and panelists in this session carry a wealth of experience in the education and EdTech sectors. Their parting advice:

  • Fill the room with people smarter than you.
  • You don’t need to have all the answers. But you need enthusiasm and an openness to coaching.
  • Relationships are vital.
  • Work hard to connect with investors — they will sit on your board.
  • Work hard to connect with educators — they will purchase, use, and market your product.
“You might have the greatest product or the greatest business idea. But if we don’t feel that we have alignment with the founder, that they’re a founder we can work with and go on a three, five, six, seven year journey together, then that’s an absolute no-go.”
Srdjan Dangubic, Five V Capital
EduGrowth Cross Border Partnerships to Drive Outcomes - Ravneet Pawha speaking
  • A successful EdTech is able to intertwine commercial outcomes alongside educational and social outcomes.
  • What is good for education is good for the whole world.
  • Measurable efficacy will take your product far. If it cuts costs, improves the teacher’s ability to manage the classroom, improves student retention or grades, then it will attract attention and funding.
“I think it would be a misnomer to focus purely on commercial outcomes and I think you’ll have a hard time achieving them if you are not having an impact on educational outcomes at the same time.”
Cheyne Tan, Potentia

Full Transcript

Sophia:

In our first session that we’d like to kick off this afternoon, we’ll explore the tricky subject of navigating capital raising. Before I introduce you to Robert Gregory, who is the National Education Sector Leader at Maddox, we have a short video to play on some of the great things Maddocks is doing. Hello Robert, it’s my pleasure to introduce you.

Today we’re welcoming Robert Gregory as moderator for today’s first session of the afternoon. Robert is an experienced commercial lawyer leading Maddocks’s National Education Team with deep experience advising universities, private sector education providers, schools, and education providers in relation to government and commercial matters.

Robert:

Thank you, Sophia. We might also start with the introduction of our speakers as well. I might just quickly start with some observations both about my firm, Maddocks, but also the topic today. So we regularly act for Founders, Private Equity Institutions, and even Trade Financiers to help capitalize new, and established, and growing businesses. Capital raising is always one of the most challenging aspects of the creation and growth of any business. On the flip side, inadequate capitalisation and failing to access capital adequately, makes everything so much harder. It always seems to take longer and involve more work than anyone could reasonably expect, particularly when starting out in a new business.

So today we have the opportunity to learn from and hear two experienced and expert professionals in the field. So, if we can join in Genevieve and Tim at this point. Hi Genevieve. Hi Tim. How are you both? So I’ll do a brief introduction, perhaps starting with Genevieve, and then, Genevieve, I might just ask you to sort of address some of the things that you as an investor across many sectors find appealing about the EdTech sector first. So Genevieve is a partner for Australian Private Equity Manager Colinton Capital. Colinton Partners with business owners and senior management to unlock the growth potential of their businesses. Genevieve is a past Deputy Chancellor and Chair of the Finance and Investment Committee of Western Sydney University, and also the past Managing Director and Co-Head of the Australasian Special Situation Groups for Goldman Sachs, based in Sydney.

So Genevieve, perhaps just starting with you, as an investor across many sectors, and when you’re looking at where to allocate your and your client’s capital, what are some of the things that you think about and what makes the EdTech sector particularly interesting to you?

Genevieve:

Thanks Rob and everyone for putting on the conference, and this is my first ever video conference, so I hope I can do it justice. But, first and foremost, I wanted to initially acknowledge the traditional owners, and also thank the Victorian government for hosting and actually investing in education. From an educational perspective I think it’s great that the state governments are getting behind EdTech. So thank you for that as well. But really now, to answer your question, Rob, which is what makes it an interesting sector? A lot of these comments are probably applicable to many industries. But as it relates to education in particular, I think one of the things that we always look for when we’re making investments are the tailwinds that are sitting behind a sector. And one of the lovely things about EdTech or education in a broader thesis is that it’s a very large target and addressable market. So a TAM. And when you look at some of the research houses that actually publish what a TAM is for 2020, the TAM for education globally is 11-trillion US, and it’s forecast to grow to about 18 trillion in 2030, which when you look at that and you say, “How do you break that down and how do I get a piece of that action, and where do I play?” Certainly the largest sector is in labor and public education, but you can break it down into services where I think EdTech plays into that services sector, and it’s running around a 30 billion TAM, which is certainly the fastest growing and probably in need of a whole bunch of things.

When you think about services as it relates to EdTech, it can range from accreditation to equipping institutions to shift online, and it can be a hybrid of how you deliver that mode of education. TAM is a really big thing that we look for, and it’s a great thematic, and that’s one of the key things that makes it very interesting. The other thing that I think is peculiar to Australia is that the brand Australia has many preeminent education institutions, particularly in higher ed, and those institutions, even though they may predominantly be brick and mortar institutions, actually credentialise the whole sector globally, and that actually credentialises any entrepreneur who’s trying to start an education business here in Australia.

That is the halo effect that those institutions actually create for for the individual company, and the last last thing that I think is worth mentioning as to what’s attractive about EdTech for me, is that I think one of the silver linings that we can potentially take from COVID is the acceleration of digitization that companies and all sectors are actually going to go through, and certainly in Colinton we’ve been looking at investing in digital transformation companies that are actually helping that acceleration. Hopefully, Rob, that answers that question for you.

Rob:

Thanks Jennifer. Everyone, that was a really great and interesting start. Tim, I might throw to you and introduce you for the purposes of discussion as well. so Tim has extensive strategy, investment, and corporate development experience, he’s an advisor to startups on growth strategy, has built business model design, and also their fundraising strategies. He’s also relevantly for today’s discussion, the past Head of Corporate Venture Capital and Head of Strategy and Transformation for the global education company, Navitas. Tim’s currently a board member of Global Study Partners and holds an MBA from London Business School.

So Tim, could you talk to us about what attracted you to EdTech and what you think is particularly interesting about the EdTech investment sector?

Tim:

Sure. Thanks, Rob. My background has always been in the human capital industry, so I was involved in management consulting and law prior to joining the education company, Navitas. I think when you come from that background, and you start to look at the potential of people, and how really human capital can kind of maximize its potential, and you start to really understand the role that education plays in society. From my personal journey, I was the first person in my family to go to university. Education has played a large part in my life. I think EdTech was a natural fit. I had the opportunity to join an education company and had the opportunity to make early stage investments in EdTech companies. So I think EdTech, you could almost argue, is the coming together of myself in a sector that I’m deeply passionate about. I’ve stayed involved very heavily since then. My current role is CEO of a fast growing future work business, Faethm, and I look forward to spending the rest of my career in this sector.

