Rita Ferrandino, Arc Capital: If Only Founders Knew This…

Debbie Goodman  00:00

Welcome to On Work and Revolution, where we talk about what’s shaking up in the world of Edtech. I’m your host Debbie Goodman. I am the CEO of Jack Hammer Global, a global group of executive search and leadership coaching companies. And I also advise venture backed companies in the Edtech sector. My main mission with all of my work is to help companies and leaders to create amazing workplaces. I do believe it’s possible, where people and ideas can flourish and thrive. And today I am joined by the wonderful Rita Ferrandino, whom I also had the pleasure of meeting in real life in person a couple of weeks ago at Edtech week in New York City. Some background on Rita’s formidable career, she has built an international reputation as one of the most impactful strategists in the education entrepreneurship community. She’s a recognized STEM education expert and authority on US education, policy and politics and a leader in future of work strategies. Rita founded Ark Capital Development, which is a global private investment and advisory firm, which invests in and advises companies in education and corporate training. They have supported over 150 companies literally all over the world. I’m not going to go through the list of countries, it’s all over the world. And to give you a sense of scale, Ark clients and portfolio companies provide products and services, generating over a billion dollars a year worldwide. So that’s very significant. She’s also, okay so you got to listen up, she’s also a lot of other things. Innovation consultant at the University of Pennsylvania’s Graduate School of Education. She was President of Education Design Studio Incubator funded in collaboration with Milken Foundation and University of Penn and she currently serves on the White House Task Force for Florida, which is a lot. And today, I’m just so excited to be speaking to Rita about what I think should be kind of good news for founders and entrepreneurs who are just super worried about how they are going to grow their companies in the current market where capital raising and access to cash is a little bit more scarce than it was a couple of years ago. Rita is going to chat to us about some common myths about growth and capital raising and share some great insights into what actually moves the needle. Welcome, Rita.

 

Rita Ferrandino  02:35

Well, Debbie, that was a very, very kind introduction. But you missed the thing that the two of us have in deep common. 

 

Debbie Goodman  02:42

Okay, what’s that?

 

Rita Ferrandino  02:43

That is this love for dance. All right, both of us dance every day, even just in the bathroom, or?

 

Debbie Goodman  02:53

Well, I’m kind of incapacitated at the moment on that front. I’ve just had a hip replacement surgery two weeks ago, but give me a couple of weeks time, I’ll be back in the dance studio. Okay, from dance to entrepreneurship and Edtech. When we spoke a couple of weeks ago, you said something that struck me, you said that Ark Capital Development has a unique model, which came out of and this is your words, “having been beaten up so many times”. I wanted to ask you more about that.

 

Rita Ferrandino  03:22

Well, Ark is a corporate growth advisory firm and private investment firm. And we work exclusively in the pre K 12, higher ed workforce education industry. And as you said, we’ve worked with 150 research based innovation companies around the world. And where we have evolved with our model is that we now only work with a select few. And those companies need to understand that it takes a coachable team to work with us, who understand they can build business expansion capacity, by tapping into our broad education industry network, in capital, in revenue generation, in talent and research and innovation. And they need to have enough revenue to be able to execute. Often companies that I work with are planning for a sizable round or acquisition. So that’s the model that we have. So we come in, we work with companies that really meet that level of criteria that we discussed, so that we can together accelerate by building on capacity that we have built over the last years.

 

Debbie Goodman  04:51

Okay. But you mentioned something important you said they need to have enough revenue in order to implement in order to execute, so isn’t that a bit like the chicken and the egg? So what if you, so you wouldn’t work with a company that didn’t have enough cash to actually execute on the strategy?

 

Rita Ferrandino  05:05

Correct. What we’ve learned over these 20 years is that often when we started companies will come to us and say, Well, all we need is for you to give us investment money, and we will take that investment money, and we will, we will grow our business, all we need is cash. And what we’ve learned the hard way is that that early stage education companies need much more than investment money. And as a matter of fact, what they mostly often need is a strategy and a tactical plan for where they want to grow the business. And they need to look at the different options that as to how they can get there. And we strongly believe that revenue is king, that that is the fastest way to sustainability. And that is the fastest way to be able to grow value in your company.

