[00:00:00] Debbie Goodman: Welcome to on work and revolution, where we talk about what’s shaking up in the world of work and edtech. I’m your host, Debbie Goodman. I’m CEO of Jack Hammer Global, a global group of executive search and leadership coaching companies. I’m also an advisor to venture backed edtech founders. And for those of you in edtech who are hiring, we have launched a fractional leaders offering.

I’ll put the link in the show notes. My main mission with all of my work is to help companies and leaders to create amazing workplaces where people and ideas flourish. And so today I’m really glad to have Steve Kupfer as my guest. A bit of an intro here. Steve is a partner at Reach Capital, which is an early stage edtech venture investment firm with a really impressive portfolio of high growth companies.

He has a long history and track record of investing in the sector. So he’s been a seed investor And he’s been an operating partner in the knowledge and learning team at the Vistria group, which is a private equity firm but Steve is pretty unique actually, in that he’s also worked on the ground, rolling out large software implementations in the sector, training hundreds of school superintendents in areas like board governance and collective bargaining and political mapping and media relations. Goodness, that’s a, that must’ve been tricky. So let’s say we have a proper expert on the pod today. And today we’re going to be asking Steve the million dollar questions about what types of companies and founders are most likely to get funded in the current markets. So if you’re a founder, listen up, this is for you. Steve, a very big welcome.

[00:01:43] Steve Kupfer: Thank you for having me here. Great to be here. 

[00:01:45] Debbie Goodman: Okay. So let’s get straight into it. You’ve been around the block, shall we say. You’ve been investing in the sector a long time. And so in your opinion, with the markets having adjusted pretty significantly. Is edtech as a sector, still an area where venture investors can achieve the hyper growth that they both hope for and are intended for?

[00:02:12] Steve Kupfer: Debbie, no question. It’s as much turbulence as we’ve felt over the last couple of years. It is pretty remarkable just how early we are in the transformation of education. Remember, this is second largest TAM globally after healthcare, about six and a half trillion. And less than 4 or 5 percent of that is digital. So not only is it still a good time to find venture returns here, like in our opinion, this is an ideal time to be entering the market  not just domestically, but also globally, as we see historic investments in infrastructure  my colleague Esteban wrote a great blog last summer about how every company is going to become an edtech company given the scarcity of labour, 50 percent of employees needing to get upskilled. So of course, as a specialized fund in the education space, we’re biased, but you know, we have a tremendous amount of confidence in the amount of venture opportunity out there.

[00:03:04] Debbie Goodman: Okay. Well, I just love hearing that. I’m pretty invested in the sector myself, so great. That’s a vote of overall umbrella confidence around the sector.

Great. All right. Thanks, Steve. We’re done here. Okay. All right. So considering the market changes nevertheless, because there have been market changes, we have to just agree that things have shifted and tightened up, has Reach changed its thesis or investment criteria in any meaningful way? I mean, all the kinds of companies and founders that would have been invested in say two years ago, even a year ago, are they still worth investing in? 

[00:03:42] Steve Kupfer: Yeah, so I guess if we parse those two out, if we look at themes, you know, I don’t, I don’t think our themes change as much during a climate like this as much as they do, maybe narrow. And so part of what we try to do is a sector specific fund to spend a ton of time with the folks that are going to be consumers of our portfolio products and services. So whether that’s HR leads, whether that’s a school principals or district superintendents. And so between the work one of my colleagues, Joe Myra does with People Matters and interviewing a lot of these corporate HR leaders, the work that we do with Reach Forward, which is kind of a group of K 12 advisors. We’re taking the themes that we have historically, you know, consistently been very interested in that we believe can use technology to drive the quality of connection between humans, which we think is just an essential part of the learning process, whether that’s early childhood or whether that’s workforce development and we’re, we’re narrowing that focus based on the priorities of these institutions at this point. 