Rob:

Picking up on your last comment there, what have you experienced in seeing some of these businesses going from the early stage into becoming more mature businesses, their need for capital, how they’ve accessed capital, and some of the things you’ve seen along the way, if you like, from the business side itself?

Tim:

Yeah, I mean every sector believes that they’re uniquely different. But in reality that, Genevieve can talk more eloquently about this. But they’re probably not. They share a lot of similarities. We still have the same financing structure in education as we do in other sectors. We have a relatively robust angel market in Australia, and then we have a VC sector that’s increasingly becoming interested in education, and then we have a private equity sector that’s becoming increasingly interested in investing in scale ups. I think the sector dynamics are very similar. I think from an investment perspective the challenge that a lot of startups face is that, the usual chasm that they have to face in terms of gaining traction, is usually the point at which a lot of companies have to go international. It’s that combination of growing within Australia but having to go internationally to gain the next level of growth is something that usually requires a significant amount of capital. So they can sometimes find themselves in this catch-22 situation.

But I’d say, since I’ve been involved in education full-time over the last four or five years I’ve seen the sector become a lot more relevant to traditional investors. So VCs and private equity organizations have the option of investing in multi-asset classes. I’d say five years ago it was probably more heavily linked with social impact investment and now I’d say there are a lot of very traditional VCs and private equity firms that view it as a very interesting asset class, one that can generate the types of returns that they need to generate for their shareholders.

Rob:

We’re looking at it from an investor’s perspective. Are there particular things that you’re looking for in a business or an opportunity that would be attractive to you, or, conversely, would be particularly concerning about it? So picking up on the broader sector, or comments around TAM, but then perhaps into more specific business plans and approaches that people are looking at.

Genevieve:

It doesn’t really matter what industry when I make this comment, as well as what Tim was saying. But, certainly, what we look for in a business is, “does it have a really good reason to exist?” Like, what is unique about that business, and what problem is it actually solving, and does it have a business strategy to actually match that? I know that’s very generic, but you can see when you start looking into business models whether that model actually has merit, and therefore can it actually make money and be commercialized.

Just to get some vernacular sorted at the beginning of this panel which might be helpful, venture capital can be private equity, it can be listed or unlisted format. So there’s many different ways that you can access capital but I don’t really know the audience here and exactly who’s in this entrepreneurial panel. But obviously you can start with an idea, and that’s certainly in the angel seed investing sort of space, and that’s worth just distinguishing. So that might be where you really are bootstrapping something. Venture capital is you’ve got something a little bit more with momentum. You might be still cash flow negative. Then the next phase you enter into late stage venture capital, where you’re about to break even in the cash flow or even you might be cash flow positive. Typically private equity enters once there’s a little bit more stability in the cash flow. Then you can get larger scale private equity as well. So that’s more stabilized and certainly more of a household name. But all of that matters because, depending on who you’re talking to, they’re looking for different things. So that’s a long way to answer you, Robert, but some of it has got to do with who you’re talking to, what phase of life the company is in.

Tim:

I’ll just add to that. One of the specifics about Australia and the ASX, is the fact that there is a relatively large microcap market. So you tend to find that there are organizations such as Regal, or other organizations like that, which do invest in education companies leading into that IPO and then appearing on relatively small revenue, and potentially not even break even. I would say there’s dangers associated with the micro cap market, but that is definitely another player that exists in the Australian funding scene. I would say one thing about Australian businesses as well, is that a lot of the startups are forced to kind of enter a break-even phase earlier than, say, their US counterparts, and that’s partly because they have to in order to maintain relevance, and size, and get into the next level of funding. But if you look at the US companies, they’ll expect to run at a loss for a lot longer than an Australian company on average, unless that Australian company gets access to international investors early.

Genevieve:

I’ll just add to why this exists in Australia, and it’s partly because when that company is starting out they tend to address the Australian market only. When you’re assessing it as an investor, and why an investor wants it to break even a little quicker, is because they’re only looking at the Australian addressable market to begin with. If you’ve got a format that absolutely has applicability to go to the next level then you can actually look at the TAM in a bigger way, and that’s really why the USA allows them to run a slightly more negative cash flow for longer, because they’re looking at the US TAM as the benchmark for that. They’re plowing in a ton of marketing capital into that, and that’s why they investors allow them to run on negative cash for a bit longer.

Rob:

We’re getting a few questions starting to come through, and we’ll start addressing those shortly. I suppose for the purposes of today’s discussion, and picking up your point, Genevieve, I think probably for most of the audience it’s that angel, VC, private equity phase potentially looking to IPO in due course, and probably for the purposes of the discussion, we’re focusing more so on equity markets rather than debt. With that in mind, and picking up your last point, does the really quite rapid rate of change in education technology, and I think with COVID-19 we’ve just seen a massive acceleration of that in the last six months, do you think that is a plus or a minus, and then how would you link that into scalability? So taking a business that’s addressing an Australian market perhaps to addressing a regional or global market?

Genevieve:

I think what has occurred because of COVID is the delivery of education has had to accelerate. It’s had no choice, and therefore the teachers, the professors, the people who’ve probably been a little reluctant to change their teaching methods have had to change. So if everyone’s working out how to provide that education in the most constructive way to the learner then I would say that everybody’s learning a little bit at this point how to make education online effective. If I could put it like that, and meet some of the human elements that a receiver of education needs to receive, so content, and how you provide flexible content. Providers. There’s gonna be a ton of things that come out of this that are actually really positive for the sector, and I think that that’s only a good thing. So I think it will accelerate in my view. I think it’s going to be able to accelerate more.

For your second question, can an Aussie company really grow internationally very well? Absolutely. I think they can, and it all depends what the problem is, what the need is, how they’re solving uniquely versus competitors, and obviously what credentialising customers they can get on board as well.

Tim:

I’ll just add two points to that, and apologies for cutting in. Number one, for some Australian entrepreneurs, turning themselves into a billion dollar business just isn’t their objective and that’s true in every sector, but also education which has traditionally quite a social bent. Often it’s not about value maximization in terms of the investor. Sorry, in terms of the entrepreneur. They have other goals, and it’s important to recognize that. So that’s the first thing.

The second thing is I think Australian businesses generally stack up pretty well in terms of quality of product versus their international counterparts. Scandinavia has a reputation as having good quality products. It’s very rare, though, that you have a truly differentiating technology. Currently a truly differentiating technology, in the same way that some consumer good sectors would have, or some financial sectors would have. A lot of innovation in education is around business model innovation and in finding a specific underserved niche that you can target, and grow in. For example, Cloud Guru is a good example of a great training business that is focused on a very underserved global niche, and they have become a global leader in that space, and they will grow significantly in that space because they have an audience that wants to be trained. They can’t get good training. Cloud Guru does it fantastically well, and those learners exist around the world. So you often can find great businesses coming out of Australia that either target an underserved niche or have great business model innovation.

