Deal To Watch: Stepping Up The STEM Game

$4M

Key Stats: Launch Code After School on SeedInvest

Valuation Cap

$4M

Amount Raised

$0

Number of Investors

Not Known

Minimum Raise

$25,000

Maximum Raise

$1,070,000

Likelihood of Max Unlikely
Start Date

08/12/2019

Stop Date

09/27/2019

Days Remaining

9999997

Security Type

Debt

Investment Minimum

$1,000

Deal Analytics

Click Here

Summary

The Launch Code After School team has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our due  diligence and selection methodology, please reach out to hello@kingscrowd.com.

Every day, the world becomes technologically more advanced, and yet, for decades, little has changed in how the youth in society are educated.  As civilization becomes more advanced, it’s necessary to have a population that can keep up, but perhaps more important than that, it’s imperative that today’s youth have the skills and knowledge needed in order to keep society pushing forward to bigger and better heights.  That is where Launch Code After School comes in.

After selling his firm, MakerSquare (an adult coding boot camp with locations in Austin, San Francisco, Los Angeles, and New York City) to Hack Reactor in 2015, Ravi Parikh decided to do something different.  He set out with a team of other like-minded individuals to create Launch Code After School, a coding boot camp dedicated to teaching kids aged 7 through 14 how to program. Through a mix of summer camps, weekly classes, and online content, the company’s goal is to create a nationwide franchise aimed at changing what our children know and when they know it, with the end result of teaching valuable career skills to the workers of tomorrow.

The Problem

In the fast-paced modern age, there exists a significant skills gap when it comes to technology.  According to Launch, in 2017 there were 1.4 million jobs needed in the computer programming space in the US, but only 400,000 graduates to fill them.  According to the BLS (Bureau of Labor Statistics), the number of actual computer programming jobs are slated to fall by 7% between 2016 and 2026 as companies look to offshore those positions. The demand for web development professionals is set to grow by 15% over the same timeframe. Overall, the demand for the broader computer and IT space should grow by 13%.  Both of these are much faster growth rates than the average career in the US economy.

Economists aren’t the only ones who understand the demand here going forward: according to the BLS, 84% of parents believe that computer science skills are required in order for students to succeed in primary and secondary education.  As technologies expand out from where they are today, they will become ever more complicated and specialized. Understanding not just the basics of programming, but actually understanding multiple coding languages, will prepare today’s youth for interacting with the world of tomorrow.  

The Solution

 

Recognizing this opportunity, Ravi and his partners decided to set up Launch.  With initial funding of $550,000 drawn from local angel investors in Texas, they opened their doors on their first location last year.  The end goal was to teach children aged 7 through 14 how to code in multiple languages, including HTML, CSS, JavaScript, LUA, Python, and more.  In their first year of operation, the company brought in revenue of $65,511, but recorded a net loss of $273,285 and operating cash flows of -$204,762.  

Over time, the headcount at its business grew, with 113 new students added in the second quarter of 2019.  According to management, the current summer camp enrollment stands at 179 students, which should guarantee an annual run-rate of $240,000.  For its summer sessions, Launch charges between $99 per month and $449 per month, but it is also working on weekly programming where it intends to charge between $199 per month and $299 per month.  An additional revenue stream for the company will be its $49 per month online course, but given the small average class size of one teacher for every eight students, there’s an undeniable benefit to paying more, if possible, for the hands-on help.  

Although management intends to grow the business organically, it also sees a significant opportunity when it comes to franchising.  Between 2019 and 2024, Launch plans to open 106 locations, with an eye on potentially more than 300 shortly thereafter. Of the 106 locations expected, 78 of them are projected to be franchised.  In addition to charging a franchise fee of between $20,000 and $40,000 per location, the business expects to charge a fee of 8% of net revenue, plus another 2% assigned as a technology fee.  

 

As you can see in the image above, each franchised location should cost between $146,100 and $344,700 to set up.  Customer acquisition cost should range between $300 and $425, but with the average client having an estimated LTV of $2,900, the upside is imminent.  Within a few years of launching, each location should be generating net revenue of between $500,000 and $700,000, with EBITDA likely to hit somewhere around $225,000 per franchised location.  For its current Davenport Village location, the company projected that next year it will start with 158 students and, by the end of the year, will grow to 224. Total net revenue for the period is forecasted to be $468,989, with EBITDA and cash flow expected to total $186,357.