So it’s really more a question of kind of how does that aperture change? Less so how do we change the entire  you know, theme base from which we’re working as far as qualifications for deals, I don’t think there’s any question that there’s been more of a focus on union economics, on quality of team. I think we’ve spent more time in the last 6 or 8 months, particularly  screening candidates. Going much deeper on the quality of the team around the founder, just because part of our job, you know, is a big part of our job is to get our companies from the seed stage to the next stage and with as much capital efficiency as possible.

We don’t want to get into a situation where we’re going from bridge one to bridge two, you know, that, that rarely leads to a good place. And so getting a good team around a founder to make sure that they’re making the best use and getting the greatest yield out of the capital that we deploy is enormously important.

So obviously at the earliest stages, people is a huge part of that. So I think a combination of strong, fundamental unit economics like we can see a path towards a long term sustainable business. And that doesn’t necessarily mean we won’t optimize for growth for an extended period of time. But we have to have conviction that this model fundamentally can get to a point where it can level out and not require, you know, an enormous amount of capital in the process.

[00:06:07] Debbie Goodman: Okay. I just want to go back a little bit , when you said that you actually are very interested in the quality of the team members, the leadership team surrounding the founder  and that you actually screen for that. I haven’t heard that much in, I know that that happens a lot in the private equity space, but I don’t hear of that happening much in the venture side of things and I’m always astounded as to why that doesn’t happen more, because honestly, the founder can’t do everything. And I sometimes see the downfall happening when they don’t have a great revenue leader. They haven’t got somebody who’s doing great marketing and all the growth, the growth elements of the business are just not supported well enough by great people. So how does that work with you guys?

[00:06:54] Steve Kupfer: Well, I think there’s a couple of forcing functions for it, Debbie. You know, if we look at K 12, which is a segment we spend a lot of time in, it’s a very cyclical business. And so you don’t have the luxury of 12 month sales cycles or 12 month renewal cycles. You have your windows that open and close. And if you don’t have the right team around you and you miss that window, in many cases, you’re going through another six or eight months before you can make a material change of direction and not to mention the cost of those transitions. So for us, you know, we see at the early stage.

You know, obviously that capital efficiency, it depends on the quality of the team you have around the founder. And so if we’re spending a lot of time having to learn lessons a second, third, fourth time, you know, there’s a material implication for that. Not only on the way that we underwrite the investment, but on the culture of the business.

And so I don’t think it’s ever been more important to make sure we have individuals that can lead functional areas with a lot of autonomy so the founder can focus on the things that, you know, are really paramount to long term success of that business, whether that’s expanding the market that they operate in, whether it’s cash management. It’s been a pretty substantial  derivation from, you know, the good old days of 2021, when capital was free flowing, there was a ton of hiring going on that we couldn’t really keep up with  it’s a really important part of the calculus right now.

[00:08:16] Debbie Goodman: You’re definitely speaking my language. I mean, in the sort of 2021 until early 22, I was kind of flabbergasted at the pace of things. I’ve been in recruiting a long time and this was, I’d never seen, I’d never quite seen this before. And the speed with which companies and founders were needing to make hiring decisions meant that they weren’t doing a great deal of due diligence on people. There just wasn’t the time for the rigor and mistakes were made and so much money got wasted in the wrong initiatives and the wrong people. And so, if there’s one really good thing that’s come out of this tighter cashflow situation, it’s that people are making much more prudent, I hope, hiring decisions. Because each person is so critical and, and yet if you say, well, you know, there’s plenty of people in the market. If this doesn’t work, we can always get somebody else. But the wasted time is just, that’s real dollars, investment dollars that’s just going like flush down the drain.

[00:09:14] Steve Kupfer: No question, particularly for really seasonal businesses. So we’re seeing it not only on the front end, but we’re also seeing it on the back end where we’re prioritizing much more time developing communities so we can get, you know, heads of marketing together, heads of products together  you know, to really make the best of the community and the network that we’ve established over the course of the last eight, nine years. So really across the entire continuum from hiring to support, and then even, you know, when we’ve had to go through difficulties of furloughs or when there are cuts being made, you know, we’re also trying to play the role of transitioning where there are great people that have been part of a zero to one growth path that we know have the capability to deliver in that stage and where can we find opportunities for them to be successful in other places.