And I’d say Go1 is a great example of something that has great business model innovation. They target from another service niche. They don’t have a particularly innovative product, but they have absolutely nailed their execution, and that’s pretty cool.

Rob:

When you’re looking at an investment opportunity or maybe advising someone how to position their own business, do you think they should be chasing those niches? And what do you think that potentially limits their ability to scale, particularly if there’s a particular regulatory environment here in Australia, or something along those lines that they’re aiming to work to that perhaps doesn’t apply overseas?

Tim:

We’ve definitely seen changes in regulation in Australia that have created booms and busts within the EdTech space. You only need to look at the vocational training space and the routing that happened there in the mid-to-late 2010s that it’s a good example of regulation creating favorable conditions for private providers. Private providers coming in, not having their outcomes sufficiently tested, and then chasing dollars. You do get these situations where bad, poorly formed regulation attracts bad actors, and that’s the same in any space, and it’s particularly true in education. However, when we were making investments in businesses that had a heavy exposure to government funding, we didn’t make any investments in businesses that had pure exposure to government funding. It was really important that a business could survive on their own feet and that they could attract students that were willing to pay for the products, themselves.

If you look at the product businesses in Australia that have done very well internationally, they haven’t had an overreliance on government funding in their Australian operations, and I think that’s important to understand and seek out when you’re looking to make investment decisions. 

Rob:

Does that go with the general focus of the business? They’re lifting their eyes a bit out of Australia to all the world.

Tim:

When we were at Navitas, we obviously had a strategic investment lens. So the business had to make sense to our wider portfolio, and that meant that we passed up on some great businesses that were going to do very well, but ultimately weren’t strategically relevant to us. But we always needed them to have an international goal, and we also needed the CEO and founder to want to have that international growth mindset, and that didn’t exist in every founder coming out of Australia. But I’d argue it doesn’t exist in every EdTech founder globally.

In order for a business to become internationally relevant, you have to understand the international markets and start to make international plays or enter international networks I’d say relatively early. That’s easier to do in some sectors where you can directly access students than others where you have to work through an intermediary, like a university for example.

Rob:

Thanks Tim, Jennifer. But very few heard any reflections on that and particularly around minimum investment sizes. The different categories of capital investors are looking at, particularly when they’re looking at different businesses in this sector

Genevieve:

There’s a couple of things to just add to what Tim was talking about, this is where EdTech can be more than just a B2C provider. It can be a B2B provider. So basically servicing the education institutions as well, and there’s different lenses you can look at EdTech under, and one of the companies that we actually just invested in at Colinton is a company called Clear Dynamics. It’s actually an ERP software business. But one of the sectors it is looking at is education. But, really, where it comes into its own is where you mention ERP. Most people run in fear because they think of large dollars and a long time to implement, but really why we invested in Clear Dynamics, which is a Victorian based business, by the way, is because it does something quite unique in that it can actually deliver ERP software at speed. And when I say at speed, it can actually get proof of concept up and running within weeks, not months. And through the way its tech stack works, which is using metadata married with AI over partially-built modules, can actually stand up ERP software pretty quickly.

I think what’s lacking in the higher ed space is investment into how the student journey goes through in a much more seamless way. And certainly Western Sydney we made some investments in that and other areas to make the student journey way more seamless and easier to get through. I think Clear Dynamics has potential to do that in the education space in Australia, just as it does in other verticals. But why I mention that is more because, when we think about education technology, it doesn’t just have to be delivery of education content or delivery of education. It’s everything in the ecosystem around a business that you call education. And so that’s kind of an interesting thing to talk about, because there’s many things to solve in that space from a point.

But coming back to your thing about ticket sizes… So ticket sizes for angel investing can range from 50,000 to 250,000 per ticket. If you’re talking about venture capital funds, most venture capital funds will be in the one or half a million to, say, three million dollar ticket sizes. Growth or private equity, you can probably expect five million to 25 million, and then when you get into more regular PE, it can be 25 million tickets and above. So that was the question you asked me, but how does that apply here in this space in Australia? Well, there’s a number of different scenarios and examples you can give, but for the audience on the phone, if you’re just starting up with an idea then your first raising is typically friends and family, small tickets. If you’re a little bit bigger than that, you might be able to take that to a venture capital provider and you might club that deal. Clubbing it means you get many providers coming together to give you that funding. But generally you start out with family and friends first round, and then the second round could be another family and friends. And then you really get into more of the professional investor space. So that’s kind of the third round of funding.

Rob:

You want to maybe just quickly touch on the size of ownership stakes that investors are looking at at each of those levels and how that affects the founder. For example, after the family and friends round and those sorts of things.

Genevieve:

Well, look. It can be contentious. It doesn’t have to be, but certainly until you get into the larger capital raisings, the founder is in control. In an ordinary equity sense that means, when I say control, they still maintain 50 percent of the ordinary equity or more. When you get into the larger rounds, and that’s when you get into sort of 25, 50 million, 75 million, 100 million rounds, that’s probably when the founder is dropping down below the 50 percent control range. So anything before that, typically, they’re keeping control if they’re valuing it correctly. If I could put it that way, having said that, there are many different forms of the way that funding can come in, and essentially where you sit in the capital stack is really a lot dependent on how much momentum the capital raising, and how much of an interest the capital raising is, to those investors. So if it’s a well sought after deal you will be able to push the investor down to ordinary equity. If it’s not a well sought after deal and you’re fresh in your rounds, then the money will come in higher up the capital stack. What I mean by that is it will come in as at least preference equity, or even a con note, or even quasi debt. That’s to give a risk/return profile to that investor that matches what they think is appropriate for the growth of that company at that point in time.

Tim:

Actually, I’d say, extending on to that in the US, safe notes have been becoming more and more relevant, and more prevalent in tech like with other sectors, and less so in Australia. They’re very founder-friendly, so if you do have a situation where a company is raising successfully out of Australia then it’s usually a sign that they’ve either got large US investors involved or that they’re a very good business and they’re oversubscribed. You do see common equity and then post Series A. It’s just peer pressure. I think we’ve got pretty similar structures to other countries except for safes haven’t become as relevant in Australia. I’d say valuations are typically lower in Australia than in other countries, other major investment countries, such as the US or the UK. I think that’s probably consistent. You do get exceptions. Some of the big raises recently have been led by your larger VCs, but traditionally Australian EdTech companies have been invested, and have been raising valuations much lower than their US counterparts of similar revenue.

