What LearnCapital Looks For in Companies | Michael Staton

So what we look for. That was kind of the first set of questions, right? Because there are a few ed-tech entrepreneurs, I wanted to get into investment categories, things that we invest in. So the first, AltSchool, Minerva, cloud-powered schools is what we call them. These are new types of schools that are building their own software in the cloud. That help them scale and help them achieve lower costs at scale. Number 2 is fully engaged learning, so mechanisms to motivate and engage learners and make sure that they're learning what people hope they're learning. Unbundling, so we look for entrepreneurs that are focused on very, very small pieces of the pie, can do it extremely well, and take that to scale. Employability, and then essentially data feedback dashboards. We call it the Dataplex. There's lots of different versions of it. This is a spectrum of unbundling. Content and skills, signals and profession, software for scaling, direct instruction. We look for transformative companies. We want a company that has at least a 10x improvement on whatever the status quo is. So for Coursera, you can get a specialization for $300 to $500. If you want a college major, that will cost you way more than 10 times that. Bridge International Academies is a rapidly scaling school in East Africa, and now India and Nigeria. And teacher absenteeism has improved by over 100x, Or teacher presence in the classroom. Teacher absenteeism has been reduced. General Assembly has 2 to 3 month programs where you can increase your income potential by $30,000 to $50,000. Again, similar program would be 10 times the length of, in a traditional professional program. We look for breakthrough models. Companies that are doing things that are outside the realm of regular expectations. It's almost like you wouldn't believe it could be done until they do it. We look for exponential organizations. Right. Companies that can grow exponentially. Have you guys, is that required reading for you guys? Exponential organizations or scale up or growth hacking or any of these? Growth hacking. OK. Cool. There's a big difference between companies that can grow linearly versus compound versus exponential growth. I have a blog post on that if you want to read more. What's your blog? It's called On Entrepreneurship. I use Quora. Yeah. So, we, and we also look for value innovations through Blue Ocean Strategy. So, this is a, have you guys read Blue Ocean Strategy? Yeah. Okay. So, basically, we look for companies with unique positioning. that are able to differentiate and essentially create their own market, or uncover, re-segment the market. We have a scorecard, which we never actually use, but we articulated once to kind of be aligned on what we look for in companies. So, this is the hypothetical scorecard that we never use, but at least we can go through what we look for. In team dynamics, we look for founder bond, origin story, Whole team. This is— whole team means the team has the skill sets that they need to build the company. Entrepreneurial credibility, market credibility, and something called cognitive flexibility, which is the sweet spot in between being so stubborn and persistent that you're gonna just burn out, run through cash, and hit a wall, versus being so agile and responsive that you pivot your way out of the cool opportunity that you were doing, right? And so we look for entrepreneurs that take a lot of feedback, synthesize it, and make their own decisions. Needy entrepreneurs are tough when you're an investor. And then entrepreneurs that don't take feedback at all also seem a little tough to work with. Yeah? Market attractors. So total market size, achievable market beachhead. Do you guys understand the concept of a market beachhead? Yeah. So it's like the entry point. What is the first set of customers you're gonna go after? Entrepreneurs often come in and say, this is a $10 billion market, but they don't actually have an achievable beachhead that's laid out in front of them. Early market leadership, large outcome credibility or exit credibility, unique positioning, customer need and pain. the scale of customer need and pain. Product process and iteration speed. Product differentiation. Product maturity. Product-driven growth. Usability or simplicity. And scalability. Success momentum. Customer validation and low churn. Ease of growth. Compound or exponential growth. Trends align. Ease of earned media. Unit economics and customer value. And then revenue traction. What is low churn? Low churn. That's when you keep the customers that you get. So if 100,000 users sign up, and then the next month only 3,000 are using it, that's relatively high churn. Or if you make a sale and they have to renew every year, and your renewal rate is, let's say, under 80%, that's tough too. Company culture. Build a talent magnet. Talent magnets are when people leave their highly paid job that is totally cushy at Google and come join your startup for half the pay, basically. Scaling discipline and ability to prioritize. Outsized productivity. Data-driven execution. Motivating work environment and lean tendencies. OK. Plan. Achievable milestones, appropriately staffed, use of proceeds, numbers are validated, well-capitalized. And there's a state called default alive. Did you read the Paul Graham article, Default Alive versus Default Dead? Yeah. Basically, every company that comes in and pitches you has a plan where if they are successful, they will die because they run out of cash. Right? And so default alive is essentially, The plan that you are trying to achieve means that you will not die and you will control your own destiny. You can think of it as getting to break even, though it's often a mix of either getting to break even or it's so easy to achieve, so easy, right? It's so believable that you're gonna achieve the milestones that you need to achieve to unlock your next round of funding that we're in. These are the statements that That investors love, right? And everything else you say is, frankly, dilutive to these phrases. We have indisputable traction towards a compelling vision in a large and growing market. We can't keep up with demand. And we print money, right? So, I use the phrase money printer. It's basically like, if we invest $1 in you, you're gonna make 3, 4, 5, 6, 7, 8, right? There's also been a lot of blog posts recently in the entrepreneurial sphere where CAC over LTV has to be greater than 3. We looked at a company 2 weeks ago, CAC over LTV is 12. And so, some companies just unfairly make money. So, we look for those. What is CAC over LTV? Cost of customer acquisition. Cost of acquiring a customer over lifetime value of a customer. Or LTV over CAC is greater than 3. Sorry. LTV over CAC, rather than the other way around. So, when we first meet companies, they're often in this phase, which I call the founder rainmaking phase. Anybody here right now? The founder rainmaking phase? No? Are any of you able to just go out and get somebody to pay you $20,000 without, without a real product, or no? Some of you, you are? Founder rainmaking means that the founder can just go around and book revenue, right? Or the founder can release a new product feature and it just grows like lightning, right? It basically means the founder is doing all the work. Which, again, I said is the necessary first phase of, of getting a company off the ground. But then you have to have something that's repeatable, trainable, scalable, and then unlocks either compound or exponential growth. You have to start with founder rainmaking, but we find a lot of companies come in and say, hey, please invest $2 million in us. I'm uniquely able to go out and close deals. And we're always like, okay, so you can close deals, right? But, like, can other people close deals? Can you actually train someone else to do it? Can you repeat this over and over in a predictable manner? Do you know what your pipeline looks like? So, anyway, instead of founders that are trying to build companies and going out and rainmaking, We're looking for validation and traction. Right. So, customers, customer delight. Every single person that comes in and pitches us says, customers love us. How do you dissect that? Right. We look at probably 300 or 400 companies a year. Right. How do we dissect that? How do we figure that out? So, we want numerical love more than anecdotal love. And if we had the workbook now, we would Figure out, like, where are you telling people customers love you, but you don't actually have any numbers to back it up? And then how can you get numbers to back that up? Product success. So, anecdotal engagement. People are using it. What, what does that mean? Right. People keep coming back. People send us feedback that they love it. What does that mean? You have to define product key performance indicators, and you have to track them. Revenue potential. We're gonna make a lot of money. I've talked to lots of people. I have 5 conversations going on right now. We hear that all the time. We want funnel metrics and pipeline value. There's also something called pipeline liquidity, which is how quickly things move through your pipeline. Then operational excellence. We're great. We're the best. I've got 2 people on my team. They're the fastest, most wonderful people ever. What does that mean? We want operational metrics and KPIs. So moving from anecdotal to quantitative is extremely important in this act of company building. Great.