Money is the one thing that unites investors. But for Kapor Capital, reaping financial returns is not the only thing matters.
Created in 2009 by the entrepreneurs-turned-philanthropists Mitch Kapor and Freada Kapor Klein, Kapor Capital holds “impact investing” as a core part of its philosophy—and not just a buzzword. For them, investing isn’t just about helping people build successful business; rather, they believe in making that opportunity accessible to everyone. In 2015, they pledged to invest $40 million over the next three years to spur diversity in tech entrepreneurship.
“Making tech more inclusive is about more than just accessing untapped talent; it is about rethinking the kind of products that America makes,” Kapor said when he announced the pledge. Last January, Kapor Capital unveiled its “Founders Commitment,” which aims to incentivize startups to “bake in diversity and inclusion since day one.”
Companies that sign the commitment agree to establish and meet diversity benchmarks across its funding stage, employee size, customer base, and core business; to invest in tools and training programs to mitigate bias in recruiting; to organize volunteer opportunities for employees to engage with underrepresented communities; and to participate in diversity and inclusion events.
So far, 73 of Kapor’s 163 portfolio companies—and all investments since January—have signed the pledge.
Partner Brian Dixon joined the team in 2011 as an intern, and came back after finishing an MBA program to help grow the fund. He spoke with EdSurge about what Kapor looks for in edtech entrepreneurs—and the warning signs that will nix a deal. This interview is an extended and edited version of a Q&A that was first published on Chapter 2 of EdSurge’s State of Edtech report.
What’s the theses behind the fund? And how much do you typically invest?
At Kapor Capital, we invest in seed stage impact companies. Everybody has a different meaning of impact, so here’s ours: it comes down to core businesses that close gaps of access or opportunity and are solid, venture-scale businesses. Sometimes there’s a misconception that if you’re doing impact, you’re not focused on returns. We believe that you can do both.
One of the things we look for in entrepreneurs is the lived experience: Why are they creating the product? Is there something personal to it? That’s panned out well for us because we attract entrepreneurs who start a company for a mission.
We do about 20 of these investments per year, our average investment size is anywhere from $100K to $250K. A large percent of those historically have been in edtech. In 2015, seven out of 17 of our investments were edtech-related.
How many companies overall do you have in your portfolio now? Do you do follow-on investments?
We have more than 130 companies. These [deals] are all seed stage, but we also do follow-on investments. We don’t lead Series A rounds,, but we like to get involved. If we do a check of $250K for the seed, we might do a follow-on check of maybe between $100K to $250K. But not the $1 million or $3 million check.
How much is Kapor Capital investing?
But we do have a $40 million pledge to build out a diverse and inclusive entrepreneur pipeline, $25 million of that is focused on Kapor Capital. We are investing $8.3 million each year over three years—2015, 16 and 17.
What’s different about investing in edtech than other areas?
What excites us about edtech comes down to educational outcomes. Education is core to anyone’s development and we want to see students and teachers have a level playing field to learn….Edtech is not necessarily the answer but a part of the answer. Our thesis is that there’s no silver bullet. It’s still going to require great teachers in the classroom and edtech allows those teachers to potentially scale what they’re doing. What’s different is this that isn’t an experiment—these are children’s lives and we understand the importance of getting a solid education.
What’s changed about investing in edtech over the last five years? What lessons would you have wanted to pass along to yourself in 2011?
Coming on in 2011, the boom had already started and it seemed like every week you saw more and more edtech companies. What I would have said back then was: “Make sure that you’re actually building real businesses.” It’s great that there’s more activity in education and….there’s a chance that we can actually move some of these numbers of failing schools to not-so-failing schools and onto being great schools.
But there’s also a piece of investing that comes down to: Is this a sustainable business? Business models are important. When you think about education, you have the student, the teacher, the school, and then the parent. In most cases, you have to charge one. The question is, who pays for it and how do you build those businesses? These are hard problems to solve.
What are you looking for when you evaluate a proposal?
Last year we got over 2,500 pages [worth of proposals]. We did 17 [investments]. There’s a lot that you use to filter out, but it’s hard.
The first thing I look at is the team. Early on, you have to have the full team, meaning somebody has to have the product vision, somebody has to actually build it (and that might be the same person), and then another to figure out: How do you get people onboard?