Rob:

I’ve seen one safe note in the EdTech sector the last few weeks. So it is starting to happen. Looking at it, perhaps on the other side, Tim. What would you say that a founder or an emerging business should be looking for in an investor? 

Tim:

I guess there’s different types of investors. So you just have to understand the motivations of the investor. Number one, if you have a strategic investor. Let’s say we’ve just closed around and there’s a strategic investor that’s invested. It’s like, what is the relationship between that corporate VC and the parent? Are they there to create and identify opportunities for the parent to acquire later on? Or are they kept at an arm’s length? I guess what is the investment strategy of that strategic investor? 

If they’re a VC then it’s kind of like where are they in the fund life cycle? What’s their mandate? Are they investing heavily in your space or are you their sole bet in that sector? Are they education specific? In which case, do they open up a network to you or are they multi-sector? In which case, they might be able to provide an expertise in other complementary areas. So if you’re an AI business in education, then they bring an AI business in finance, and you’ll be able to learn from them. So I think getting a good understanding of what the investment mandate is, who the investment leaders are, because ultimately if they’re going to be leading around then they’ll probably sit on your board. They’ll have a fair degree of control moving forward.

I’d say also understanding the differences in motivation between a VC and a private equity company is really important. Private equity depends on the type of PE fund, but they will often make their money by putting debt into the business and that has implications on the kind of growth strategy that you can pursue, versus a VC which tends to sit back a little bit more and expect you to run at a loss for longer. But I would say understanding the difference between VC PE and the pre-IPO funds which will be expecting you to take a public position on the markets in a couple of years, then investing those are all really important foundational understandings that you build. Then once you have that, it’s about getting really clear on who the manager is because they’ll ultimately become a board member. And then the fund. What’s their mandate? Where are they in the fund life cycle, et cetera?

Genevieve:

Maybe just to add to what Tim said, if you’re raising money, when you go and talk to investors, do you spend time asking the investor what their mandate is? What segment they’re in, how long their whole period is for, and what the typical returns they’re asking for? You as a company raising capital they are absolutely entitled to ask that, and you should ask that, and that way I think it takes some of the mystery out of the capital raising. So just as you’re sharing your need for money, you should also ask the investor what they are looking for. It is a bit of a journey of discovery to understand how you marry up those needs for both people. Don’t be afraid to ask is probably what I would say to you because lots of people in the finance industry can use lots of vernacular and lots of different words, and it can be super confusing. But seriously, just ask, and it’s a totally legitimate question to ask what that mandate is that the investor is looking for.

Tim:

One other thing, because it’s particularly relevant for the people on this panel. Somebody very wise once told me that when a strategic investor makes proposals about how they’re going to grow their business, it’s important to ask them to express that in writing rather than just purely have it in conversational terms. The principle is that investors invest in you because they think you’re going to grow. Certain investors have the potential to help you to grow. So follow up on that and make sure that you never lock it in the blood. But the simple thing is you can get it in writing.

Rob:

We’ve got a few minutes left. I did want to address some of the questions, and I suppose one of the themes is a particular factor of key importance to you when you’re looking at that business in the education technology sector, but perhaps more broadly, commonly, get wrong.

Genevieve

I think what a lot of people miss is how to explain their business succinctly. So one of the things that I think, if you’re somebody raising money and you struggle to explain what your business does, you should try and keep it to 10 minutes. In the first 10 minutes, when you meet a capital provider or potential capital provider, you really need to succinctly explain what your business does, why it’s unique, and how it operates. If you can’t do that in 10 minutes you often will lose the capital provider’s attention. You can always come back and fill in the whole story about how you founded the business, your personal journey, some of the things that make it very real for you individually. But initially just explain what you’re trying to do very well, and that’s actually half the battle because then you’ll have somebody who’s engaged and wants to learn more. If you can do that very succinctly.

Tim:

The best businesses I’ve seen have been able to describe themselves super succinctly within five slides. That’s really all that an early stage investor is looking for, is for a large addressable market opportunity. They’re fundamentally making a bet on the people, and when you have a really effective founder team that talks in lockstep and has a very clear vision for the future, then that’s half the battle.

I would say one thing because I have seen it in Australia is the role of advisors, especially in early stage businesses. I tend to find that some startups can use them as a crutch, and you’re not going to ever incentivize somebody enough to describe your business in a way that access is capital. I would always view it as, “Is this leadership team backable?” and part of that is, “Are they able to understand their business well enough?” and, “Are they able to articulate it in a way that’s going to attract capital?” and I think if you become over reliant on advisors early in your life then you don’t pick up the skills required to have these conversations at critical points in time. So I would just add that as a word of caution where I’ve seen some great businesses outsource thinking and outsource network building to a third party, and that is I think pretty dangerous. So I would just raise that as a point of caution for organizations.

Rob:

I think we’re coming up right on time, perhaps, to end on a positive. Genevieve, what would the best pitch, if you like, or the the best compelling offer you’ve seen, what are they? What are the factors of that? What makes it really great?

Genevieve:

Well I think the founder knows their craft. So the founder is actually someone who has an intimate knowledge of what they’re trying to achieve. So they absolutely know the craft, and they know the strategy. They have somewhere where they want to go. It’s not necessarily vision so much, but they have a goal and they really know where they’re heading with it. It’s delightful when you meet somebody who’s very determined and clear about what they want to do. That actually comes fundamentally down to the person. You marry that up with very good tech, and when I say very good tech, the latest technology that doesn’t require a lot of development and a whole bunch of arms and legs to support the growth and model, then that’s a really interesting thesis. And then the only other thing that I’ll say is you can actually clearly see how they can scale it, and so what I mean by scale is that they need more marketing arms and legs to enable them to access more industry verticals, or more customers of a certain type, or whatever. So that clearly is one of the things that I look for in scalability as well.

Rob:

Well, thank you very much. I might take this opportunity to once again thank you, Genevieve and Tim, for your really valuable insights today, and pass back to you, Sophia.

Sophia:

Thank you, Genevieve, and Robert, and Tim.

Full Transcript

Sophia:

So we’re nearing the close of the summit and, in this next session, we will be joined by a very experienced investment panel to share some of their insights and expertise. I would like to introduce you to Patrick Brothers who will moderate this panel. Patrick co-founded HolonIQ, a global market intelligence platform for education. He’s a member of the World Economic Forum and the B-20 Education Employment Task Force. He’s passionate about transforming the way the world learns. Over to you, Patrick.

