Aug. 24, 2020

Acquired by Chegg - lessons learned from raising $5.1 mil and getting acquired - by Dan Johnston.

Acquired by Chegg - lessons learned from raising $5.1 mil and getting acquired - by Dan Johnston.

Dan Johnston, currently the Co-founder & CEO at WorkStep and the Co-Founder at InstaEDU explains what major lessons he had learned from building InstaEDU and raising $5.1 million for it. We also talked about what he would do if he can go back in time and change one thing in the process. Super helpful for any early stage founder and specifically for founders in educational field.

Workstep: https://www.workstep.com/

Similar story of acquisition of SchoolMint: https://www.fundraisingradio.com/acquired-by-bv-investment-partners-founder-of-schoolmint-jinal-jhaveri-shares-his-experience-of-getting-acquired/

 


Transcript

And today's a guest speaker Johnston Co, founder and CEO at work step and also the CO, founder of that was acquired by cheque. 

And this episode will mainly talk about this acquisition how Dan raise money for, and how the whole thing happened. So Dan olskey called by you giving us some background on yourself and on. 

Absolutely. And thanks for having me on. As far as my personal background goes. 

My relevant experience actually starts when I managed a third party warehouse in the Walmart supply chain, which is when I became intimately familiar with the challenges that work step, I most recent company set out to solve. 

For the background related similarly,
I was a tutor myself with lead myself and my Co founder to found an in person tutoring marketplace, 

which we bootstrapped and was eventually acquired at which point we set out to build something that was more scalable and something that could reach students anywhere in the country, 

and eventually the world,
which is when was born in,
was an online on demand tutoring company,
which we then raise venture funding for scaled for a couple of years, and then grew within shag,
a larger public education company. 

Yeah, I suppose that's my professional background from thirty thousand feet right now I'm working on work step with a fantastic team. What we do at work step is we help large industrial companies hire and retain their frontline workforce. 

Nice, actually, that's a big issue. I've heard about a lot retaining the workforce, especially those, you know, front lines to people who actually do work. So it's really cool. I'm looking forward to hearing, you know, more news about that company soon. 

But for now, 

let's focus on the first thing that I want to ask you is you founded the company with your sister, 

was that the issue for some investors because from my personal experience, 

that might be a pretty big issue founding accompany with your relative. 

What about you do you see any traction there? In terms of investors are not cool. 

Yeah, it's, it's a fantastic question and it's definitely something that would always come up. 

I think that when you're talking to a perspective company as an investor, you tend to put yourself in their shoes. 

So, what every investor would say is something along the lines of I can't imagine founding a company with my brother, or my sister, because they sort of apply their own relationships there. 
You know, 
the one thing that we always made sure to make clear was that we were brother and sister, 

not husband and wife, 

because some investors do have a hesitant to invest in couples for the very reason that if if things go south of course, 

couples can become non couples sadly, 

the, 

the good news about brother and sister is that that relationship can't change. 

Right? Somebody is your sister or your brother forever. And so like a CO founder relationship, you sort of have to work through everything. 

And so, when we have the opportunity to explain that aspect, and that, we had a lifetime of conflict resolution and teamwork skills built up. 

I ended up not not be a challenge. At least not something that anybody explicitly said was an issue or a blocker for them. 

Nice yeah, that's actually a really great explain. I think that that's the major reason why, you know, those brother and sister or brother and brother or sister and sister found in companies or Andre Valley younger estimated so nice work. 

They're presenting that to the investors and you eventually raised five point one million dollars for. How do you manage to raise a very first round? Where do you find the money for? 

Yeah, you know, in hindsight, our initial round of funding for ncu was quite fortunate. 

We had been bootstrapping and see, you are really funding the development of with some of the profit from our in home touring business. But it was only going to get us so far. 

And when it came time to raise institutional funding, we had a lot of challenges. 

I think honestly, we probably got twenty thirty knows before we got our first. Yes. From a sort of a lead institution perspective in that yes. 

Of all things was a direct professional connection of a advisor who I happened to actually Tudor her kids. 

So, our advisor, I was a tutor to her children, and she knew a moon. I made at social capital and let him know what we were working on. 

And he invited us in to give a pitch and demo at social capital,
which was a relatively new firm at the time and just immediately got, it are sort of live demo went particularly well that day.
And. 

You know, from there, the rest of the process worked out quite nicely, but it was definitely a long road to get to that first. Yes. 
Right nice. That's exactly the regular advice that everyone's giving to early stage founders and I'll try to look at your network. So good work there they work. 

