Contributors: Michael Staton, Founder/Chief Evangelist of Inigral & Mick Hewitt, Co-Founder/CEO of Masteryconnect

It’s been an interesting year in edtech with a lot of new investment and capital flowing into the market. Recent articles in EdWeek and the Chronicle of Higher Education speak of the recent movement of money and heightened interest in education technology.  Both Inigral and MasteryConnect are examples of companies that have raised capital from seasoned EdTech investors as well as investors that are new to thinking about the education space.  After much time spent raising money in the edtech market, we put our heads together and came up with the top 5 things we think entrepreneurs must know to get started raising money in today’s environment.

“Great entrepreneurs are like great surfers.  In order to be the best they can be, they need a really big wave.” – Mike Moritz, Sequoia Capital

1) You’re not growing a business, you’re creating a scalable business model.  Many entrepreneurs just go out and try to get customers and bring in revenue.  However, because the investment community, and even the customer base can be skeptical of new market entrants in the education sector, it’s more important to focus on business metrics that demonstrate a scalable business model.  Some of these include: measuring demand, determining price, understanding the customer, understanding the market, and pinpointing cost of goods sold.  These metrics will illustrate whether or not your business can “scale” to an emerging or existing market. It’s also important to know what scaling means to you and the investor.  In K12 for example, student population is just over 50 million in the United States.  It’s important to be mindful of your total addressable market including how your product reaches global markets as well as if your product has reach into parental purchasing power.

2) Find investors that “get education” and buy into your vision of the future.  Educate and form long-term friendships with those who almost do.  Don’t wait for those who don’t see it, even if you have a good meeting. Investors spend a lot of time thinking about markets, where they’re going and where they are not.  Each of them likes to think they have a coherent vision for the future.  If yours maps to theirs, it’s likely they’ll entertain investing.  If it doesn’t, there’s pretty much no way they will.  As an education entrepreneur, it’s important to find an investor that sees the world the same way you do.

Since education may be seen as complex or foreign, this may involve you helping to shape the vision of those who almost see the world the way you do, or enjoy thinking about the world from your angle.  You will likely have to educate (ironically) investors about education and avoid “eduspeak.”  MasteryConnect, for instance, allows teachers to share and use “Common Formative Assessments” in the classroom.  While that term means a lot to people familiar with the K12 environment, it doesn’t mean anything to those outside of it, so investors will have to be spoken to in layman’s terms.

While you are seeking out those who align with your vision, build positive relationships with those who like you and want to support you by focusing on communication on progress that allows them to “root” for you.  And please understand that good meetings do not necessarily lead to checks in the bank; you will likely meet with dozens of investors who all tell you how wonderful you are before anyone calls you back with a genuine interest in investing.  For more about this, read the Venture Hacks guide.

3) Assemble a whole team: include people who understand the problem, the customer, and can design and build a solution.  Don’t forget to bring in team members who can actually market it.  Everyone got some kind of education.  As a result, lot’s of people think they can imagine a better way to do it.  However, naive claims to revolutionize the way education is delivered will likely fall on deaf ears (unless you can prove it through traction.)  Dave McClure once famously said a good founding team will have three roles: “designer, developer, and hustler.”  In education, you also need market expert, problem/domain expert (someone who has probably taught before or been in an educators shoes), and someone who can crack the revenue code.  Although it might be possible, it’s not likely that this comes from a team with just a “hustler.”

4) A good product is good, but solving the distribution problem is the key.  Education has a bad rap – people think it’s a hard industry to grow in.  Education has an intact bureaucratic system that doesn’t quickly adopt new ways of doing things.  Decentralized decision making is the norm, and where centralized decision making does happen it can become highly political.  This has led to a consumer and teacher first approach to distribution within many of the new companies tackling education.

Think through breaking down barriers of distribution with new models like freemium and direct reach to educators or consumers.  Exciting new ecosystems are being developed right now that are on the cusp of breaking down more distribution barriers with student data moving to the cloud.  These new ecosystems will provide schools and districts more freedom in stepping outside of student information systems and purchasing “best of breed” applications for things they’ve only dreamed of doing in the past.  The Shared Learning Collaborative and other “ecosystems” where student data is accessible to start-ups are great examples to share with investors on how the market and distribution channels are changing.

5) Find the weakest link in the fence around monetization.  While Education is a $1.4 Trillion dollar a year market, finding easy paths to revenue can be tough.  There are many ways to make money, but nearly all of them come with their own challenges.  While many people assume that teachers are willing to pay up to five dollars a month for something, teachers have limited discretionary money and most of that is already put to use.  Getting schools, districts, colleges, universities, or systems to pay for things can be notoriously hard, even if there’s a lot of evidence of wasteful spending in other directions.  Dealing with direct sales can be a big business challenge and frustration.  Typical K-12 companies have a “boots on the ground” approach to sales with the goal of having a sales person in every state.  Often, these are experienced people from K-12 administration that have pre-existing loyalty networks.  However, new approaches look to change this cost-intensive model.  Helicopter parents from well-to-do households can be notoriously demanding, even if they have money in their pockets, and children do not make financial decisions regarding their education.  Advertising can be a “no-no” if done wrong.

All this to say, spending time on finding the weakest link in this fence for your business, and creating win-win opportunities within your revenue model, will be worth the investment and energy.  You should spend time on this up front, before you seek capital or scale to customers, as revenue models that assume people will just be willing to pay or accept sponsors will likely need a more creative approach than usual.

About the author’s companies: MasteryConnect closed a $1.1mm seed round with NewSchools Venture Fund, Learn Capital, and ImagineK12 in December 2011.  Inigral has raised over $7 million through three rounds from Founders Fund, Retro Ventures, and the Bill & Melinda Gates Foundation.