Patrick:

Hi, Sophia. Thank you so much. Like you said, really exciting panel ahead of us. I’m going to make some quick introductions as soon as I see my colleagues join us. Perfect. So, on screen, and we really do have a wonderful panel to dig deep into an investor’s perspective here, let me make some really quick introductions before handing over. So, firstly, Karen Bohm. Karen is a founder and partner at Pangea Impact Investments. Karen, thanks for joining us this afternoon.

Cheyne Tan. Cheyne’s an operating partner at Potentia, and Srdjan Dangubic, who’s a partner at Five V Capital. What’s wonderful about the panel we have this afternoon is all of these folks have very specific expertise that relates to investing, have experience in investment, but also have experience in other sectors and spaces too, to be able to bring some comparable insights to the space. Let me make a start. Karen, can I start with you, and can you just share a little bit more about Pangea and then share a little bit about how Pangea is thinking or acting in relation to education and education technology?

Karen:

Sure, Patrick. Well, Pangea Impact Investments was started by my husband and myself about five years ago, and we make direct equity investments using our own funds and our own time into businesses that primarily focus on education, and we also focus on health. So most of our opportunities come through the impact investing network. It’s a pretty tight bunch in Australia, and in terms of my professional background prior to starting Pangea, I was practicing law, primarily employment and industrial law, and I did that for about 10 years in Sydney and in London. That’s just a very useful background to have and also feeds in well to our focus on education, and people, and training, and skills.

The other half of Pangea, Anthony, comes from an extensive background in education businesses. Most notably he co-founded Think Education Group and also Open Colleges Australia. So he has been through the high growth digital business, and so we bring obviously capital, but also we’re not passive investors. So our approach to looking at education businesses in Australia is how can we support the entrepreneur beyond money? And we like to be active in the space and share some of the lessons we learnt on our journeys as operators.

Patrick:

Awesome. So impressive. Cheyne, can you share a little bit more about Potentia and your background as well?

Cheyne:

Super relevant, super interesting. Sure. Thanks, Patrick. So Potentia is a tech and tech-only focused private equity fund. We’re based in Sydney. Our focus is predominantly ANZ and investing in ANZ-based companies with corridors into Asia and beyond. We have a bent towards education in that two of our five portfolios have a strong education presence. The two in our portfolio that have an education presence is a company called the Education Horizons Group, which owns a number of education products including Synergetic and Sector, which is a student management system and learning management system in the K-12 space.

The other education business is a company called Comply Space. Comply Space is a compliant software business with a strong footprint in the Australian K-12 space, so I come to education investing with three different perspectives, I’d say. So firstly, clearly, the work I do at Potentia and, as an operating partner, I spend most of my time with our portfolio helping them to unlock the value that they see and the opportunity they see in their businesses and, secondly, I spent some time on the advisory board of an early stage investor in Europe called Emerge Ventures. Emerge is one of the largest education investors in Europe at the very early stage.

And lastly I have a background as an operator myself. I built my own education tech business back in 2010, a company called BlickBook, which was an engagement analytics platform within the higher education space which was later acquired by a company called Civitas Learning, which is a data analytics platform in the higher education space. I then ran Civitas’s international business for a couple of years.

Patrick:

Thanks Cheyne. And Srdjan, Five V capital and some of the investments you’ve made. We’d love to learn a little bit more.

Srdjan

Sure. So we are a Sydney-based Australian and New Zealand-focused growth capital fund. We’re focused on backing growing businesses and helping both through capital and being an active shareholder. A combination of what you’ve heard from the previous two presenters as well. In terms of EdTech, much like everyone who’d be at this conference and participating, we’re not rocket scientists but we’ve seen the social impact that education and then education technologies have had at a global level at one point. But equally, as investors, we’ve seen an opportunity to invest in businesses that would ultimately see significant value creation over time. So in that context we’re invested in a couple of relevant businesses. One is a business called Education Perfect, which is a secondary schools focused knowledge management platform that now operates globally, used by about a million students on a daily basis, and the other business that’s relevant is a business called Total Learning which is a corporate enterprise focused learning management system. It’s a technology platform that’s used again at a global level. Interestingly enough, both of those businesses actually have come out of New Zealand, which is no more than an observation. But it’s just probably a reflection of the ability to to create globally significant and globally scalable businesses from really anywhere in the world. That’s the summary in terms of EdTech. And to Patrick’s question, we’ve got a broader investment portfolio that encompasses everything from those two businesses that I’ve mentioned to a number of BPO businesses, financial services businesses, retail, and so on. We do look at EdTech in the context of a broader investment universe, but it’s been an area of focus, and we’ve met a large number of businesses over a number of years now.

Patrick:

Cool. Can I ask the three of you, and please jump in rather than feeling that we have to go turn by turn, but as the three of you look at the Australian EdTech landscape, what do you see and how do you view the Australian landscape with respect to questions like, “Are they unique?”, “Are they scalable?”, “Are they thinking global or is there something locally that’s special about them?”, and I think, Srdjan, to your point, let’s bring New Zealand in for that piece as well. But really broadly, is your investment committee talking about the Australian EdTech landscape, how are you viewing it? What are the things that excite you, and some of the challenges that you contemplate as well?

Srdjan:

Sure. Well I might jump in. Look, I think the things that excite us, maybe a little bit cliche in the sense that we see a huge market, a huge opportunity, a huge ability to make a difference, and so I think they’re some of the very high level comments, but I think the more relevant piece about ANZ is we’ve got an incredibly powerful brand from an education perspective more generally. Not just EdTech, but education generally, and I think as a consequence of that we’ve seen a number of businesses that have reached global scale having started in Australia, and New Zealand for that matter.

I think there’s a really strong platform in terms of brand, in terms of capability, that ultimately a number of businesses have been able to leverage and a number of businesses should be able to leverage into the future to create globally relevant and globally scalable products. We’ve seen that. I think we continue to see it, and that’s probably what excites us the most is the ability to back a business, wherever it might be, whether it’s Sydney, Melbourne, anywhere in Australia or New Zealand for that matter, but actually playing into a global marketplace.

I think that the other piece is that we’re dealing with an incredibly dynamic space and we thought it was dynamic 12 months ago, and if anything over the last six months that has only accelerated for obvious reasons, and we’ve seen a huge increase in awareness, a huge increase in demand, and maybe some of the frustrations we’ve had in terms of the adoption of EdTech in various institutions that’s accelerated, and it’s almost now the businesses that we’ve been talking to or invested in, we’re dealing with the opposite problem, which is how do you deal with this influx of demand, which is a real positive. I think that’s the other, in quite an unfortunate global scenario, the one positive is awareness has increased, adoption has increased, and that’s probably an exciting phase for us because we think we should be able to capitalize on that even more aggressively in the coming years.