 

Why We Like it

The management team at Launch accurately pointed out that there are around 74 million children in the US today.  Of these, around 35 million are either upper-middle lass or upper class, the most likely users of its services.  For its online offering, once it’s launched, the company believes the market opportunity could be around 1 billion individuals.  Of course, with several competitors out there, like iCode, Hatch, uCode, Code Ninjas, and The Coder School, among others, achieving a large part of a very disparate market is highly improbable. 

Even if Launch does not go on to capture millions or even hundreds of thousands of students, the potential upside is far from insignificant.  Industry revenues in the US in 2018 came out to $240 million, with just over 20,000 students graduating. This was up from fewer than 2,200 students who graduated in 2013.  One benefit for Launch, once it opens the door to its online program, is that of the 1,387 online and in-person coding programs analyzed in 2018, only 12% throughout the US and Canada offered both in-person and online options.  What’s more is that, for the players who do achieve strong growth, there is an attractive upside, illustrated by 2U, an education technology company. Earlier this year, 2U announced that it had agreed to acquire Trilogy Education Services, a leading coding boot camp  business, in a deal valued at $750 million, despite the company only ever having raised $80 million in funding.  

The Executive Team

Having an excellent business plan and technology is important for the success of any startup, but at least as important as this (sometimes, in the case of a service business, more important) is the management team and other support partners in place.  Only through quality execution that comes from a quality team can any idea truly thrive. 

Below is a brief summary of the key executive team’s backgrounds.

Ravi Parikh – CO-FOUNDER/CEO

Parikh co-founded and founded several software companies including; Maker Square, RoverPass and now Launch Code.  He merged MakerSquare with Hack Reactor in 2015 based on a duality of purpose. He’s the principal strategist with Launch Code and he heads up the engineering department, investor relations, and fundraising.

Jobin George — CO-FOUNDER

George comes to Launch Code with a background as a strategy consultant in the health care industry with Advisory Board, a best practices firm and an account manager at TrendKite.  His responsibility with Launch Code is managing the B2B sales force and corporate locations and initiating key franchise documents.

Vijay Kalvakuntla — CO-FOUNDER

Prior to joining Launch Code, Kalvakuntla was an investment banker in the energy sector and has an MBA from the Wharton School of Business.   Instrumental in the initial round of fundraising he sits on the board of directors and manages corporate governance and financial strategy.

Mitch Morales — CO-FOUNDER/COO

Morales’ career began with e-learning 360 in charge of M&A.  He quickly developed a knack for finance and entrepreneurial skills as an energy trader and developed one of central Texas’ premier music festivals.  Morales brings expertise in B2C marketing and entrepreneurship as he manages general operations and finances.

Lindsay Walker – CO-FOUNDER

A teacher with a master’s degree in integrative STEM education and developer of e-learning curriculum platforms.  Walker was credited with a certificate in front end development where she built K – 12 computer science curriculum content.  She and her team develop all curriculum for students and teacher training.

 

Deal Terms

Instead of looking for immediate equity capital, the founders at Launch are looking to raise money in the form of a crowd note.  This note bears a 5% annual interest rate, which accrues quarterly, but is unlikely to actually pay out any cash to the holder. Instead, the amount accrued will be converted, after a period of 36 months or upon an equity raise, into a number of shares equivalent to the valuation of the firm, less a 20% discount (all subject to a $4 million valuation cap). 

Shares will be converted into the highest-quality preferred units if preferred units are outstanding but, if not, will be convertible into common ones. Some voting rights will be limited, except for in cases that an investor is a “Major Shareholder”. 

The Rating: Deal To Watch

Launch Code After School is a Deal To Watch. The experienced management team has played in this space before and knows how to approach building a company within this market. With fast revenue generation and traction within their first location, the team is proving that the service offering is in demand. However, running a service business especially in the education space does come with its own challenges especially as it relates to quality management within the franchise model.

These are concerns that should be considered as the level of scale with a service business is limited and the continued success of the company relies on franchisees executing at a high level and maintaining the brand vision, which is easier said than done.

Acquisitions by other older, after school education brands such as Mathnasium could present themselves over time, but it is not a space ripe for large sized acquisitions per se based on our analysis. The value of this coding service may also lose appeal as more schools look to integrate coding into their core content, though many after school programs in core classes still thrive, so this is of less worry. 

Overall, the business has decent fundamentals and meaningful enough traction to indicate that a healthy business with solid margins can arise over the next 3 to 5 years.

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About: Daniel jones

Daniel Jones is a graduate of Case Western University with a degree in Economics. He has spent several years as an equity analyst writer for The Motley Fool where he focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics, in addition to contributing equity research to publications such as Seeking Alpha.

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