Building a Successful SaaS Ed-Tech Company

Interview with Zach Posner, Former CEO of Engrade (acquired by McGraw-Hill Education)

Background: Building a successful ed-tech company may initially appear to be a fool’s errand. The challenges for ed-tech entrepreneurs are many, and the hurdles to reaching substantial revenue traction are high. Ed-tech entrepreneurs selling to schools often encounter tight school budgets, long sales cycles, and bureaucratic decision-making processes. Entrepreneurs selling software solutions to improve student and teacher performance in schools are often befuddled by a resistance on the part of schools to change and innovate. Ed-tech entrepreneurs selling directly to students (or their parents) often find difficulty in monetizing, combined with high churn rates and aggressive competition for share of wallet.

But entrepreneurs continue to beat the odds, and every now and again they succeed in a big way in improving education and building a successful company at the same time. Many are driven by a simple, noble mission: to help students learn better and to help teachers do their jobs better. In doing their work, they improve society and deserve to be recognized.

One such ed-tech entrepreneur is Zach Posner, former CEO of Engrade (acquired by McGraw-Hill Education) who recently left McGraw-Hill Education. Zach’s story of building Engrade from a popular product with little revenue to a successful revenue-generating business is one that illustrates the opportunity within ed-tech, and how innovative entrepreneurs overcome the challenges.

Founded by young entrepreneur Bri Holt, Engrade provides SaaS software to K-12 schools to track student performance. Initially founded by a student entrepreneur to enable teachers to track student performance on tests and assignments, the business achieved strong initial product adoption but no meaningful revenue. Zach joined the company to help it scale and turn into a real business.

In this interview we learn about how Zach navigated the business as it established its revenue model, sold to schools and school districts, built a sales team and grew in revenue size, raised venture capital, and eventually reached an acquisition.

Summary: Engrade is an instructional management platform that integrates systems, data, and tools into a single cloud-based platform that has connected over 10 million administrators, teachers, and parents.

Interviewee: Zach Posner (ZP) LinkedIn | Twitter
Year Company was Founded: 2004

Interview with Zach Posner:

Q: Could you provide some background on the early history of Engrade? How did the company get started?

ZP: Sure, Engrade was founded in 2004 by Bri Holt, a high school student, as a free service. The product was an online gradebook for teachers. Teachers loved the software, and it had grown to thousands of users. The product would have had a very high NPS score if people had measured it. The business was very seasonal, but the usage was very high.

At the same time, the product didn’t have revenue. I joined the business in 2010 to help commercialize the product. The product was free up to that point, and I started thinking about how to build a business around it.

Q: How did you think about building a business around a free product? What things did you need to do to transform the company?

ZP: The most important aspect of Engrade’s value proposition is connecting the right piece of content, to the right student, at the right time. That was the central theme of the business. So I started to think about how we could use that value proposition to engage schools and districts, to help teachers better monitor student performance. We had a dashboard to track student performance that teachers realized liked, so we started there.

There are 55 million students in the U.S. and ~ 48 million of those students are in public schools. Every single one of those students can benefit from greater attention paid to them by teachers. So we decided to create a dashboard for teachers, where we could help them monitor their students. We chose to adopt the standard pricing model for schools, which is a per student per month model. We learned this by studying other companies that had gotten to scale.

We initially went to schools were there was a critical mass of teachers already using Engrade. We already had a receptive installed base. But we realized that we would have to get to the district level in order to really grow the business. Districts don’t compete with each other, so we could establish strong word-of-mouth by having teachers in one district tell teachers in other districts about the product.

Q: That sounds like a good strategy. How did you build a sales team to execute on this strategy?

ZP: We first tried to find salespeople who had previously worked at companies that sold software to school districts. That model didn’t work. The salespeople weren’t productive, and they were also expensive. So we shelved that approach.

I realized that before hiring dedicated salespeople, founders should first figure out how to sell the software themselves, and that there are small iterative steps you need to make. So that’s what we did.

My advice is also to not hire a VP of Sales, hire junior salespeople first. It’s difficult for a salesperson to go backwards in their career, and if you’re hiring an experienced VP Sales too early, that is what will happen.

Q: Did you have any team members with sales experience on the team when you joined? Also, did you previously have sales experience?

ZP: I didn’t have sales experience, but I learned it myself. I don’t view selling as sales per se. I view it as educating the customer. This is the approach that I fostered within my team, to educate the customer.

Q: After you introduced the paid product, how long did it take to start signing up customers and generating revenues?

ZP: We started selling the product in 2010. So we didn’t start generated revenue until six years after the company was founded. We generated a few hundred thousand revenues that year, which was our first year of sales.

Q: What was the profile of our initial customers?

ZP: We signed up schools and school districts. We got adopters of the paid product because many teachers were using the free product in the classrooms. They were a receptive audience. Every state works differently, so we had to learn the ins and outs of each state along the way.

Q: What was the fundraising strategy for your business?

ZP: We didn’t raise seed capital — the business was bootstrapped. We skipped the friends and family phase and went straight to angels & venture capital.

We raised funding from investors who had invested in successful ed-tech companies, as well as the founders of those companies as angels.[1] We built a strong investor syndicate — these investors were smart money.

Q: How did the sale to McGraw-Hill come about?

ZP: We had been speaking with them in a business development capacity. At the time, we have been considering raising another round of venture capital, and we already had deal proposals.

When we looked at the entire picture, we decided it made most sense to partner with McGraw-Hill Education. McGraw-Hill Education could help us grow the company to a much larger size than we could independently So we ended up negotiating a deal and MHE acquired us.

Q: Do you have any key recommendations for seed-stage founders?

ZP: There is no magic bullet. It is all about execution. Founders need to learn how to sell the product first. You also need to time the market correctly.

Key Learnings from Zach Posner:

· Not all successful companies are rocket ships: While Engrade’s product became adopted by teachers and schools between 2004 and 2010, it generated no revenue and wasn’t even truly a business. However, Bri Holt was able to gradually establish customer satisfaction and demand for the product. This long adoption period made it easy for Zach Posner to come in and ramp up the business. Not all successful companies grow like a rocket ship in the early days.

· The founders should sell the product first: Engrade’s lack of success in hiring productive salespeople taught Zach a valuable lesson: founders should learn how to sell the product before hiring a sales team. This is a refrain that we have heard repeatedly from successful SaaS founders.

· Ed-Tech founders should capitalize on the unique structural characteristics of selling to schools: While the obstacles in selling to schools often dissuade would-be ed-tech entrepreneurs, the smart entrepreneurs turn the unique structural efficiencies into weapons for their startups. As an example, Engrade adopted a “Trojan horse” strategy by providing a free product for teachers. Because teachers were generating strong utility from a free product, Engrade went back and charged for a premium product. Because school districts are willing to educate each other about a product, Engrade capitalized on this positive word-of-mouth.

· Raise capital tactfully: Engrade made several smart fundraising choices. Instead of raising seed capital, the business was bootstrapped for its first six years. When it came to raising VC, the company raised money from ed-tech VCs and angels who had successful track records. When McGraw-Hill Education came calling, the company had alternative funding proposals, and was able to evaluate an acquisition from a position of strength.

[1] Note: Engrade raised a $3m Series A round led by Rethink Education and including NewSchools Venture Fund and Kapor Capital, then a $5m Series B led by Javelin Venture Partners.