Karen:

We share the same optimism. COVID has placed tremendous pressures on young businesses, but it’s also opened up tremendous opportunities. We’ve had a couple of businesses, for example, that have had to pivot two completely online offerings, and that was a shift that was underway. It’s just accelerated that transition, and I think the education is typically counter cyclical. So there are those opportunities for good businesses to get out there, and Australia is a great market to get in, and test.

Education is universal and the benefits are universal. Certainly you can roll it out into adjacent markets, into Asia or further afield. Every business we meet seems to point to the US market, but we try and encourage them to look a little closer to home sometimes. Our personal investment strategy is that we like to look for businesses that are solving education solutions here domestically first. But if they’re growing, and they’re scaling, and they’re having an impact then it should be able to grow well beyond Australia’s shores.

Cheyne:

Patrick, the only thing I’d add to those two comments is, I think what’s perhaps unique  about the Australian EdTech sector is this odd duality that a lot of EdTech players face here. So the challenge of the Australian market is really a challenge of, in my opinion, small numbers and often you’ll find that that’s manifested in a lot of really small and often sub-scale applications or solutions that try to fight out for what is on a global level, or a relatively small market. It is really hard getting ten percent of any market. Ten percent of a smaller market, it leaves you with a small number. So I guess the challenge is, in Australia, you’ll often see these EdTech players fight it out locally. But the ones that really manage to break out and scale internationally are the ones that we, as a fund, particularly find exciting. I think as Karen mentioned, you do see a lot of Australian EdTech players moving into Asia and the Middle East.

And I would agree with Karen that I think that the American market is unique in itself. The needs and the use cases in the US are very different to the rest of the world, and the last thing I’d say that I think is a real advantage for Australian EdTech players, as Srdjan mentioned, is that brand that the Australian players can leverage you’ll find in a lot of the Middle East and a lot of Asia. The curriculum is often based off of the British or indeed the Australian curriculum, and coming out of Australia has a lot of that. It provides a lot of advantage to Australian players.

Patrick:

Okay, we’ve got some questions rolling in and they’re lining up beautifully with some of the themes we discussed in our prep. So let me hit a couple of them now. Perhaps one of those questions you’re just not going to go past in their tech panel touches on how much of EdTech is impact versus not impact, as characterized by the standard person’s definition, but also also the  tension, or maybe not the tension, between investing in education for commercial returns versus  for those impact ROIs. Who wants to tackle this one first? Karen, do you want to have a go? Pangea Impact Investment sounds like a great candidate.

Karen:

Sure. Well, our approach when we look at an investment is, first of all, it has to pass our impact hypothesis. So we actually go very deep on do we think that there’s a problem here that is going to be solved, and solved at scale? And is that the founders’ true north? Is that why they’re really chasing this solution? Some impact investors talk about having mission lock, and putting the impact hypothesis actually into the constitution, for example, of an organization to try and tie entrepreneurs to the impact. We actually find that really good impact education businesses are automatic or are naturally intertwined. The social impact and the financial growth should be intertwined, and just self-support.

Anthony and I call out if there is a tension between the impact and the financial objectives. We call that out early on, and we put together a bit of a pre-investment document, and we share that with the founders, and we work through that to determine whether or not this is going to be a happy marriage in terms of how we view the business and how the founders view the business. So, for example, natural tension is you’re going to raise the price on your product, and how’s that going to have an impact on accessibility in the market, for example. So you can work through all of those tensions. In our experience, if the central philosophy is if it’s a great business model and it’s growing then the impact is growing, and then the business is thriving, and therefore it’s not dependent on grants or philanthropy. So it should all marry up.

Patrick:

Nice. Srdjan, you’ve got a really broad portfolio of different industries. How do you guys think about this?

Srdjan:

From our perspective, we are investors at that point earlier, and so we look at investments and look for a financial return. But equally a number of other criteria, and I think the other criteria are becoming increasingly more sophisticated around various policies in terms of modern slavery and so on and so forth. But I think the interesting thing for us, from an education perspective or an EdTech perspective, is that these businesses are the most obvious businesses that have the biggest social impact out of our portfolio. Now we love all our investments equally, much like you love all your children equally, but I think that from a personal perspective what’s exciting is every time we have a board meeting, every time we have a conversation on education, or example, we know the decisions that are made there, hopefully to ultimately the benefit of millions of students who’ve used that platform historically, and who are going to continue to use it, and so there’s certainly a satisfaction within that, and we have incredibly positive feedback from our investor base and our other stakeholders around involvement in a business like that. I think that’s a layer of positivity that just reinforces, ultimately, the attractiveness of the sector overall.

Patrick:

Shane, sitting on the board of Emerge and inside, these businesses are now investing. What’s your take?

Cheyne:

Quite simply, Patrick, I don’t think they’re mutually exclusive issues. The reality is, I think it would be a misnomer to focus purely on commercial outcomes and I think you’ll have a hard time achieving them if you are not having an impact on educational outcomes at the same time. Potentially not an impact investor per se. Having said that, we think carefully about the impact that the money we put to work is having, the money we are willing to work. It represents savings of hard-working Australians from super funds that are our investors. And so, having the opportunity to invest in a sector like education is really meaningful. As Srdjan mentioned, I think both operators, investors, and users are involved in this sector because there is this additional outcome that has a true social impact. So having said all of that, I do believe that the work we do is important, and I think it’s important because of the impact it has.

Patrick:

I want to touch on a quick question too, with respect to EdTech specialist investors over in the US. I think we just saw Ventures raised like a million dollar EdTech fund. They’ve got one and a half billion funds under management. Meanwhile there’s a lot of investors who perhaps wouldn’t have looked at EdTech before who are coming in because they see the dynamics. They don’t have the expertise or the experience that the three of you have, but how do you think about a specialist EdTech investor who maybe is doing efficacy screening versus a general investor who’s perhaps equally interested in the impact side, but without as much experience in EdTech? How does that weigh on your thinking? Is that important or distraction?

