Accelerator Diaries: EduGrowth week 3 – Sustainability vs Growth

By April 22, 2017Uncategorized

Every business starts with an idea. A vision for the future, usually built around a better way of doing things with a product you’ve created at the centre. The experts will tell you that the greatest opportunities involve solving problems that cause the greatest pain. If you can identify a clear problem for a group of people and solve it then surely they would pay for a solution?

That all makes perfect sense in your head but the reality can be vastly different. As a startup founder, it can be hard to ask for money. Especially when your product is new to the market and you’d be happy just to have people using it. Asking for people to pay can feel a little awkward, a little ‘salesy’ and a little greedy even. But, how can you know if you really have a proper business opportunity unless you prove people are willing to part with their hard earned money?
 
For Leo and I, we founded Prevyou with the aim of helping students find meaningful work experience. This is a problem that we cared deeply about solving because we had lived through it ourselves.
 
Now that we’ve left our jobs and taken on investment we have another very important factor to consider – commercialising the idea. Who is going to pay for our service and how? Being able to answer this question with confidence is essential for the survival of our venture. The unfortunate truth is that, right now, we can’t.
 
This week I decided to dive into this topic as it’s such a critical issue for most early-stage-businesses. You either figure it out or your company dies, it’s a pretty dire proposition. However, as we search to find an answer for this question it feels like we are moving away from the altruistic service that we had hoped our venture would become.
 
As part of EduGrowth we’re constantly being asked this question. This week we were really put under the microscope about this issue and it led to some sobering realisations but also an important breakthrough in our plans for a product…
 
Enjoy!

What we learned

We all know that we live in a capitalist society, those are the rules that we operate under. Obviously, any business needs money to survive and there are three main ways that money can come in:
  1. Customers: the people who use your service pay for it. This is the best type of money. It comes with very few strings attached; you simply exchange a good or service for money and everyone is happy.
  2. Investors: people/ organisations give you money in exchange for an equity stake in your venture. They invest on the belief that the future value of the business will be enough to pay their investment back and then some. For early stage startups, it is still very difficult to get a bank loan (especially if you’re a 20 something and doesn’t own a house). This funding comes with strings attached, there is an expectation that you’ll pay it back and then some.
  3. Government: is certainly the hardest money to get and it comes with the most strings. If anyone’s looked at the forms for the Government grants in Australia, you’ll know just how complex it can be. The R&D rebate tax rebate offers is a no-brainer for any Australian Tech startup, but still requires the assistance of a savvy accountant. Aside from that, the options are pretty few and far between.
We’ve taken two small rounds of funding from investors as seed capital. The seed stage of fundraising is usually used to prove the concept. We didn’t have a great deal of traction before we took this money, but we painted a big picture for the future.
 
The expectation is to prove that we have a sustainable business model before we can confidently expect more investment. This is essentially the goal of this accelerator program, prove the concept has some legs and then execute and grow – sounds easy enough right?

Use now and pay later is a strategy fraught with danger

Up until now, this has been our strategy. Build a large and loyal user base for our service and then figure the best way to monetise. The clear problem with this approach is that it makes it hard to measure the real progress being made.
 
Screenshot of Prevyou courses
Let’s say for example if we had 50,000 users on our service, who weren’t paying anything…. yet. That sounds pretty impressive, right? We could go to an investor with the plan of charging each of our users $10 per month, which would equate to a $6 million a year revenue.
 
The obvious problem with this logic is how do you really know the value of a service until you actually ask someone to pay something for it? In that example perhaps 50% of users are happy to part with $10 a month or perhaps 0% are, we simply wouldn’t know.
 
The key risk with this model is building something that has no commercial value. It still may have great social value, but in a business context it all comes down to dollars and cents. Take Wikipedia for instance, it’s a not-for-profit. They made the service free from day 1 and it still relies on donations to stay afloat. It’s hard to argue with the value that it offers as a service, but it does not have a business model behind it. Wikipedia can get by with donations because it has such a huge user base, but very few ventures have the same luxury.

“Sustainable businesses are built by sustainable people”

This was the advice given to us by a mentor in our previous accelerator. He was making the point that as founders in an early stage business, everything depends on the work that we are able to produce.
 
Leo and I are comfortable living frugally and we’re both ok with the fact that we gave up well-paid jobs to start this venture. That being said, living off tuna and rice and sharing a small one-bedroom apartment (with a foldout couch), isn’t something that we’re planning on doing forever!
 
For our own personal survival, which is tied directly to the survival of Prevyou we need to get to a point of sustainability ASAP. The trade-off between helping people and commercialising your idea can be summarised like this:

‘How many people will you be able to help if you run out of money?’

