The introduction of one of my favorite early-stage investments and my attempt to figure out what I might be able to bring to the table as a startup investor.
I once mentioned to a friend that I had invested in approximately sixty early stage ventures. He was gobsmacked. “How do you stay involved and help so many founders?”
Let’s just say that I am now trying to make up for years of passivity.
Kunduz is a tutoring start-up based in Istanbul, Turkey that answered over 3 million questions for students last month. They most recently grew 4.1x year-over-year on their way to reaching over $300k in monthly recurring revenues (MRR). I invested in Kunduz’s demo day round in September 2018.
Doing well on your college placement exam can be a make-or-break proposition in many countries, and evidence exists that direct tutoring can bring an average student into the top percentiles. The challenge is how to provide this at an affordable price. What initially attracted me to Kunduz was that they had already enrolled 7000 tutors for their mobile based platform.
Effective tutoring often entails follow-up questions and answers. The primary focus of Kunduz has been on how to best help students who have follow-up questions. That is where real tutoring happens. That focus is why I thought Kunduz might succeed.
Plus, I have never forgotten what Sam Walton said about the advantages of starting in Arkansas before entering more competitive markets. Many international start-ups have a similar advantage, and I thought Istanbul could be Kunduz’s Bentonville.
Earlier this year, I spoke with Basar Basaran, the co-CEO of Kunduz, in what became the first of several long conversations. In his latest investor update, he had mentioned that the company had recently started getting their story out and they were looking for support and feedback about increasing their public profile. Among my many questions was why increasing their social media presence was on his mind.
Basar explained that one thing that has slowed their pace has been not being visible enough to potential hires. They are proud of their entrepreneurial culture and the challenging work that engineers get to work on at Kunduz. Basar believes in spending 20% of his time getting to know people, and—just as importantly, having people getting to know you.
This week I want to put a spotlight on Kunduz, as they seem to be at an inflection point after proving out might have a unique opportunity to 10x their business. Many of my readers are a lot smarter than me about early stage companies, so with Basar’s permission I’m just going to frame their situation and outline my questions about how they should proceed. Consider this an intersection of a whole bunch of getting-to-know each other dynamics.
Kunduz has a very straightforward customer interaction:
Their focus in Turkey is for students who are preparing for the college entrance exams. Utilization dips in the summer when school is out of session, and then ramps up significantly as the school year progresses:
MRR’s exceeded $300k last month, representing about 30,000 paying users. Kunduz is cash flow positive and has a head start and scalability in Turkey that probably won’t be caught. The market size is significant: 4.5 million students take these exams every year, with 2.5 million college, 1.5 million middle school, and 500k gap year students needing to do exam prep.
Kunduz’s initial focus was on later year high school students and their college exam prep, but they are expanding their audience to earlier grades and becoming an all-around learning app. School districts have begun to purchase licenses for their students in an effort to level the playing field. Kunduz has gained the support of teachers by relieving them of needing to do lots of individual tutoring and thus enabling teachers to focus on teaching bigger conceptual frameworks and lessons.
As an investor, I look at charts like the growth chart above and transpose those pretty trend lines into actual numbers. Kunduz’s growth has been amazing, but their customers age out. Can they expand their offering in both directions, and get a longer life-time value from their customers? Such an expansion would mix well with a high and improving level of retention by current customers:
There is one last slide I want to share before I dive deeper into how Kunduz operates. You have to know a little bit about the business in order to understand what is happening here:
I could go on for pages about how Kunduz has tackled the problem of answering student questions in a responsive and effective way that also provides direct engagement by tutors for follow-up questions. Any student question that already has a highly rated and approved answer is provided with that answer. Follow-up questions bring in the intervention of a live tutor.
The AI to match questions with answers is not as straightforward as you might guess. Kunduz’s AI is all in-house. Using Google’s OCR (Optical Character Recognition) barely accomplishes 5% of what they need. Kunduz has solved 20 million questions and while it sounds simple enough for them to screen their library, but given the way questions are asked, it can be very difficult to get the content out of it. Plus, they must monitor and detect behavior that needs to be blacklisted—curse words and other inappropriate inclusions.
However, you can start to see in the chart above what happens when you can begin to answer 75% or more of your questions by matching with solutions from your existing library. The average cost comes way down, and that in turn bleeds through to customer acquisition costs (CAC) by reducing the cost of providing freemium answers to new users.
This has brought CAC within a 1 to 2 month payback period. Basar told me that I could share that slide, but I’m going to overrule him. I intended to, but when I went to paste it in, I took a close look at its breakdown and the cost percentage they were attributing for freemium versus paid marketing and literally said aloud: “Holy smokes.” Does anyone still say that? Beyond this guy?
As an addendum, I'm now including that fifth slide demonstrating Kunduz's low customer acquisition costs because my reluctance was not shared by Basar and his longtime good friend, co-founder and co-CEO Melih Sener. Basar wrote me that:
"We are proud of the low CAC and high gross margin nature of our business. That keeps us both alive and growing with so little funding."
