CodeCombat (July 2020)

Deal Abstract

https://www.seedinvest.com/codecombat/series.a

Product that I have personal experience with that has been operating for over half a decade. This company doesn’t have the outsized returns of a normal angel deal, but it does have the appeal of having passed the existential angst stage. Now positioned very well during the COVID-conomy to make a bid for distanced, highly-produced, gamified coding education. Backed by a16z, Y-Combinator and Hone Capital.

Decision

Yes

Why Investing/Passing

  1. I’ve used the product myself and know the team has been in this for a long time.
  2. Distanced learning, gamified education, coding, all things that obviously are going to grow further, especially during this environment.
  3. Interesting that the team founded Skritter, obviously sticking to the core value prop is good but this team could very well position itself to be an EdTech giant if it finds repeatable, scalable ways to gamify other education. In this case not asking if company can go from 0 to 1 (it’s already done that,) but rather 1 to 100.

The 6 Calacanis Characteristics (91 161 18)

CheckPass/Fail
1. A startup that is based in SVPass. Source.
2. Has at least 2 founders Pass (2+)
3. Has product in the market Pass
4. 6 months of continuous user growth or 6 months of revenue.Pass:
Q2 2019: 339k
Q3 2019: 359k
Q4 2019: 365k
5. Notable investors?Pass With Flying Colors: Victory lap of the big names such as a16z, YC, and Hone Capital, the last of which invested in AirTable, Atrium, Cruise, Guideline, Gusto, Haven, Iron.io, Lever, Pared, Petal, Superhuman, Wonderschool, and Zeel. I’ve never heard of Hone previously but they certainly got money, at some point, into many fancy toys that all the cool kids are playing with.
6. Post-funding, will have 18 months of runway Pass: Raised $624k, 2019 burn was $3 million, targeting 1.335 million, so would have 25 months of runway at maximum round.

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • Yes: Codecademy and FreeCodeCamp.org come to mind. But I can’t think of anyone who has gamified coding as well as CodeCombat has.
  2. The Timing question
    • Phenomenal: The company is over 7 years old, but this time in history with a global pandemic is about as good as it gets to have a great reputation and new product ready to scale.
  3. The monopoly question
    • Yes: Selling to schools is really hard. I’m thinking Nearpod and Clever. Assuming that this company has figured out even the teacher dashboard section of the enterprise offering, no reason to see why it wouldn’t be a monopoly in coding education (or even other highly engaging online education.)
  4. The people question: 
    • Good: Scott Erickson and George Saines seem to have transitioned (it’s been 7 years,) but two of the original cofounders are still there, and most importantly, the CEO with a demonstrated passion and competence in EdTech still seems in it to win it.
  5. The distribution question
    • Very good: Most impressively, they’ve sold to almost 500 paid schools. Schools are not innovators, but rather followers, so this bodes well for defensibility.
  6. The durability question
    • Very: one could easily see if this product is successful, it would have huge position to enter into adjacent market e.g. email marketing, CRM, etc. Not that it wants to, but getting the spout of customer and sales acquisition data is very powerful.
  7. *What is the hopeful secret?: 
    • COVID allows them to triple their revenue from an already respectable ~$5 million to ~$15 million in one year.

What has to go right for the startup to return money on investment:

  1. More states add programming to mandatory education: why are only 19 states requiring CS education? It’s 2020? I’ve been hearing of this need for half a decade now (minimum) and am particularly surprised that the three highest states receiving VC (MA, NY, and CA) are not requiring it yet.
  2. Sell, sell, sell: identify the characteristics of schools most eager to shell district money for this type of solution. Is states/state-equivalent bodies abroad that have to make good on modernizing education that shell out the money? Who is this most immediately a painkiller for.
  3. Delight your advocates/”freaks“: Parents and teachers who love the product won’t be decision makers, no matter how much they love the product. However, the more CodeCombat can delight these stakeholders, the more pressure PTAs and teachers unions will give to decision makers. Not to mention, is there a college/university play here?

What the Risks Are

  1. Painkiller vs. Vitamin: I remember the mid 2010’s being the golden age of “teach yourself coding online” solutions. It’s been 5 years since then. What if this is a prevalent case of not putting your money where your mouth is. What if the supply of coders is just very inelastic. As someone who taught introductory CS101 and programming, this research haunts me.
  2. One Trick Pony: This business can be quite big just teaching coding. At the same time, as a venture investor, I’m really looking for 5x-10x growth in a 3-5 year period. Can doubling down just on coding meet this need?
  3. People risk: This business has been around for 7 years, and has churned 2 founders. I don’t see the CEO/CTO churning, but if that was to happen, it’d be a big hit to the company’s leadership.

Muhan’s Bonus Notes

  1. This is not a great “broke angel” deal in that the valuation is already at $25 million and returns will not be outsized. However, I played around with CodeCombat many years ago, possibly while I was still in school, and know the product is good here. I do think that the company could grow to $50 million to $100 million especially in the Corona-conomy. But primarily, I’m investing because I like the values of the company and have positive personal emotions with the product.

Financials (References)

  • Total Amount Raised: US $624k
  • Total Round Size: US $1.355 million
  • Raise Description:  Series A
  • Minimum Investment:  US $500 per investor
  • Security Type:  Crowd Note
  • Valuation Cap:  US $25,000,000
  • Offering Type:   Side by Side Offering

Updates

This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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2 comments
  1. Yina Huang
    Yina Huang
    July 16, 2020 at 11:04 am

    Wow. This was a great post. I just signed up to use their product. Love the introduction of “painkiller vs vitamin”. Came across this metric in a Knowable startup podcast and love this as a way to distinguish the product or service.

    Would love to chat about this company further!

    Reply
    • muhan
      muhan
      August 4, 2020 at 9:04 am

      Glad you enjoyed it! It’s definitely cool seeing some companies “grow up” so to speak. Let me know if there are any specific points you want me to cover and I’ll happily follow up.

      Reply
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