This statement defines the balancing act of creating real value and being paid for doing so….

What’s changed for us

 
The sobering realisation that’s come from this feedback is we need to work on proving the business model before we commit to building anything. This is a hard pill for us to swallow because we enjoy building things. We enjoy creating products and getting them into the hands of our users as soon as possible.
 
What we need to avoid is build the wrong products. The ones that we believe to have a revenue stream behind them, but actually don’t.

Validating the business model

To implement this is a pragmatic way there are a couple of approaches that have been suggested to us:
  1. Upfront commitment: we have been playing with this approach a little already. Essentially you present a price point to customers and test if they will pay before you go ahead and build the product. This will allow us to validate if a market exists before we need to commit to building.
  2. A pilot with preconditions: another option is to run a free pilot program with some set prearranged conditions. This would be an option that we would explore with our University partners, who would like to see some results before they pay. Essential we would agree on some terms at the start to measure our performance. If we meet those goals then they would agree to pay for the service, if not then it’s tough for us!

Clarity on our product

After weeks of rigorous testing and exploring different market we are finally reaching a point of clarity on our service. Some may argue that there hasn’t been enough time put into the tests to prove a reliable result, which I wouldn’t argue with. The fact is that none of this can be defined as an exact science. The conversations we’ve had with potential customers and key stakeholders have also shaped our decision.
 
One test, which has been running in the background is a landing page for a product called the Digital Mentor. We’ve had this page live for almost 2 weeks now and despite no marketing efforts, it’s received more than 15 signups at a conversion rate of approximately 40% (if you compare with the results of some of our other tests is pretty remarkable).
 
This result is an indication that there might be demand for a service that adds some structure to work experience programs.
In our conversations with hundreds of Employers, this was reinforced. Employers said that they would like to work with students if the process for doing so was pain-free and the results for their business are meaningful.
 
Delivering this solution would result in a whole new market of work experience opportunities. We know that practical experience is the most direct way that we can close the skills gap. It offers a chance to build both technical and soft skills, whilst ensuring students remain engaged. Theoretically, this solution ticks all the boxes. 
Most importantly, this model has the most clearly defined value proposition for our users – gain meaningful, real-world experience whilst building practical skills. With the focus on proving our revenue model as soon as we possibly can, we believe this service offers us the greatest chance of finding our first group of paying customers.
There are also some existing businesses that have done some work in proving there is a market for this service:
  • QLC: is a platform that connects students and startups for projects based work;
  • Paper Planes Projects: is a course that offers students the chance to work on real-life business projects throughout.

Screenshot of QLC website

Both these services have gained some promising initial traction. Usually, I have tried to steer our ideas away from existing competition, in fear of entering an already crowded market. However, Ben was quick to remind us that when it’s a new product/ service, competition isn’t necessarily a bad thing. It means that the early entrants have done a lot of the hard work for us in educating the market, which leaves the door open for us to move quickly and improve on what they’re offering.

The plan for next week

This service is a marketplace, in the sense that we’ll be matching employers with students. This means that we’ll need to balance out both sides of the market.

Supply side first

As with most marketplaces, the supply side is where we will be starting. That means we will need to register a few Employers before we can start marketing to students. If we market to students before that, it’ll be a complete waste of time – as there will be nothing for them to purchase on our website.

Create an outline – don’t build.

To ensure we’ve actually got something to talk to the Employers about we need to design a basic curriculum. The idea would be to have a list of projects that they could choose from, that relate to a specific outcome. This way that Employers will have some ability to customise their project, but not enough that it would move away from the learning outcomes.
 
Riley has been very keen to point out that we shouldn’t spend too much time building this yet. Until we actually have some conversations with Employers, anything we build is just our theory of what they want and could prove useless.

Update our mentors

Now that we have some greater clarity on our product, it’s time to touch base with our mentors again to hear their feedback. It’s been a few weeks since we first met so it’s a good time to get in contact. Our plan is to send an email update to all our mentors and send personal messages to the ones we’d like to speak to one-on-one.
 
Screenshot of email update for mentors
Reflecting on the first three weeks it has certainly been a steep learning curve. It’s hard to keep your sense of perspective when things are changing all around you so fast.
Leo and I also know that it’s important to take the necessary time away from work to refresh our minds. It’s easy to fall into a habit of grinding away endlessly, but if you don’t take the time to enjoy the journey – what’s the point of it all
(Here’s a shot of Leo heading down for a late afternoon swim at Coogee Beach)
 Leo walking down for a swim at coogee