Freemium In Education

We’ve been investing in the education sector for a few years now. We started our exploration of online education in early 2009 with an event called Hacking Education. The takeaways from that event have informed a lot of what we’ve invested in since then.

One of the key takeaways was that learning could and should become free. Our friend Bing Gordon said this at Hacking Education:

From an economic point of view, I would say the goal… is to figure out how to get education down to a marginal cost of zero. 

We have invested with Bing in online education. Bing and his partners at KP led the most recent round in our portfolio company DuoLingo. DuoLingo is the most popular language learning mobile app in the world. And one of the reasons for that is that DuoLingo is free.

So you might ask “how can you make money giving away a learning app?” This past week DuoLingo answered that question with the commercial release of the DuoLingo Test Center.

The DuoLingo Test Center is currently free but it won’t be for long. Give it a try if you’d like to see how it works. Once the DuoLingo Test is accepted at schools and employers, the company plans to charge $20 to take its test.

There’s an established incumbent (monopoly) in this market called TOEFL. If you’ve come to the US to study, you’ve probably taken this test. It’s a lot more expensive than $20 per test and DuoLingo is out to prove it can do this testing less expensively and better.

But what this example shows is something more than how one company plans to monetize its free app. It’s a model for freemium in online eduction. Provide the education for free but charge for the certification (testing). This is a very elegant implementation of freemium as its an easy on ramp and the customers who get the most value are the ones who pay.

I am pretty sure this will become the dominant monetization model in online education. We are already seeing it emerge in other sectors. A number of the attendees at Hacking Education predicted this over five years ago. It made sense to me then and it makes even more sense to me now.

Fun Friday: How Do You Take Your Coffee?

It seems like its been a while since we’ve done a Fun Friday around here. I’m not sure why that’s the case but its time to change that.

I’m sitting here in the Soho House in Berlin drinking a nice cappuccino and thinking about all the ways one can consume coffee.

image

I have one cup of coffee a day. No more because it makes me wired. No less because I’m addicted.

Because I only allow myself one a day, I’m obsessive about making it a good one.

I prefer espresso coffee and my primary drink is a Cortado which is also called a Gibraltar. Its usually a double shot of espresso with a small bit of steamed milk. Think of it as a mini Cappuccino. I generally get it in a shot glass. My favorites are at Kava in NYC’s west village, Blue Bottle Coffee in NYC and SF, and my absolute favorite is at Intelligentsia in Venice Beach California.

I do like an iced cappuccino on a hot steamy morning like we have in NYC in the summer. My favorite iced cappuccino is from Jack’s in the west village of NYC and Amagansett NY.

I have various coffee shop lists on Foursquare. This is my favorite coffee shops in Manhattan list.

So that’s how I like my coffee. How do you like yours?

Update: Wil suggests “post a selfie of you and your morning coffee in the comments”. I think that’s a great idea!

The Pro-Rata Opportunity

Mark Suster has a good (and long as is his wont) post up on the topic of the changing structure of the VC business.

Mark focuses on something important that is probably not getting talked enough about when people talk about the VC business these days. I like this slide from his post:

suster slide

“Capturing pro-rata” is sooooo important in early stage venture. You make 20 investments in a fund. One is going to return the entire fund. Two more are going to return it again. A few more are going to have strong outcomes and return it again. The rest are noise when it comes to fund returns (but you better not treat them like noise).

Guess what? Early stage VC is a lot like poker. You want to go all in on your best hands. And if you make a seed or Series A investment, you get something called the pro-rata right. That means you get to invest an amount in every private round going forward that allows you to keep your ownership at the current level. A pro-rata right in Facebook, Twitter, Dropbox, Airbnb, Uber, ……….. is worth a lot. And early stage investors get those rights for free in the early stage rounds.

At USV, we recognized this early on but did not know what to do about it. So we let our pro-rata rights go unused in Zynga and Twitter because we did not have the funds to take those allocations. Brad agitated about it. It bugged him. I was also unhappy about it but did not want to increase our fund size so that we could take these allocations. I strongly believe in small fund sizes. It’s a core of our strategy at USV.

So we came up with The Opportunity Fund. It’s a companion fund that is designed to “capture pro-rata” as Mark puts it. We raised our first one in late 2010 and our second one earlier this year. It has been a big success. It is now so much a core of what we do that we now raise an early stage fund and an opportunity fund as a pair. You can’t invest in one without investing in the other. They have different economics for the LPs because they require different amounts of work on our part and because we don’t want to commit to put the entire Opportunity Fund to work (we did not put the entire initial Opportunity Fund to work).

When a company hits escape velocity, the investors in the inside are the first (after the entrepreneurs) to realize it. And if you’ve watched hundreds of rockets go up in your career and dozens hit escape velocity, you start to be able to smell escape velocity coming. That means that “capturing pro-rata” is an opportunistic thing. Seeing something before others see it is one of the few legal and sustainable ways to make money that I know of in the investment business. And so having a vehicle to do this aggressively is a huge weapon in the hands of an experienced VC firm.

Yes it is true, as Mark points out in his post, that public market investors are also coming into the private markets in a big way to capture all of this valuation expansion that used to happen in the public markets. But they do not have the one thing that we have – the pro-rata right. And so using it becomes even more important.

I am glad that Mark took the time to write his post on this topic. It’s a big change that has happened fairly quickly in the early stage venture capital business (all post financial crisis) and the ramifications of it are important to entrepreneurs, VCs, public market investors, and LPs. I’m very pleased that USV has been early to this theme and a thought leader in it.

Independent Directors

Boards are important. They might not do the day to day work of company building but they set the tone at the top. The group that the CEO reports to has a big impact on the CEO’s mindset which trickles down.