 

Debbie Goodman  06:04

Okay, so now you said revenue is king. Shouldn’t that be obvious? Although I do realize that, you know, we had the sort of unbelievable growth in the markets with so much investment capital being dished out and revenue was not necessarily a criteria that companies, that investors were even looking at or needed to worry about. Certainly founders didn’t need to worry about it too much. These days, we’re seeing particularly early stage and I attended some of the shark tanks at Edtech week, I saw you moderating so brilliantly. You know, for many of these early stage founders, what they are looking for is enough capital to make those strategic hires in order to drive the growth. What about that, like, catch 22 situation where they’re just completely stuck? I hear what you’re saying Well, it’s not just money. What happens when there isn’t enough to hire the next key person? And they’re saying, well, if only we could just get some more investment from you, Mr or person investor? It will solve all our problems. What do you advise, then?

 

Rita Ferrandino  07:14

Oh, well, you’ve just asked so many questions. So I’ll kind of break them down. So the first statement I will make is, I believe strongly, in lean startups. And I believe very strongly that you need to very quickly and as inexpensively as you can get an MVP and go out and try to sell it. Because one of the biggest mistakes that I see founders make is they spend much of their resources in building their product. And then when they have a completed product, they then take it out to market, and then they don’t have enough runway to be able to learn how to sell and make the changes to accommodate the market demands. So okay, so what they need to really do is be able to be quick, be nimble, and to get to people writing checks for what they’re doing to be able to prove to the market and potential investors that they’ve got something someone will buy.

 

Debbie Goodman  08:21

Okay, so just that piece, you know, the saying that perfection is the enemy of good, I mean, or good enough. And I often see this as well, with companies saying, well, you know, we need to get our product really perfect or right, or we just need this extra feature. And they spend a lot of time working on those features and bits and bobs and sales is delayed for too long. And then they run out of cash before they’ve even figured out whether the customers want to buy it.

 

Rita Ferrandino  08:54

Exactly. And then they never get to the place where they can come to you so that you can provide them with the service of finding amazing talent to come in to grow their businesses. So yes, that is one of the biggest mistakes founders make. 

 

Debbie Goodman  09:06

Okay, well, anytime too much time on on product, and not enough time on distribution and figuring out whether customers actually want to buy what they have to sell. And particularly in the current market where I mean, things are changing so rapidly. I mean, it’s always changing rapidly, that’s the name of the game, but in Edtech, I certainly saw a year ago even products that have now been leapfrogged by AI enablement, and for those companies that didn’t see it coming or got so entrenched in making their beautiful product more amazing and now doesn’t have any AI enablement. I mean, they’re just too late to pivot at some point. Have you seen that? Have you seen that a ton or a bit, or not at all?

 

Rita Ferrandino  10:00

Well, we have been seeing that more frequently. And, again, it comes back to being able to be nimble in your marketplace. Because if those companies that were spending their time on product creation would have been out into the market, they would be seeing the demands from their customers, they would have seen that sooner, and they would have had a stronger pulse on the marketplace and what they’re willing and interested in buying.

 

Debbie Goodman  10:28

So a question here, because this has come up a couple of times in my world, I’ve been engaging with a couple of, they’re seeds, they’re seed funded, they’re not yet at Series A, they have had some success in terms of sales into a certain channel. And now they are wanting to try out some new channels in order to determine whether in fact, that product will just get more sticky. Let’s say they were selling to higher ed, now they want to try K 12, or corporate or whatever it is, and, and they decide to make a hire of a part time or fractional sales person who’s got relationships or says they have relationships, but it’s not a full time hire. They’re just going to spend some hours, possibly, because this is all a company can afford, really. How successful do you think it can be? It is for a company to hire a part time or fractional sales person in order to do this critical testing out? Because essentially, they’re looking for market signals to determine whether in fact, they have a new MVP, or whether they can pivot or, frankly, just to make some sales. So my question is mostly around part time versus full time. What do you think is best?

 

Rita Ferrandino  11:51

Well, first of all, I’d like to just back that up a statement before, and I think one of the most important criteria for early stage companies is having a founder, or a founding team willing to go out to sell, they are the most equipped to figuring out what the value proposition is to a customer, how much they will be willing to pay, and what potential product modifications need to happen in order to have the the average sales price be increased. And so I feel really strongly that that is not a job that can be outsourced that that’s a fundamental core capability that an early stage company needs to have. Now, if a founder or founding team has found a path, and they are confident that if they get another dollar, they will be able to turn it into 10 because they understand their sales process, then they should not spend time on a part time salesperson, they need to find a salesperson or hire as many salespeople as they can that can follow the sales process. Does that make sense?

