Committing to a relationship is hard. In venture capital, the first investment is the business equivalent of starting a serious relationship. Prior to investment, funds and start-ups will scrutinize each other through the due diligence process—recognizing that if due diligence is successful, they will effectively be “tying the knot” in a business context.
In recent years, a new relationship between funds and start-ups has become popular: the incubator relationship. Incubators are enterprises created with the purpose of supporting start-ups, usually through providing business or industry-specific mentorship and access to capital. Startup incubators have exploded over the last few years, growing from only a handful five years ago to an estimated 170 by 2014, according to Techcrunch. Successful incubators, such as Y-Combinator (YC), are now recognized as one of the best launch pads for new businesses, offering financial and non-financial support while reducing enterprise risk. Competition for entry can be intense (success rates are as low as 3 percent for YC), with less than a third of the acceptance rate for Harvard Business School.
While incubators are not entirely new to the social sector, they have been especially rare in the education sector. We at Pearson’s Affordable Learning Fund (PALF) believe that the incubator model applies just as well to education. Earlier this year, PALF and Village Capital partnered to launch Edupreneurs, an education-focused incubator program with a twist. Selected from over 125 applications, 14 social impact education entrepreneurs (“edupreneurs”) completed a 12-week program in India focused on building their businesses and improving their “investability”. Through workshops, they received mentorship from seasoned entrepreneurs, investors, and professionals. The twist is that the edupreneurs themselves chose which ventures would receive funding—each enterprise assessed each other on 24 criteria, with the top two ranked companies receiving up to $75,000 each.
We think that incubator programs like these can play a vital role in the education sector. Our confidence stems from a belief that the merits of an incubator relationship apply to education start-ups just as or more strongly than to new tech ventures.
1) Incubators provide funds and start-ups the opportunity to “date” before marriage.
In romantic relationships, couples date to trial the experience of marriage before further commitment. The business equivalent of dating is when a fund and a start-up work together to appreciate the start-up’s value.
Over the 12 weeks of our Edupreneurs program, we were able to witness, understand, and respect the work ethic, passion, and personality of each entrepreneur. We saw their receptivity to both our feedback and fellow entrepreneurs’ feedback. Both our fund and potential start-ups received unparalleled exposure to one another, which helped both of us determine whether to pursue a longer-term relationship. This exposure is simply not possible through traditional due diligence, even though it’s particularly important in emerging countries where evaluating an entrepreneur’s track record can be difficult.
2) Your partner is likely in the relationship for more than money.
Intellectual capital, rather than financial, is often what aspiring start-ups really need. Many education entrepreneurs have transformational ideas, but lack the business background or industry relationships to successfully operationalize their novel concepts. Similarly, many serial entrepreneurs lack full knowledge of the education domain and/or find regulation and pedagogy nuances difficult to navigate.
The actions of one entrepreneur in our program—C. Rajagopalan, founder of Magic Pathshala—are a prime example. Magic Pathshala, a mobile-based K-12 education company, entered Edupreneurs already backed by a major Indian software company. Nevertheless, over 12 weeks, Rajagopalan actively worked to revamp his business model and investment pitch with our feedback, and delivered a stirring speech at the program’s end, concluding: “Magic Pathshala would not be where it is today without [Edupreneurs].” Even though Magic Pathshala did not leave the program with guaranteed PALF funding, Rajagopalan thanked and emailed me after the program.
We designed our program to offer education-specific support without a mandated financial commitment— providing non-financial capital was a critical component of the program as we guaranteed financial support for only two companies.
3) Not committing gives you the bandwidth to “see other people”…
By leveraging the incubator model, funds have greater financial capacity to pursue more relationships. This is especially valuable in the education sector due to the diversity of capital needs. For instance, new school chains often require significant investments for building and administration costs, while education technology and service companies usually require less capital to get off the ground.
While all 14 education enterprises in Edupreneurs were different, these four companies demonstrate the diversity of our cohort:
- Experifun: An interactive science kit solutions company designed for the K-12 curriculum
- Sudiksha: A rapidly growing chain of 22 preschools that taps an overlooked labor pool of educated women with no previous experience to run franchise locations
- Callystro: A gamifed learning company mapped to a grades 1-8 curriculum founded by four education and technology professionals, each with over 15 years of experience
- SEED Schools: A chain of low-cost private schools focused on the integration of technology in the core curriculum along with teacher training support to enhance learning outcomes
Through an incubator, funds can also support start-ups outside of their investment mandate; for instance, through Edupreneurs, we engaged with high-potential education enterprises even if they weren’t large enough to receive a PALF investment and worked toward becoming a transformational catalyst for their growth. To aid “out-of-investment-scope” enterprises, PALF also actively passes deals onto our diverse network of impact investors and grant funders. Consequently, we can develop the entire education ecosystem and build relationships that can lead to future investments.
4) Even if the relationship doesn’t work out, you’ll be better off.
Though not all start-ups receive funding at the end of an incubator program, they will leave with superior business acumen, and a network of mentors and industry relationships. Even the recognition of being accepted into a business incubator is valuable. After our final Edupreneurs workshop in Bangalore, every participant also cited their intra-cohort relationships as among the most valuable outcomes from the experience.
Building a business is very difficult, and securing capital from impact investors has become increasingly competitive. The successful completion of a prestigious business incubator program could easily prove the difference between earning a call-back from an impact investing fund and receiving no response at all. It is widely publicized that 94 percent of companies that undergo YC successfully raise capital after graduation; we believe that an education-focused business incubator experience can similarly improve the odds of a successful capital raise for an edupreneur.
The incubator relationship presents significant benefits to both funds and start-ups compared to the traditional investment model—all of which apply strongly to the education sector. Following our successful experience running the Edupreneurs program, we firmly believe that incubators will drive growth and transformation in the education industry, and we encourage other education industry investors to join us in pursuing these invaluable relationships.