So it kind of runs the entire gamut, but at the early stage, this is about people, if you don’t have the right people. It doesn’t matter how sound your thesis is, your market analysis is, it’s going to be really hard to be successful in the absence of top-grade talent.

[00:10:11] Debbie Goodman: Okay. I just want to use that as a soundbite on my website, because I couldn’t agree with you more. Okay, thanks, all right. So founders are just having a rough time of it right now, and mostly because fundraising is so challenging. I mean, whether you’re trying to do your next round or whether you’re trying to get money for the first time, and I recall you saying that, yes, it’s tough, but actually the environment has just normalized.

And that it’s actually only outlier businesses that should be getting funded in the first place, but not every business or every idea deserves to be funded. So, unpack that a little more for me.

[00:10:51] Steve Kupfer: There’s a lot of interconnected factors here. When you have zero percent interest rates for an extended period of time, obviously the incentives for capital deployment change. And so one of the reasons that we saw a lot of dollars coming into venture, particularly through the pandemic, when it changed the way we thought about work and collaboration and  a reliance on technology for a lot of things that we had never thought about before you combine that with zero percent interest rates. And obviously you’re going to see just on a risk adjusted basis, a lot more money going into higher risk asset classes as that changed naturally. If some of our LPs can take capital and put it into a money market for 5 percent or long term treasuries for a much higher yield, you know, the blended risk that they’re going to take is going to change. And so, you know, that kind of inflow-outflow from venture capital is very much, you know, interconnected. And so venture capital has always been an outliers business. It’s always been a power law business. And so for founders, sometimes, you know, we have to kind of scaffold what our return expectations are really put into context.

Can you be part of a 20 company portfolio that has aggregate enterprise value of 6, 7 billion dollars? And they look at you like, wow, that’s really, really, big. Well, that’s the reality of kind of what we turn here. And so if you further apply the power law to that and say, more than likely one or two businesses in those portfolios will, will account for that entirety of that return, it gives some perspective in the kind of business that we have to be able to back and the kind of conviction we have to have that these businesses can not only get to scale, but get to scale in a way that doesn’t sacrifice our ownership requiring so much capital. And so I think I’ve tried to create some context for founders to help them better understand that venture capital is in that business. And so I think we’ve kind of got away from that for a few years as a result of interest rates where I’m like, okay  I think I can build a 20, 30 million dollar top line business here in the next 10 years, I should be able to raise venture. Well, you know, it certainly depends on fund size. If you’re talking to a billion dollar fund, you know, for 20 billion, million dollar fund.

But I think we’re getting back to a place that’s healthy and normal for the asset class and for founders. And, you know, that doesn’t provide a lot of solace for founders that are trying to capitalize their business here. But I do think for the asset class, it’s represented a healthy adjustment.

[00:13:18] Debbie Goodman: Yeah. I think that’s just like a really good reminder is that venture was never intended for moderate growth. That’s not the match. And I’m seeing some founders now really bemoan the situation. Oh, my investors are just not interested in reinvesting, but the reality is, is that if your company trajectory doesn’t have the promise that it showed perhaps at the initial stages or the markets have changed radically, then it’s just no longer a fit.

Then it’s just a misery train for everybody, and I think the sort of the early stage founder mentality of, well, I’ve got a great idea, it solves a good problem and therefore I should get venture funding. I think that premise is really like really blown out the water now.

[00:14:02] Steve Kupfer: Yeah. And I also think the venture community has done a poor job of educating founders on exactly kind of what this asset class serves and that when LPs give us their capital, they’re asking that this is allocated for very high growth, very high risk with the understanding that there’s going to be a high failure rate, but that on a risk adjusted basis, we’re going to see very strong returns. You know, it was never intended to be, this is going to feed to your point, you know, moderate growth. Healthy cash generation, over a long period of time, this is 7 to 10 years, you know, deployment fund cycle. And we expect to see, an excess of 20, 25, 30 percent IRRs, and there are only so many businesses at this kind of scale that can align with that profile.