 

Debbie Goodman  13:19

It makes sense to me. I think that what we encounter, what I encounter, maybe you do too, is companies that are founded by people who are great product people or great tech people or they spot a problem in the world that they want to solve. And you said this, you said they fall in love with the solution to the problem. But as we know, love is not enough in so many ways. And for certainly a lot of founders, they can’t stand the idea of having to get on the road and do sales. In fact, it’s beneath them. Or they’re just really unconfident. They’re unsure about how to open doors. They don’t know how to sell they don’t know how to close it’s something that’s scary or completely out of their wheelhouse. And there’re many of them out there. What do those types of people do? Well, should they do?

 

Rita Ferrandino  14:18

Frankly, I think that what a product founder who’s not really interested or capable of selling needs to seriously consider, this is controversial, drumroll. They need to find a founder who they need to bring in. A co-founder who actually does have an understanding and who can help drive that part of the business. Because if you have a product founder it’s very rare that they’re going to hire a part time sales rep at a below dollar per hour rate and expect them to figure out how to sell the product and then drive the sale of the product, such that you’re going to be able to get a scalable sales process out of that. Every organization has to have somebody who is passionate, who wakes up every moment, and who understands that the value of the business it’s vital to figure this out, and have to care about it that much and have that much at stake.

 

Debbie Goodman  15:26

Okay, well, I’m just gonna go back to the last three founders I spoke to and tell them Rita says!

 

Rita Ferrandino  15:33

I would be happy to tell them but that is just not going to work. And again, right, I have a lot of experience. And I’ve seen a lot of incredible products, sit on shelves, never used by anywhere near enough people or have as much impact because the founders did not figure out how to sell the product.

 

Debbie Goodman  15:56

Okay, so we started touching on some of the big mistakes that founders typically make. You’ve seen them all. What are some of the others we have? So many entrepreneurs who listen to this podcast and and I’m an entrepreneur myself, I’m wondering, maybe I’ve stepped into a couple of these landmines. There’ve been a couple of businesses I’ve started along the way that never saw the light of day, really. So come on.

 

Rita Ferrandino  16:22

I think all of us who are entrepreneurs can say that.

 

Debbie Goodman  16:25

Yeah. What do you see these days as some of the key mistakes that you kind of wish you would be able to whisper in their ears at the outset, in order to help them avoid the these particular pitfalls?

 

Rita Ferrandino  16:40

Okay, well, I think I’ve mentioned my top two, the first one is that they are, they should not put all of their resources into product development that they need to get to MVP, and they need to start selling and interacting with the market right away. As a matter of fact, I think they need to take in market considerations very early on in the product development piece. The second is that they really have the responsibility of figuring out how to sell the product. And they can’t really build a successful company if they do not understand what a customer is willing to pay money to purchase. And then the third is lack of focus, where they see in education, you’ll often say, oh, I can sell into this market, into K 12. I also can, because the content is basically the same, I can then also sell this content into higher ed and oh, yeah, I can be in workforce development. They’ve run out of runway. Focus on your most likely successful target market and get scale at it before going and doing a lot of experimentation on the other markets.

 

Debbie Goodman  17:57

Okay, well, that’s perfect, because now people can just focus on three things instead of getting distracted with all the other potential mistakes. But that is so true. I mean, it’s sometimes exciting if you’re an entrepreneur who just loves the novelty and you’ve just got 1000 ideas and you just want to do, the excitement is the chase. I call it squirreling. It’s like, oh, let me climb up this tree, there might be another different kind of nut. And oh, wow. Okay, that was interesting and fun. So let me climb up this other tree, and we just squirrel and squirrel and squirrel. Next thing, there’s been not enough focus, and I do see, sometimes in myself as well, see that as a very distracting, usually fun, very exciting. And then you look behind you and say how come I didn’t do any sales? Well, because I was running up a bunch of trees, after some squirrels after some nuts.

 

Rita Ferrandino  18:49

Thursday, I did a workshop where I made the team actually write on a whiteboard, you know, all of the projects that they currently had. And it was dizzying just see on a whiteboard, all of the things they were trying to do. And then I said, this was the high level consulting that they paid me for. I said, stop. Just stop. We have to recalibrate because there aren’t enough human beings or there isn’t enough capacity to do three of the 30 things that they were currently trying to do. So capacity management, certainly important.

 

Debbie Goodman  19:38

Right? Um, what are investors most impressed by? Because I think that’s also what at any stage of the game precedes A, B, C, whatever stage of the of the fundraising phase you’re in. What and maybe it’s different things at different phases, but Let’s take early stage. What are investors most impressed by when they meet a founder? And they go yes, that’s investable?

