Why this edtech company won’t easily take VC money
This article is from an episode on Disrupting Japan. This is heavily revised from the original show transcript. For the full episode, go here.
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Not everyone approaches startups as an exercise in business model design, where you have a system of interacting components that need to be optimized in underserved markets. In fact, some founders start out with a vision of what they want to do before figuring out how to backfit a sustainable business model onto it.
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This is exactly what Peter Galante, a podcaster at Japanese Pod 101 and founder of edtech company Innovative Language Learning, has done. Not only did it lead to the success of his business, but it’s also preventing even well-funded competition from entering the space.
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Here’s the interview.
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What initially brought you to Japan?
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When I was in high school in the early 1990s, we had a Japanese exchange teacher who came to stay in our house. I’m from New York, and this was when Japan was becoming the new No. 1 economy. Meeting someone from Japan, spending time with him up close, learning about the culture and language, and more importantly, making a real lifelong friend, was the main reason I became interested in Japan. So when I went to university, I chose Japanese as the language to study.
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My Japanese teacher said to me, “You should go to Japan.” So I interviewed for something called the Japanese Exchange and Teaching Programme, but I didn’t get it.
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So I made it a goal to come to Japan. I wound up coming as an English teacher, then I entered Hitotsubashi University for a master’s program. I made it to the doctorate program, and about two or three years in, I started the business.
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What does your company do?
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We provide about 10- to 15-minute lessons primarily on the Japanese language that are usually centered around a conversation. The conversations feature two voice actors speaking Japanese. We break down the conversation and explain the nuances of the words, vocabulary, and grammar.
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Japanese Pod 101 acts as a platform for the sample lessons, then people can come onto our site to subscribe to the whole package. We offer a freemium model where the lesson is free for two weeks. Currently, the platform supports 34 languages.
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What led you to start the podcast?
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I think it was passion. All of my institutionalized Japanese learning tended to involve a middle-aged person who taught very formal Japanese. They were all great teachers, but when I got to Japan, I met crazy people like me who like to joke, laugh, and go out on a Friday night. And they used a completely different language than what I learned in the classroom. So I wanted to find a clever way to give Japanese language learners a head start, which I never had.
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I definitely did not envision it as a company at first. In fact, I did not even know how to do a podcast or anything about audio content, but I just knew that I wanted to do this.
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We first started in December 2005. We had a few hundred downloads a day, and then somebody in Apple put our podcast on iTunes’ front page, which boosted our downloads to a million a month. Luck factored into that for us.
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How did you think about monetizing it?
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It took about six months for me to think about how it can be a profitable business. After we had all of the traffic, we had to find people. We bootstrapped, having just a small monthly budget.
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But I think the real challenge was the fact that it was a new model. Our spending went from zero to US$20,000 very fast. We had to focus on how we could make money. We were giving everything away for free, and when we introduced the payment system, the community was not very happy. Some people were very supportive, but others were like, “Hey, what’s going on? We’ve had this for free. We’re never coming back.”
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What drove you to produce video content?
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2017 was the crossover point for video being a more popular medium for people to consume lessons than audio. And right now, audio is actually shrinking while video is exponentially increasing.
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So we needed to find the balance and reinvent ourselves as a company, because the way this market is moving with educational material involves so many things that are becoming free. Ten years ago, you had to pay for quality content, but now, quality content’s being produced by the hour or every second.
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The fact that YouTube content has been getting more engagement than spoken audio drove us to produce video content. So now, we create two types of content. Internally, we defined them as engagement and academic. Academic is the type of content that will appear both on YouTube and on our site. Engaging content is meant for users who are very interested in getting new content, often driven by marketing ideas such as “top 10 dishes to try when in Tokyo.”
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What’s your strategy to deal with customer churn, which is a significant issue for companies like yours?
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I think – and from what I heard about online learning platform Udemy too – the number of people who actually complete the courses is so low. Getting them to the end of the line requires some type of interaction.
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People were passively learning through our content, so we started paying close attention to having a wide variety of hosts so that people could find someone they want to identify with. If they like their teacher and want to communicate with the teacher, they’re going to stay.
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We’re also creating courses that they can finish in a certain amount of time. People seem to be more engaged when there’s a bit of a deadline.
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Finally, we’ve recently started shifting over to portfolio learning. Here, people would take a video of themselves at a sushi restaurant, for example, ordering sushi or recording an audio of themselves applying what they have learned. They would then send it to the teacher, and if the teacher approves it, the learners can add it to their portfolio.
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Have you ever looked at raising venture capital?
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Early on, we did. And we got the best advice.
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One of the listeners of the show happened to work in a private equity fund in New York. He said, “Let’s see if there’s something we can do.” Later, I found out that it was his money he was going to invest. We then spent so much time putting together the pitch.
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We told him, “David, we would like to have US$3 million.” And he said, “Guys, listen. If I give you US$3 million, you wouldn’t know what to do with it.” It was the best advice I ever heard.
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If we got that money, I don’t think we would’ve known what to do with it. We probably would’ve called a headhunting company, brought in some guy who’s used to having a team to execute with, and gone about building the company completely differently. By not having the money, we were forced to think creatively, make every penny count, and pitch the people who became part of the company on our vision.
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Did you ever think of raising money again?
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We did. But at that point, for better or worse, we had a clear vision of what we wanted. When we pitched and investors didn’t agree, we had the luxury of walking away. They said, “Guys, listen. See these other 24 languages? Kill them. These eight are going to make you all the money.” They weren’t incorrect, but we have certain other reasons why we wanted to build a portfolio language.
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If, for example, their numbers and our numbers don’t match, we’ll say, “Listen, our visions don’t align. We’ll just keep going our way because we have a vision that we’re locked into.”
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What I find most interesting about Japanese Pod’s story is that the very thing that has made it hard for them to scale is also what prevents others from entering the space and competing with them. No VC will fund the creation of thousands of educational videos and even if they did, without that large and engaged community, a new startup would have to pay five times what it cost Japanese Pod to create these lessons.
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The truth is, content is just not highly valued today. It’s whatever fluff you need to put up on the page to attract advertisers, build Google juice for SEO, or prove you’re an authority in the business. Meaningful podcasts, articles, movies, and stories have value in and of themselves, but they’re created by people who are not focused on the bottom line.
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In every successful edtech startup I’ve talked to, there’s been some aspect of the company that doesn’t or can’t really scale. Some real human-to-human interaction increases in cost linearly with the increased number of users. And good businessmen, VCs, and founders have trained themselves to identify these frictions and eliminate them. But in many cases, those frictions are the very reason these companies are succeeding.
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Education requires some kind of human interaction. It requires the teacher to care. They have to see their vocation as something more than creating content. For this reason, the VCs who are telling their edtech portfolio companies to optimize their business models and externalize their content creation might actually be dooming them to failure.