[00:14:51] Debbie Goodman: Yeah. I mentioned earlier that I just read today in, I think it was Pitchbook newsletter, around how few disbursements there were, distributions there were, from venture funds back to the LPs in actual cash. And I mean, at the end of the day, the money comes usually from the LP, and if they’re not going to get their return, the funds are going to dry up.

So it’s a flow, it’s a flow of money. It needs to make sense. It needs to work. And I think some founders may have lost a little bit of sight of that during the heady days of so much free cashflow, well it felt free.

[00:15:24] Steve Kupfer: We kind of lost sight of that too. I think the psychology moments where there’s just so much build and so much capital going into the ecosystem. It’s easy for not just founders, but investors and LPs, you know, who made a ton of commitments during those vintages, it’s an easy psychology to get wrapped into.

[00:15:44] Debbie Goodman: Right. Okay. So we’ve had to really adjust the psychology for every part of the ecosystem. Let’s get right onto it then. In your view, what companies and founders are most likely to get funding this year either because they’re in the right sector or because they have the right characteristics that make this a, almost like a no brainer investment. Are there any no brainer investments these days?

[00:16:11] Steve Kupfer: No, I mean, there’s never any. Our job would be much, much easier if we could find no brainer investments, consistently. I think what we’re finding ourselves doing is, is going back to the fundamentals. I think when the market gets difficult, you know, the firms that can really stand on their founding principles staying very, very close to the themes that they have to the customers that their portfolio companies serve and have a really multidimensional perspective on the problems that their companies are trying to solve, you know, there’s no substitute for that. And so I think any firm that’s trying to kind of figure out how do we just take as much risk out of  this new era that we’re in, probably has some work to do on the fundamentals that they work with. And so I think we’re spending a lot of time just again, talking to our customers, talking to our portfolio companies, better understanding what are the themes we have? What are the problems that are being solved? And then, you know, aligning the deal flow and the companies that we’re evaluating to a lot of those priorities as they’re changing. And so if we look at, if we look at K 12, just as an example, obviously break inflow of federal stimulus, that’s going to slowly go away. We have devastating teacher morale, labour shortages, student mental health and behavioural challenges are at an all-time high special ed referrals and evaluations. And service constraints, have never been tighter. And so, our job is to meet our businesses where they are and where their customers are. And then obviously have a perspective on how is this going to evolve? You know, how do we identify current pain points that we believe can amplify into large markets or, even expanding markets, whether that’s domestic or global.

And so we continue to have a ton of conviction on the same themes that we developed three, four years ago, when it was flowing into the business  with a slightly different lens that we’re going to have to look at companies that maybe satisfy a shorter list of priorities for our customers that don’t have the kind of latitude to spend, whether that’s on the L and D side with corporates or whether that’s in districts. So it’s really kind of back to that aperture analogy. It’s really more of a, we’re focusing on businesses that are meeting those needs. And so there’s a lot of big founders and big tans that, you know, we can look at and just say, this isn’t an urgent enough problem in this climate to be able to underwrite venture returns. So I would say to founders who are saying, do I have a good chance, of raising money in this climate? I think you have to have an objective perspective on how high on the priority list is this for my customer in a very difficult, if not just uncertain fiscal climate and the higher it is on that list, regardless of how high quality the solution might be for a problem that would be very real, you know, the easier it’s going to be to raise.

[00:19:08] Debbie Goodman: Right. Okay. I think that’s, you’ve just given me the nugget, which is the pain needs to be severe in terms of the problem that’s being solved. I mean, I go to a number of the sort of shark tank and pitch style sort of events in the edtech space. And I’ve listened to founders who are just so passionate about their idea and their business that’s just getting up off the ground. And I mean, I’ve been there myself, and it’s your baby, but I listened to these and I go, some of these are not really big problems. I mean, they’re nice to have. And it’s kind of devastating for me to realize listening that this is probably not going to get off the ground from a venture perspective, an idea that just doesn’t solve a problem. Painful enough problem. And there are a lot of seriously painful issues in all sectors that the edtech market serves.