If you raise capital for your business you are likely to get investors on your board. If you choose well you might get some good board members that way. But you might also get indifferent or worse.

The biggest piece of advice I give to entrepreneurs on the topic of boards is to get some independent directors on their board. Ideally these would be peer CEOs who have a lot of experience building and managing companies.

Recruiting board members takes time. Most entrepreneurs prefer to recruit people who work for them and can impact the day to day effectiveness of their organizations. And so they prioritize that.

What they miss by putting off the work of adding independent directors is that they should be also investing their time in improving the effectiveness of the group they work for.

If your board is you and your cofounder(s) and some investors you have a suboptimal board structure. Do yourself a big favor and recruit a few strong and experienced independents. It is well worth the time and energy you will spend on it.

Flurry

Yesterday our portfolio company Flurry announced it was being acquired by Yahoo!

I thought I’d provide a bit of history since this was an interesting investment for us.

Back when Apple was launching its app platform in the winter of 2008, we met with Greg Yardley who had teamed up with Jesse Rohland to build an analytics service for app developers. We had known Greg from his work with Seth Goldstein at Root and we were fans. And it seemed to be a smart idea to give developers the ability to see what people were doing in their mobile apps. So we provided seed financing to Greg and Jesse along with our friends at First Round.

Pinch launched the first iOS analytics service and got rapid adoption. But they ran into some challenges, the two primary ones were monetization and getting onto Android and Blackberry (which was relevant back then). And that’s where Flurry entered the picture.

Flurry was a pivot into the same business as Pinch was in. They were already on Android and Blackberry but were far behind Pinch on iOS. They were led by a hard charging CEO named Simon Khalaf who had big ideas for monetization. It was a match made in heaven. So the two companies merged and Flurry became the surviving company.

Flurry continues to lead the mobile app analytics business. According to Simon’s blog post yesterday, there are 170,000 developers with 542,000 mobile apps using the Flurry service.

And now Flurry becomes a Yahoo! branded offering. There is no question that the Flurry data and its advertising products (powered by Flurry’s data) will be a great fit for Yahoo!’s mobile ambitions.

So we have a happy ending to a startup story with a few twists and turns. This is an example of where 1+1 equaled a lot more than two. I’ve been involved in a number of “startup mergers”. Some work. Some don’t. This one worked beautifully.

Free International Roaming With A Premium Upsell

I just landed in Berlin after an overnight flight from the US.

In the past, turning on your phone after landing overseas could be an expensive experience as the phone downloads all the email you received since taking off at international mobile data rates.

I’ve used a host of techniques over the years to avoid the experience of landing, turning on my phone, and immediately getting a text message that I’ve blown past my international data roaming cap.

I’ve turned off mobile data and waited until I got to hotel WiFi to download my email but that meant no mobile data for directions to the hotel. I’ve bought SIM cards in airports. And more recently I’ve rented a pocket WiFi before traveling overseas.

But last year the Gotham Gal and I switched back to T-Mobile after they introduced free low bandwidth international data roaming for all customers in the US.

Here is the experience when I land. I turn on the phone, it finds the local mobile network, connects, and my phone lights up with notifications and emails start coming in.

In addition I get a text message from T-Mobile offering to upgrade me to an international data pass that offers 4G in 100MB buckets at roughly $10/100MB.

I buy the upgrade every time and am happy to pay for the higher speeds.

But the important thing here is the customer experience. No longer do customers have to fear turning on their phone. No longer do customers have to jump through hoops to procure an affordable mobile data plan. If you want faster speeds, T-Mobile makes it drop dead simple to upgrade right on your phone.

This approach to international mobile data should be adopted by all the mobile carriers. It’s a great experience.

Messaging, Notifications, and Mobile

I’ve written about this stuff before, but I continue to be interested in it.

I actively use the following messaging apps on my phone:

Kik – my primary channel for The Gotham Gal, my daughter Jessica, and USV people

Snapchat – my primary channel for my son Josh

SMS – my primary channel for my daughter Emily and a lot of my friends

Hangouts – secondary channel for my daughter Jessica and USV people

Twitter DM – primary channel for people who don’t have my cell number

Though I don’t use them, I realize the following apps are quite popular in the US as well

WhatsApp

Facebook Messenger

Skype

Viber

Tango

Line

So how is it possible that we can all have and use four, five, six or more messenger apps on our phones?

It’s because the notifications channel is the primary UI on mobile, replacing the home screen, and its easy to communicate with people using a variety of applications on your phone.

What I’m wondering is if we will see even more fragmentation in our messaging behavior on mobile in the coming years, or if five to six apps per person is status quo, or might we see some consolidation?

I personally don’t see any reason for consolidation and if I had to make a bet, it would be on further fragmentation. Each of the apps I use offers something slightly different than the others. And so for certain people, and certain kinds of conversations, one messaging app is preferable to another. It’s very possible that entrepreneurs will continue to come up with unique and differentiated experiences and that will drive further fragmentation.

Feature Friday: A/B Testing Headlines On WordPress

AVC community member Shana Carp has been building a neat service that A/B tests headlines for WordPress posts and helps you figure out the one that will bring the most traffic.

It’s called BayesianWitch. You can sign up here and add the plugin to your WordPress.

Although I think it’s a great idea for someone who wants to optimize their posts for more traffic, I have not implemented it here at AVC.

As I told Shana, I like to write my own headlines and I am not that concerned with traffic. There’s already a healthy number of people who come here every day and engage.

But if you are still building your readership and want to make sure you’ve got a headline that pops in social media channels like Facebook and Twitter, you should give BayesianWitch a try.

I am sure Shana will be hanging out in the comments and please let her know what you think about the service, how it works, etc, etc.