 

Rita Ferrandino  20:11

Well, for me, it is a coachable founder, who understands the value of education industry expertise, understands that it is a network, and that you need to bring different skill sets into your organization in order to be able to accelerate quickly. It’s also I think, one of the most important messages I would give to entrepreneurs is that you have to understand that working with investors, it’s largely relationship building, that it doesn’t happen after just one meeting. Most of the investments that we’ve made, and I have 56 active investments in the education space, so I can say this with fidelity is that entrepreneurs who introduce themselves and what they’re doing, and then stay in touch with me through their journey as they grow and then when they’re ready for Ark services, which is a more comprehensive set of services to help them scale, we don’t have to start from the beginning, we’ve already built trust, I understand their business. And I know that there’s somebody to work with. And then once I have confidence that they’ve got a strategic and tactical plan for whatever money they’re trying to take in, then we’ll invest and then we’ll bring them to the other investors that we know.

 

Debbie Goodman  21:51

And then if you have to sort of reflect on commonalities amongst entrepreneurs that typically go the distance, you mentioned, coachability. And, yes, I’ve encountered, certainly entrepreneurs that are very steadfast in their own opinions and think they know better than everybody, and they’re very uncoachable. So I know the type. But coachability is one thing, and I get that that’s critical. But what else makes a truly successful entrepreneur?

 

Rita Ferrandino  22:26

So founders who are willing to sell, and whether they are selling to potential customers, or potential investors or potential partners, or actually even selling, that talent should come to their organization, it’s that willingness to be out front. And to be the face of the company. And that is lessons that we’ve learned a long time, my partner and I at Ark Capital about eight years ago made the decision that we would not invest again, in any company without a founder, who was really had the chutzpah to be able to get out there and be willing to be the front of the company.

 

Debbie Goodman  23:15

Right? That’s interesting, you say that. I have from time to time been the front center face, always driving some level of business development and growth. And then there have been phases when I’ve stepped back. And I’ve just allowed the brand to, the Jack Hammer brand, to sort of stand on its own two feet. And every time things get a little like sort of quiet, because markets have their ebbs and flows, man, I’ve got to get on that horse and just get out there and, and do the thing again, and it’s pretty phenomenal, how quickly, things can rebound. And if I was prepared, if I was going to just say, I’m done here, I’ve done my time, I’m just not doing it again, things would seriously stagnate from time to time. So I get that, that need for certainly an early stage, I imagine there comes a time when CEOs can step back from that, particularly if it’s not something they typically enjoy doing a lot or just haven’t got the time to do any longer. 

 

Rita Ferrandino  24:12

Right. And again, I work from seed stage to Series B. So I do work in that real accelerated growth part of the journey.

 

Debbie Goodman  24:24

Okay, what are the three things last question? What are the three things you want all founders to focus on for 2024? Because it’s around the corner.

 

Rita Ferrandino  24:36

Right. And 2024 does look different than 2023 and 2022. and we need to understand that the current market conditions, regardless if you’re in higher ed or pre K, the market conditions are changed. So my first thing you have to do as a founder is you’ve got to understand and stay focused on your customers’ needs and how your solution solves their problems and the willingness to pay money for it. Okay, so it’s that whole focus sales, don’t lose sight of that. That’s number one. The second is today, I would tell you, you need to manage cash flow and that investment money is expensive and difficult to obtain. Revenue can take a long time to procure, but has a higher value. You need to really manage your cash flow so that you can stay to fight, fight it the next day. Okay, and then the third is, if you’re going to take investment money, you need to move to profitability, quickly. Today’s investors are looking for your company to be able to become self sustaining. And that if they again, if they give you $1, you can turn it into 10. They’re not giving you $1 In order for you to be able to build, you know, basic infrastructure that you can build, get to and three and four over a longer period of time, so move to profitability quickly. So just in recap, those three are focus on your customer needs and sell to them, manage your cash flow and move to profitability quickly.

 

Debbie Goodman  26:25

Well, that should not be rocket science. Profitability has been a bit of like a curse word to like, What do you mean, I need to be profitable? Huh?

 

Rita Ferrandino  26:35

Today you do.

 

Debbie Goodman  26:37

Today you do and into 2024. If that is not in the foreseeable future, it’d be really, really tough. So got to figure that out. Rita, we have come to the end of our sessions been fantastic. I would love to pick this conversation up during the course of next year to see how things are changing. It’s certainly a very interesting and fluid market. I’m going to be heading to the EdWeek Market Brief Summit next week K 12. So I’m excited to see what’s bubbling up there. And with those words of wisdom, I’m gonna say goodbye. Thank you so much. 

 

Rita Ferrandino  27:18

Thank you, Debbie.