So do you raise your whole round from just social capital or was there someone else who participated? Oh, you're making me go way back in the memory arcades. 

Now this was back and this is back and let's see, spring, two thousand and twelve. 

If I recall correctly, we raised one point one million in total and I believe seven or eight hundred thousand of that. 

Was from the lead social capital and the rest were from ten to fifty thousand dollars, smaller checks Although the exact breakdown at this point. 

I don't think I recall guys. So, those small checks are the major question that I get asked a lot by the founders. So, how do I find those, you know, small investors who might be able to fulfill the rest of the round? 

I get in touch with those people because those are usually angels. So, in your case, how do you reach out to them? 

Yeah, 

so, 

you know, 

again, 

it really is that standard advice, 

which is, 

you know, 

understanding sort of who does activity in the specific space that you're building or who invest in these sort of early stage, 

angel, 

angels and seed rounds and then trying to build, 

you know, 

first or second degree connections to get to them. 

So some of the folks who invested were people who my Co founder I had worked with in the past, who did some angel investing? 

Some of the folks were,
I believe referrals from other people who were investing,
you know,
we had worked with somebody who participated and then told their friend or coworker or partner who 
then also participated in. So,
if it is just this sort of, like, 

networking,
based approach,
where you sell one person,
and then see who they know,
and then see,
if you can sell the mission and vision to that next person, to the point,
where you can sort of,
fill out whatever of capital,
you need to get to the next stage. 

Right, yeah, the, the network about it. I mean, the network chain is pretty useful in that case. So I feel like you really like going back and your memory and recalling things. That happened like, eight years ago. 

So let's go there at the very beginning of the, 

if you could go back in time to the very, 

very beginning and change something, 

what would be would be the amount of capital you raise for a very first round would be the way that you raise the money or the way you build a business, 

or what would that thing be?
Oh, man, that's a that's an interesting question. 

And one that I wasn't prepared for and one that I honestly try not to trying to think about as much, you know, I think that especially in light of everything that's happened over the last six months. 

Perhaps what I would go back and tell myself in two thousand and fourteen, which is when we sold the business to check for what was a positive outcome for both our team. 

And our investors at the time is that digital learning is going to be really big, and that might take some time. 

But providing the top tier digital equivalent to what is a very, very, 
very large in person industry,
which is private tutoring will have sort of massive opportunity in the years and decades to come. 

And if you already are the leader, you can compound your advantages. So, I'd probably tell myself this is going to be really, really big and maybe you should just keep going. 

That's a really good advice to herself, because it is really big right now, and it's growing really fast, especially now that many people are asking themselves to I even want to pay for that D*** college. If they if I still stay at home. 

So, that's that's a great advice, but still great outcomes. So good work there. And let's talk about that. I should before going to the actual acquisition. Let's talk about your fundraising process. So you bootstrapped the first part. 

When was the moment when you were, like, okay, now it's time for me to go out to investors and actual raise some additional money to boost this growth or to build this product. When was that moment when you decide that I need my now yeah. 

You know, 

I think as soon as we landed on this concept of being and on demand digital video based tutoring platform, 

we knew that to build the layers of technology to support this use case, 

and also acquire in large enough user base to make the network of facts work, 

for example, 

you can't deliver on demand online tutoring if you only have ten students, 

because you won't have the. 

Incentive structure for tutors to be available twenty four, seven, so you needed the amount of scale to make this work and so that was the scale component and the technology component. 

We're both the requirements of validating thesis. So, given our thesis, we knew that we needed, you know, traditional venture to tease out whether that thesis was correct or not. 

And so,
at that point, 

it just became a question of how for a long can we get prior to going out to raise capital to show that a, 

I suppose we're competent in the, this can be done. 

And so it was never a question of if it was just a question of when and so how long we could survive without capital to sort of prove out what we felt we needed to prove out, in order to get that sort of first injection of institutional funding. 
Nice yeah, that's perfect. Perfect answer. So now we discussed the first part. Let's discuss the final 
part, which is the acquisition domains. Do you buy check how did this happen? How did you get in touch with Jack or how did they get in touch with you? 

How did this happen? So the check acquisition was something that happened. 

Very slowly, I would say it first and then very quickly toward the end. And what I mean, by that is, we actually had. 

Been sort of friends of theirs, or sort of, in contact with check for at least a year prior to the acquisition and we had been formerly partners with them. 