Cheyne:

I’ll just quickly jump in there on two points. One is that I do think the education sector, much like other heavily regulated sectors, is somewhat unique. There are some factors about the sector that are unique to regulated spaces. So what I would say, I think having some capability inside interest focus on the sector is valuable and important in order to be effective. Having said all of that, if I point to my experience with Emerge Ventures, and, as I say, I was only on their higher education advisory side when young, and Nick set up Emerge probably back in 2010, about 10 years ago I think it’d be fair to say. There were questions and doubts as to whether or not the sector was big enough to warrant a dedicated EdTech incubator, early-stage investor, and they were focused only on Europe, and they were asking companies to move to London to launch their education businesses, and I think I would actually argue that 10 years on what has enabled them to do that is that they really have a pan-European focus, and that enables them to have a real European scale and, at the same time, a global scale, they were getting Australian tech companies to go over to be part of that program. So I would say, from a dedicated EdTech investment perspective, there aren’t that many dedicated tech funds, and that’s because it’s the law of small numbers, and the problem of unit economics, and education is really difficult.

Patrick:

Interesting. I’m going to keep this moving because we’ve got lots of questions here. I’m just gonna seed a thought with the three of you about where you think EdTech might be five years from now, but I’m gonna shift in the meantime while the cogs are turning. We’ve got a lot of questions which are seeking your thoughts on… We’ve talked a lot about EdTech. Now let’s drill and double click. Inside EdTech, are there specific parts of education technology that you see as quite attractive at the moment, or more attractive than they may have been? And maybe on the converse, are there parts that you think are less so than perhaps they were as a consequence of COVID, but just the ongoing evolution of the space, if you double click into EdTech what are you guys talking about? What’s interesting?

Cheyne:

We’re in K-12, but I actually think that the professional education space is really compelling. Corporate education and whatnot. What makes that sector interesting is that, and what makes education challenging is that this purchasing process and the decision-making process is much more commercial in the professional education space. For that same reason, the other part of the EdTech sector is a challenge.

Karen:

I was just going to add that the area that really interests us at the moment is the unaccredited training for adults, and filling those gaps. I think we’ve moved into a space where people need to re-skill in their 30s and 40s, and educational providers have been too slow and are too slow in that space. So there’s some really exciting solutions coming into that space that means that people are invested in rather than made redundant and those skills lost. So I like that whole hypothesis of taking people on that journey, whether it’s the impact of COVID, whether it’s automation or AI, generally. We’ve recently just completed an investment into Faethm which is very exciting, and that’s the application of AI to predict how all of those big shifts are going to impact current and future workforces. I really think that’s what we need to do in terms of making the most of our human talent, which, at the end of the day, is the core of everyone’s competitiveness, tapping into that talent and investing in it rather than making people redundant.

Patrick:

Fascinating. Srdjan, what drove you guys to make the investments you did, and what are you on the lookout for at the moment?

Srdjan:

So I’ll take the second part first. I’d echo Karen’s comments actually. If there is one that excites us at the moment, we’re trying to identify opportunities in what would be the unaccredited or unregulated, depending on how you use the definition, post-secondary education, so the one aspect is definitely careers are becoming more dynamic, people need to re-skill, and so on. I think the other element that we’ve been focused on is with remote learning some of the value propositions of the established institutions come into question in terms of the traditional attending universities, be they in Australia or some of the Ivy league colleges and universities in the US. The value proposition that once existed and, really, people focused on and paid huge premiums to access start getting disrupted. I think the combination of those two factors has got us thinking a lot about what people are seeking from education. Are they seeking employment? They’re seeking film, maybe both at the same time, and equally can other non-institutional organizations. Startups really provide those outcomes, and so I think it’s not necessarily a new theme per se, but definitely it’s accelerated from our perspective over the last six or twelve months, and that’s where we’re looking at the moment.

In terms of the first part of your question, Patrick, and why did we invest? As ever, it’s a combination of factors, and I’ve seen some of the questions come up in terms of what’s critical, or why you do not invest in certain companies, and so on. I think maybe two or three to call out, and I assume you would have heard of them, and I think if I heard Genevieve at the back end of her presentation earlier, prior to this one. Ultimately it comes down to people, and the founders, and the owners. It really does. You might have the greatest product. In the background it’s the greatest business idea. But if we don’t feel that we have the alignment with the founder, if we don’t feel that they’re a founder we can work with, and assist, and partner with, and ultimately go on what’s probably a three, five, six, seven year journey together, then that’s an absolute no-go.

And so, I think going back to the investments we’ve made, it has been the founder and the team that have ultimately been almost the absolute yes/no decision point. Beyond that, from our perspective we saw in both businesses that we’ve invested in some incredible product market fit, amazing product feedback, and at differing stages of those businesses, but in relation to education.

Perfect, which is a secondary school focused platform, incredible user feedback, both teachers and students, and a platform that was evolving very quickly. It was disruptive, and all of those things, but ultimately the key piece for us was going and speaking to teachers, speaking to school principals, who were huge advocates of what the business was doing. So all of a sudden when you’ve got that product and market acceptance, it makes the rest of the growth story, and the plan, and the investment required a lot easier to believe. The third piece, we quite like the global aspect and the global aspiration of the businesses we invested in. And so that has been a focus.

To the earlier point, if you can prove yourself in Australia and NZ, that’s incredibly valuable. But it really ought to put a business in good stead in terms of approaching markets offshore, and differing businesses have attacked different markets, whether it’s Asia Pacific, Middle East, Europe, or the US. From a personal perspective, for what it’s worth, I harbor some of the same reservations that you’ve heard before around the US market. It’s a huge market. At a high level it’s incredibly attractive. It’s an incredibly complicated market and very difficult to access, and so for the businesses that we are invested in, actually the focus has been more into Asia, Middle East, and Europe, and we’ll see how that plays out.

Patrick:

Cheyne, just for a second, one of thematics that I’ve heard a lot lately is B2C versus B2B, and also just a thematic that’s come up on this conversation around unaccredited adult skilling, which there seems to be a real fuzzy line between HR Tech and EdTech happening as well. What are you seeing, B2C versus some of that stuff at the work end, feels like it’s more B2B. But do you make a big distinction between B2C and B2B? How are you thinking about it?

Cheyne:

So, as a fund, we only invest in B2B businesses, and typically, actually, a lot of our thesis is centered around SAAS businesses. Part of the reason for that is the obvious answers you’ll always hear: predictable revenues, the ability to drive off long-term growth, and actually, for education, what really matters is the ability to scale off referenceability, which comes with a lot of benefit. A lot of that benefit comes with SAAS businesses. Having said all of that, when I built my initial business, I actually started the business with a B2C bend. We quickly moved into a B2B mode, and the only thing I’d say about that is, going back 10 years now, B2C in education is really difficult, and, at the time we were focused on B2C in education within in the higher ed space, and trying to figure out where the pain points were for students in the 18 to 22 year old range. Trying to figure out what the buying signals were for students or parents in that range was really challenging, and so I think that’s why you probably see very few B2C businesses scale, particularly in the higher ed space. You probably do see, to be fair, more in the younger age space.