Early stage investing has some very different qualities that it has taken me a while to internalize. First of all, it is very much about demonstrating revenues and having a successful customer engagement model that produces increasing growth without a corresponding linear increase in expenses. In plain terms, it means that each additional unit of growth costs less.
The slide below shows the dominant effectiveness of freemium answers in growing Kunduz's business. When the answer library grew large enough in Turkey, the CAC payback period began to get inside two months.
It appears that Freemium Questions might be a remarkable flywheel that drives Kunduz's CAC lower as their libraries build. Can they do this in markets beyond Turkey?
Which brings us to the current opportunity set. Kunduz is looking to expand beyond their small footprint in India. They recently put their app in the US without any fanfare or marketing just to lay the groundwork, and with only two or three dollars per day of test marketing spend, they are nonetheless signing up new users every day.
The US market is dominated by Chegg, which is a publicly traded juggernaut that is valued at something like 15x revenues. Chegg dominates the SEO and I wonder about any start-up breaking that stranglehold.
However, it appears that Chegg isn’t built to emphasize follow up. Their response times are slower than Kunduz, significantly so, according to Basar. However, despite Kunduz offering more follow-up, and having to start over in India and the US with an English language solution, their costs will still enable them to price an their offering at a steep discount to Chegg.
According to Basar, Kunduz offers unlimited questions versus Chegg’s 25 questions. Kunduz offers further help, Chegg not at all. Kunduz responds in 15 minutes, Chegg can take hours. Kunduz is priced at $9 monthly versus Chegg at $15. As Kunduz accumulates a solutions library, the gross margins can approach those they have experienced in Turkey at 75% to 80%.
While Chegg does have a more responsive option, the Chegg Study Pack, it is priced at $20 monthly and is fairly equivalent to Kunduz's Q&A help.
I went to test Kunduz and took a picture of a calculus question. It worked as promised. I didn’t ask a follow up because to be honest, I took calculus so long ago that I wasn’t even sure what I was asking.
Thankfully, the Kunduz team looks like they are much more in tune with the needs of current students:
In less than two weeks, Y Combinator (YC) will host their twice annual demo days, in which mostly early-stage companies give brief but effective presentations about what they are building. Interested investors then follow-up via direct one-on-ones with the founders.
I took a quick tally yesterday and counted approximately thirty investments that I have made in YC funds or companies, with many of these representing indirect investments via demo day funds or syndicates. However, more than a dozen have been direct investments, such as the one I made in Kunduz.
Including my participation in 10 diversified demo day funds, I probably have exposure to more than a hundred YC startups. Along the way, I’ve heard thousands of pitches and had direct conversations with a lot of startups. I understand that getting investor feedback is an important process for founders, and I’m happy to provide that, but I also feel very limited that I’m not part of some larger partnership by which together we could provide valuable perspectives.
In the years ahead, I hope to team up with other angels and early stage investors. There must be many ways that we can assist each other. If discussing Kunduz with myself or Basar can get the ball rolling, please reach out to either one of us.
This isn’t an investor pitch, and early stage investing is definitely not for the faint hearted. We’ve all seen companies raise money at billion dollar valuations and then implode into nothing. Still, we know the equations that are used to justify getting toward those valuations. Step 1, get to $3M in annual recurring revenue (ARR) while growing MRR at 20%+ monthly. Step 2, triple your growth annually for two years and then double it twice more over the next two, establish highly defensible profit margins, have significant growth still ahead, get valued at 10x revenues, and voilà, a unicorn.
Easier said than done.
Here is what I’m hoping for Kunduz. I believe that excellent partners are instrumental to success. Kunduz had to go to Silicon Valley to get their initial backing. Now, local investors are taking a keen interest. That’s great news. It is promising to see local investors wanting to back a local champion as it grows.
One reason I am keen to look at international early-stage investments is because many of these markets have not had a tradition of independent founders. While the new generation of entrepreneurs has more powerfully aligned incentives than ever before, it is still important that they avoid any overly restrictive governance limitations as they fund later rounds.
My question is what does Basar and Melih need the most from their current and new investors to grow Kunduz to the next level? Given my strong belief in having high quality partners, how can Kunduz make sure they are talking to people who will spend the next ten years helping Kunduz reach its full potential?
How would those who are experienced in helping international companies cross borders and languages look at the risks and opportunities ahead? What developments in edtech does Kunduz need to stay ahead of in order to compete successfully as it expands its product range both domestically and internationally? How does Kunduz 10x in its next stage and accelerate toward becoming a global unicorn?
I have much more than a financial rooting interest in their success, because I sincerely believe that:
Affordable and responsive tutoring is a valuable product that can make a significant impact on people’s outcomes. Kunduz deserves some great partners.
I would like to be a better early stage investor, and not just for the financial results, but to be part of building something. I’m hoping that I might be inviting some help by setting the table and sharing what I’ve learned and found compelling about Kunduz.
This has led me to suggest an expansion to today’s prescription. We should indeed be spending a significant amount of our time getting to know people and having them get to know us—and whenever given the chance, introduce our friends.
We can do that by sharing the great work they are doing.