For at least, I would say six or nine months, and the way that was structured was actually we were looking to grow our reach in terms of, you know, the total. 

Most of the US based student base, 

and they were trying to capture more opportunities for revenue from the massive traffic that they have in terms of both book renters and folks using their digital study solutions. 

And so we were one of their primary advertisers throughout their platform. 

So you might be on a trade property consuming some sort of piece of content, and you would see a widget on the side just like any other digital advertisement that would say, do you need online computer science tutoring? 

If you're looking at computer science, click here to get help now, and that partnership was a great growth opportunity for us. 

But also it was in hindsight, an eye opening opportunity for them to see just how engage their users were with our value propositions. 

And just how much traffic they were sending our way, 

which made them realize, 

potentially, 

sort of how complementary these two products could be together based, 

on the way that their users are already interacting with our tools as they sort of pointed them to us as an advertising partner. 

Right that's actually, this most standard way of acquiring companies, you know, starting with some sort of partnership started with some sort of collaboration. 

So great story there, but let's move on and let's talk about your current work, your current activities in terms of other serves. 

So, I know that a lot of founders who have exits, they start doing a mentorship for other startups. They start doing angel investors, investments do do any of those? I do. 

It's something that I wish I had more time for specifically on the mentorship side. 

Of course, 

I've been lucky enough to be mentored by some phenomenal founders and I feel very fortunate that Silicon Valley and the startup ecosystem as a whole has this way of paying it forward where people 
further along in their career will be more than happy to jump on a call, 
or have a conversation with somebody who is just getting started or sort of trying to maybe take some similar steps that they've taken before. 

So definitely anytime a, you know, a founder reaches out and I can be helpful in any way. 

I try to do so, because so many amazing founders have done the same for me in the past and then I do do some angel investing not added crazy high volume. 

Maybe a handful, few investments a year mostly from my personal personal network. 

The only reason I don't do more of that is really just that I spent so much of my time and thoughts cycles, dedicated to scaling work step, which is our current company. 

So, that, that is obviously a very consuming all consuming Endeavour at on its own, right absolutely. And that's completely understandable. 

And that's, you know, pain forward mentality is a really great thing that, I think a lot of early station printers don't really take advantage of. 

I mean, you can literally find people you like, on Winton, just cold email them called LinkedIn, them asking for some advice for some mentorship on your progress. Maybe you don't even have a company at the time, but you want to have one. 

They're still gonna help the chances are super high that they will help so definitely do that. That's a great recommendation here. And let's talk more about those early stage injure printers specifically in the educational field. 

I mean, now that's the current of honors hit more and more online educational platforms. Online education early starts are popping up. What's your advice to those people who think of starting something in this field right now? 

And we're just hesitant, or maybe just just bumping this idea around in their head. Was her advice of those people. 

Yeah, 

you know, 

my advice to I would say, 

like, 

the earliest stage of founders or potential founders is almost always the same, 

which is if you're really serious about this, 

the fastest way to separate yourself from the field is to take the lead and make sure that you actually do it and what I mean, 

by that is, 

there are a lot of people who talk about ideas and talk about products and talk about companies or opportunities. 
But who never get past talking about it,
or writing about it and when I sort of mean by that, 

specifically is what I always tell people is if you really wanna do this incorporated company and take a step. 

So, that you would have to explicitly fail. 

Because what that does, 

it totally changes your mental model from the default, 

being just sort of allowing your excitement to Peter out over time to the default being you either have to move forward and make this work or. 

Sort of deliberately wave a white flag and say this is not going to work. 

You can't just sort of let it fizzle and it really it really is an empowering step in something that can create a lot of sort of downstream momentum in something that, 

you know, 

in our case we had we had incorporated a company maybe two years prior to do an idea that was, 

that was never going to work. 

It was like a, you know, it's like a social platform idea about video chat. This is like two thousand and ten and it was it was a bad idea. We had no idea how to work. 

We had no idea how to build a social platform, but that's what everybody was doing back then. But when that business they never took off because we never built it. 

We were sitting there and, you know, we we figured, well, let's, you know, we have this corporate entity. 

Let's let's do something so we started in home tutoring agency, like very low tech and then, that led was led to Jay was led to work. 

So, you never know what's gonna happen if you just sort of take the leap and say, you know what, I'm going to build a company. And I think this is what I'm going to build. I'm open to being flexible. 

So, that's my big advice of the early stage founders is, if you're serious about it, take a step, that can't be done. And then then you'll sort of have that forcing function to keep pressing on when things get hard. Absolutely. And that's great advice. 