Patrick:

Karen, are you saying anything or is it a conversation happening inside Pangea?

Karen:

Yeah. Some of our businesses have a mix of B2C and B2B, and one’s selling into both. Academy XI is running training directly to students, and then also offering training to companies, and rolling it out that way. So it’s not really a filter for us. For us it’s more about just who’s the market and how we are accessing it. Our biggest pain point, when you’re looking at primary and secondary schools in Australia, is this structural impediment to how sales happen in Australia, and it’s this decentralization which has empowered principals to make decisions, has meant that selling into schools is difficult. And it’s difficult for principals too because this concept of a system-wide sale is great in theory. It really happens in practice. And then the principal’s left with all these great ideas knocking at his or her door. And so it’s quite inefficient. It’s frustrating from that perspective. We do see a lot of really good ideas. But selling into schools in Australia is a challenge.

Patrick:

I’m going to shift. We’ve got about 10 minutes to go to this forward-looking perspective, and love to hear where you think education and EdTech might head, and I know that’s an enormous question. But what if it’s even just a thread or a thesis. But what’s one of those scenarios, or assumptions, or something around how you think education will play out that’s driving what you’re looking at, and how you’re thinking about it? Do you have a specific assumption around how it might play out or how you hope it plays out?

Karen:

I’ll have a bit of a stab. Look, I think five years ago a lot of the tech was all about replacing the teacher, and I think five years from now, and certainly COVID has really shown everyone in quite a personal way, people who are parents of children, just how pivotal and central the role of the teacher is. So I think you’re going to see the tech that wins, certainly when we’re talking about children and secondary students, is technology that makes a teacher more efficient and makes a teacher more impactful. The key to their success is going to be evidence of impact because there is so much out there, and it’s very front and center now. People need to know how much does it turn the dial? How does it turn the dial, and how can you show that to me? And so, it’s no longer something that’s just nice to have. Purchases are made on the basis of evidence of impact, and so I think that that has to be succeeding, and that’s what we try and invest behind.

Patrick:

Nice. Cheyne, what are you thinking?

Cheyne:

The only two very quick things I’ll add: I agree wholeheartedly with Karen. I think the two thematics that have yet to prove themselves out and, in fact, I think the sector is moving towards is, one, centered around the role of data in education. I think a lot of players have had a go trying to solve this over time, and I don’t think we’re quite there yet. And, two, as Karen articulated, I do think that schools, providers, institutions will increasingly have to quantify the impact of their work, and they will be judged on that basis. You’re seeing that in parts of Europe with the government reforming the way in which universities are remunerated through the teaching excellence framework. You’re seeing the increasing emergence of immersions, but the role of the Naplan-type programs in Australia. So I think that’ll become even more prevalent over time.

Patrick:

Interesting. Srdjan, any thoughts?

Srdjan:

Not that I can add, really. Efficacy is the name of the game at the moment. Users are more sophisticated, both teachers, principals, governments, universities, whoever it might be. And efficacy is becoming a real focus. The landscape is competitive, as we all know. There’s lots of different solutions for problems that might be similar. So proving that you’re delivering outcomes and driving efficacy improved engagement is incredibly important. I just see that accelerating, much like the rest of the team.

Patrick:

I’m going to ask you the age-old piece of advice question. There are going to be tens and hundreds who will watch this and look to organizations such as the three of you represent. If you were having a cup of coffee, and I was the founder, and said, “What’s your advice? What should I be focusing on? What should I be doing? What should I not focus on in a time right now, in EdTech in Australia? Please give me some mentorship?” What would you say? What did you just say from the last cup of coffee you had with a founder, either in your portfolio or you were meeting with?

Srdjan:

Why don’t I have a go? It’s so many! If I can distill it into one, it’s clarity of purpose and clarity of message. The company that people are trying to build, and the problem they’re trying to solve, and I think that is incredibly important because there is a tendency that we’ve observed that the aspirations, as we’ve said, which we ultimately like, at the right time to be a global business and solve a problem in one fell swoop, they’re great aspirations to have in the background, but ultimately can, in our views, inhibit the building and the creation of a successful organization over time. Education does have unique points. We’ve touched on selling into Australian schools, which is incredibly difficult. And so we’ve had lots of conversations with people. We are going to be in a thousand schools at the end of the year, for example, or within 12 months or 18 months, and to me that suggests maybe not understanding the problem and the challenge, and ultimately, what the company’s trying to achieve and how it’s trying to go about it.

Perhaps people who sit at the other side of the table who are founders and owners can find it unfair, but quite often you can form a very quick view about a person, a founder of business, and their proposition. So make sure you are really clear as to what you’re trying to achieve, how you’re trying to go about it, and that problem that you’re trying to solve, and have the ability to articulate that. I think that gives people a much greater chance of attracting capital. The right investors who are going to be helpful and ultimately help achieve something that’s not easy. It is incredibly difficult to bring and develop a successful product and a successful business.

Cheyne:

I’m not sure I’d be able to pick out a single factor. There’s two to three things I’d very quickly say about education tech businesses in particular. I think the three areas I’d say is being able to prove a repeatable acquisition engine is really hard in education. Education builds a lot of reference ability, and so once you get that wheel spinning, then it becomes easier. But getting that wheel spinning is really hard. I think proving unit economics for education products is really difficult, particularly early on, and lastly the age old product-market fit and product fit being clear on the use case, and solving.

Clearly it depends on the stage of the business, but I think for education companies in particular, those three, which is probably true for a lot of other sectors, which are difficult and important to prove.

Karen:

I think the single biggest factor for me is to tell young entrepreneurs to fill the room with people who are smarter than them. Quite often the entrepreneur is full of enthusiasm. They’ve taken it to a certain stage of development, but they actually don’t know what a good one looks like, and whether that’s surrounding yourself with some advisory board or you have some trusted experience, because I think that de-risks the execution piece for investors. We love enthusiasm. We don’t expect new entrepreneurs to have all the answers. So I think understanding that you being coachable, and you surrounding yourself with people who have other skill sets, and perhaps stepping away from a product focus, and understanding you’re going to need a terrific sales person, you’re going to need a terrific marketing person, and that’s been one of the biggest challenges for us, that young entrepreneurs try to because they’ve bootstrapped it, and they’ve done it all. Sometimes making that leap to the next stage of letting go of some of that and hiring in the expertise to drive the next stage of their business is a difficult thing. Being coachable and surrounding yourself with other good people.

Patrick:

Awesome. Thank you so much! On behalf of everyone, thank you so much Karen, Cheyne, and Srdjan. Awesome insights and wonderful contributions.