The second thing I think about is the product. What is it and who finds value from it? We like to try out the product and see what’s there, see what problem it actually solves. Especially in edtech, going back to the fundamental premise of what we’re doing, [we want to know]: How does this actually change education outcomes? And does it make the [achievement] gap larger or does it close that gap? We’re looking for tools that add scale and close gaps.
I think the third, especially in this day and age, is traction. Maybe five or even ten years ago, you could raise some money on “We’ve got a team and we’ve got a closed beta.” I think nowadays you have to have traction as well. We want to talk to the customers, we want to talk to teachers using it who say it’s so great, and really ask: How is this a game changer? That traction piece in the last five years has been so important for raising money.
What “nixes” a deal for you?
Number one thing is no impact. We always use this example of a tutoring platform. You are bringing tutoring from in-person to online. Let’s say in person it costs $100 per hour, online it’s $30/hour. Great, there’s a cost savings of $70. But we also know that there are many students out there who can’t afford $30 an hour. Those students are left out. If we see a company where that’s the type of structure they have set up, it’s probably not a good fit for us.
Let’s talk a little bit about the Founders' Commitment. How does it shape your decisions, and what role do you want to see it play in the industry?
We’re excited and proud to be really the first firm to come out with a Founders’ Commitment. If you look at the tech industry...it does not even come close to looking like America [in terms of the percentage of employees who are minorities or females]. So the premise was if you could bake in diversity and inclusion [from] day one, when startups raise their seed round or even hopefully before that, that these companies would look totally different at the point where they’re raising a Series C, a Series D, or even going public.
That was why we created the Founder’s Commitment. When we launched in January [of 2016], it was focused on the new investments for 2016, but we opened it up for portfolio companies pretty much in the whole portfolio. Seventy-three companies in the existing portfolio that didn’t have to do this opted to sign in because they wanted to build a workplace that was just inclusive for everybody.
What happens if someone doesn’t live up to the Founders’ Commitment?
It’s not like we can take our investment back. That’s not the goal and we have no intention to do that. Startups are hard and you hear this all the time. There are going to be companies that exceed their goals and there are companies that are going to come short. But the important part is to at least have goals.
The first part is setting goals and putting something on paper that we can measure against. This is not only for diversity. This could mean just creating a workplace where everybody feels welcome. That’s really important. The second is investing in tools to mitigate bias. This might be looking at your hiring processes. There are many ways that companies can actually invest in their tools and look at what they’re doing.
The third is volunteering. We’re big on providing opportunities. If you’re an edtech company, working with low-income school districts, we ask: When was the last time everybody in the office has actually gone to a low-income school to see the technology being used?
What are the benchmark of success you are looking for?
The typical venture model says that between five to seven years something will happen, hopefully an exit of some sort: an M&A or an IPO. Unfortunately, as startups go, a lot of times that will mean that the company might go out of business. It’s a high failure rate with startups.
How do we know [a failure is going to happen]? There are signs along the way. One of the first signs that you’ll see is, as you invest in a seed stage company, do they actually go to raise Series A? That’s typically a good sign. Are they properly managing their burn? Do they have a steady plan and go out and execute?
We also measure social impact. We’re asking questions about “How do you measure impact and where did you come out?” Now we’ve added the diversity numbers so companies in our portfolio report out on those goals.
Do you have a model that anticipates some rate of failure for your companies?
At the seed stage, one-third of your investments will probably be written of. In general, we’re looking for a 10x type of return and more. So, if you look at the Ubers or larger companies in the portfolio, [they do] way more than 10x, but the model is that some companies are going to fail.
Is the education marketplace a healthy ecosystem?
Last year, about 40% of our investment in Kapor Capital were in edtech. We’re believers in edtech. There is a lot of additional capital and a lot of investors who might not be an edtech investor, but are looking at it from a new space. It is great for entrepreneurs, but also a risk because [investors from other areas] might not be as familiar with the space.
What do you think about traditional venture capitalists (such as Kleiner Perkins) that have recently invested in education companies?
What they care about is: Is it a real market? Are there real market opportunities here? When you speak to any edtech investor, they’ll tell you that there’s real businesses being made in edtech and that business models continue to evolve. Ten or 20 years ago, you would have a sales force going out to sell to schools, [but] this been replaced with this Dropbox-esque model where you give it away for free and then have a freemium model. The misconception from other investors or non-edtech investors is that it’s a small market, that there are no “wins” upon it and it’s just an overlooked market.
Listen to the full interview with Brian Dixon.