Just to take any kind of step, just to see the progress starting my personal advice would be not incorporating at that point, because it's just, you know, some extra work. Maybe, at some point, it's unnecessary to my personally wise would be actually try and go find some customers. 

I mean, if you have pretty much zero type besides, you know, really show your website still try and do that just see what people say. And only that, if you see some progress, then go on incorporate. 

But let's talk more about fundraising for those early stage bearers because he knows that. It's fundraising radio. So, what's your advice to those people who decide to take that step who see some sort of traction? 
Where should they go to fundraise do have any specific loopholes maybe for someone who, as someone who has already gone through the branches to have any specific advice to those who are just beginning in this field. 

No, I don't think there are any loopholes to the process. 

What I would say is that, like, any part of your business, you need to have a very clear strategy in that strategy needs to be based on both research and reality. 

And so what I sort of mean by that is that one you want to understand exactly what you wanted and why that really starts with understanding your long term vision for the company and also coming to a view around Nope 

what sort of milestones you need to hit to get to the next level, and then modeling out what sort of capital is required once, you know,
what you need him, 

why you can start to sort of slice the investor universe based on who sort of works within that space within your sector has done deals at that stage 

in your industry,
or,
you know,
in your region,
or in your problem space and then once you have that list of,
let's say twenty individual investors who do investment activity at the scale, that would be the perfect fit for you to solve that. 

Next challenge and get to the next level of scale. Now, you're at sort of like a. 

A sales funnel, which is you have twenty leads, you need to figure out how to get from lead to opportunity. I had to get to a meeting and then once you get to a meeting, you know, how do you move from meeting to close? 

So, whether you want to think of, as a consumer acquisition funnel or sales acquisition funnel, it's basically the same concept. 

But I think the part that a lot of skipped, 

they skipped that that research and segmentation phase and they just start sort of spraying around and that sort of leads to a very, 

very,
very low hit rate and a lot of frustration.
So that, you know, that would be my advice is do the homework upfront to create a relatively short list, 
and then go diligently, one by one and working sort of each opportunity to conclusion. And if you go over twenty, that's fine. 

You tee up the next twenty with the same process. You do it all over again. 

Right, right yeah, actually, I hang up a little bit. That's perfect advice, you know, creating those lists making, like, really good research, find some ice breakers there. 

What other advice have heard on that topic is you have to create a bigger, or at least hundred hundred, fifty people, highly qualified people, and those people then reach out to them all at points pretty much in, like, one week to create some buzz. 

So, once you meet with investors, once you jumped on the call with them, you're like, oh, I just spoke to that from. I've heard their concerns. They had similar concern of yours. 

We're definitely going to address that and the investor feels like maybe I should actually rush this one because if I will not be fast, then someone else will be. So there's a sense of urgency for them to definitely try that. 

If you don't have enough time, start with twenty, that's certainly something we're moving onto. Last question of today's episode, which is a call to action was the one thing that he wanted to do as soon as the episode is over. 

Oh, man, that's also a tough question. You know, I think that. 

From an entrepreneurs perspective, the most impactful thing when it comes to fundraising, also accompany building is generating a very. 

Clear idea of where you want to be in five years, where you wanna be in one year, where you want to be in six months, and where you want to be in three months. 

And if in three months you want to be raising a seed round start to understand flesh out what that story is that would be compelling at that time. You know like, what is that? C deck? 

What is that series a deck and start to actually potentially even literally build it out and then once you understand if that narrative is compelling, you can set out to go build that narrative. 

And so if you figure out the story that you want to be telling in the future, you can work backwards to the most important things to work on today. 

But if you sort of fail to take that view, you can end up doing a lot of things, end up building, a relatively non, compelling narrative. 

And so what I would do is I would go, 

and I would write down the story that you want you or your company to be telling, 

take a milestone in the future three months from now, 

one year from now, 

five years from now and then work backwards to what does that storing mean that I would be doing today? 
Normally that helps clarify prioritization right? Your milestones are the key. That's perfect advice. And. 
Definitely, definitely work on your milestones and my personal call to action as usual is go to the description of this episode. I'll leave the link to works up in description. 

So that you can check out the company itself and also, I will leave another link to the episodes about the acquisition of by key. Twelve. I believe it was a prepare acquisition in the educational field as well. 

So, if you want to learn how those things work more deeply, that steps up for you and have a good day, everyone.