So yeah, I think that’s the brutal reality of it. Could be a nice idea. It could solve some problem, but if it’s not painful enough, it’s probably not going to, you know, hit the mark from an investment point of view.

[00:20:08] Steve Kupfer: That’s right. And then I guess, Debbie, further complicating that is, you know, we work in particularly in the K 12 and the higher ed segments, really highly regulated segments, you know, they don’t have collateral control over their budgets, you know, so another lens that in difficult climates, we have to look through in order to de risk the investments that we’re looking at is how durable are the revenue sources that we’re expecting these companies to be able to unlock, you know, is this in a difficult climate and sometimes those irrational things, whether it’s teacher shortage, sometimes it’s really irrational, like  political culture wars that, you know, scrap certain budget sources because the political optics of doing so are really advantageous,  we have to be able to suss that out and get a better understanding of, even if it’s a high priority problem, if we don’t feel there are regulated budget sources behind it, it can change our perspective on our ability to underwrite it as a venture investment.

[00:21:01] Debbie Goodman: Right. Okay. So, last couple of questions.  You indicated that there was some plays from the private equity playbook that might be useful for venture firms and for those portfolio companies, you clarified for me, not hiring PE style CEOs necessarily, but other, other plays that might be appropriate at this stage for founders to consider. Can you elaborate a little on that?

[00:21:29] Steve Kupfer: Yeah. Well, I think if we step back for a second and we look at the private equity playbook, that’s predicated on leverage and taking a percentage of a multiple on EBITDA and putting debt on the business with the understanding that, you know, we can maximize returns simply by using the cash flows of the business to service debt, just that fact alone requires a different mentality as a CEO, that you’re not an enormous risk. You’re taking everything adjusted on a basis for, you know, I can’t put EBITDA at risk because we’re using it to service debt that a bank has underwritten. Obviously, venture does not have that dynamic, so venture is very much predicated on we are building, we are growing, we are finding product market fit. We are being sensitive to the longer term viability of our business model, but for the most part, like we’re just trying to delight customers and find revenue models that allow us with reasonable capability to get to our next funding round, and so I think what we’ve seen in this climate of having four year runways that suddenly are two year runways when forecasted, and then, okay, now it’s a 12 month runway, it requires a different set of skills. You know, it requires founders to collaborate with boards to really, you know, be able to take a more calculated approach to building an annual budget and parsing out each functional area in that operating budget and saying, where can I get yield? Like, what can I afford to kick down the road? What do I need to do? It forces them to prioritize in a way, that over the last, you know, two or three years of, of booming cash, they didn’t necessarily have to have.

[00:23:11] Debbie Goodman: Right.

[00:23:11] Steve Kupfer: And so private equity, it’s native to how they operate to think through on a risk adjusted basis. If we’re putting another dollar into the product function or another dollar into the customer success function, you know, what do we expect to see in terms of expanded contract value or retention rates, you know, they’re very, very calculated. And it was right thing to be around on a day-to-day basis at the expense of the, the beauty of building from the ground and working with founders that, have aspirations to reimagine entire market. I think a lot of that stuff is really applicable now, so we’re spending a lot more time with our founders thinking through, like, do we really need those extra two engineers in this budget?

[00:23:51] Steve Kupfer: How does that change our net runway you know, to have a better understanding of  cash management. You know, do we really want to go out and fundraise, in February of 2025 coming on the heels of a presidential election? Like, is that a time you are going out looking for equity? If we can avoid that, like how do we modulate the pace of the business, even at the expense of growth in some cases, which is much as we don’t like to do.

It’s in this climate, sometimes the most responsible thing to do. And so I think that’s some of the plays from private equity that haven’t historically really been relevant. In venture we’re finding, you know, with increasing, this is an important skill set for, for CEOs to have. So it’s been rewarding to see a lot of our founders build that muscle they didn’t necessarily have before and come out much more versatile and be able to say, okay, you know, I can optimize for growth, I can push, and I know how to kind of make calculated bets, but I also know when to pull back and manage my cash runway in a way that, you know, is in the best long term interest of this.

[00:24:50] Debbie Goodman: Yeah, I was, just as you’ve been talking, I was thinking, wow, that’s, really extending the range of founders, it’s asking a lot of them. And the reality is, is that when you, as a founder, if you’re getting cash from an investor, the demands are going to be extensive. Including this expanded set of skills that is going to be expected of you.

So buckle up.

[00:25:13] Steve Kupfer: Outreach is where we’re learners and we’ve got a lot of educators on this team. We have a lot of folks in education and think natively as educators and learners. And so we really probe for that on the founder side too, because in a climate like this, you have to be interested in learning those things. You can’t just opt out and say, you know what, I don’t really know how to do that. So, you know, I’m going to continue to kind of optimize for growth. That’s, that’s not an option here. So it really helps to be able to look through a lens of how much of a learner is this founder. Cause when you hit, you know, it makes a huge difference.

[00:25:51] Debbie Goodman: Yeah. Okay. Last bit here, 2024, looking down the drag of what  hopefully it won’t be a drag, but how do you think the year is going to play out? What should founders and investors be maybe most alert to or most concerned about?

[00:26:10] Steve Kupfer: I mean, I think it depends on what segment you spend a lot of time in.

I think we spend a lot of time in K 12, probably disproportionate to other areas, we’re looking a lot at, labour models in schools. We’re looking a lot at the prospects for how public policy can change in an election year, and how could our companies traverse, you know, a course where there’s a conservative Congress, of course, where there’s a more liberal Congress?

Like, what are the policy landscapes at the federal level and at the state level? And how does that impact the way that we look at companies and underwrite the future for growth, both on the upside, and on the downside. We’re also spending time obviously on generative AI. It wouldn’t be a 24 podcasts without it.

[00:26:58] Debbie Goodman: You know, we didn’t say like once this whole podcast, we’ve almost made it all the way to the end. 

[00:27:02] Steve Kupfer: No, I guess I blew it. Education is filled with workflows. it’s all everywhere you look when you walk into a school, there’s a workflow happening somewhere. And so, we are unsurprised that teachers have gravitated so quickly to the use of these tools

and we’d be remiss to really go deep on understanding exactly what problem are we solving? How durable is it? To what degree will this technology get commoditized? how important is it to just, to have distribution as an incumbent versus, creating your own distribution as startups. But when you have tools that are delighting teachers at the rate that they are and generating the kind of engagement that they are, was it that in London, last month in, in June and just watching teachers light up at the prospect of that workflow used to take me two and a half hours. And now it’s taking me two and a half minutes.

[00:27:55] Debbie Goodman: Yeah. 

[00:27:55] Steve Kupfer: You know, talk about being able to improve the quality of the human connection. Boy, if I can spend a lot more time sitting with kids, you know, instead of having to write up reports or narratives, it makes a really big difference. So, you know, of course that’s another area that we’re looking at, but ultimately in 2024, I think the story will continue. Like we have to have businesses that have strong fundamentals to them. We can’t just assume we’re going to be able to go out and raise money at a large, you know, step increase in valuation and with strong fundamentals. So again, going back to those budgets, how durable the revenue sources they have, how strong is the founder and the team they have behind them. How important is the problem they’re trying to solve? You know, those are, that’s kind of the trifecta that we’re spending the most amount of our time circling.

[00:28:41] Debbie Goodman: Well, on that note, thank you so much for your time, Steve. By the way, your dog has had a starring role in this  podcast recording as well, so  thank you. This has been really interesting and informative and for founders who are listening, hopefully some really good insights from an investor perspective on what they need to be doing right now.

So happy 2024 to you and thank you so much.

[00:29:08] Steve Kupfer: Thanks for having me, Debbie.

[00:29:10] Debbie Goodman: Bye now.