Investing in the Future of Educational Technology
Venture capitalists are very excited about educational technology, and they are putting big money to work. Chegg has raised $250 million, Kno has raised $89 million, Desire2Learn has raised $80 million, Rafter (formerly known as Bookrenter) has raised $66 million, and Knewton has now raised $54 million. Meanwhile, angel investors and incubators have put smaller amounts to work in hundreds of educational technology startups.
I am often asked whether a bubble is forming in educational technology investing. Are we experiencing something similar to the clean technology investing bubble that started in the middle of the last decade? I don't think so. Clean technology startups were a lot riskier. Many clean tech bubble companies were conducting basic research: they had to spend tens or even hundreds of millions of dollars before it was clear that they had developed products that worked and could be manufactured at reasonable prices. Also, many clean technology bubble companies competed in commodity markets subject to extreme price swings. One could build a biofuels plant and then discover that the price of oil had declined by 50 percent.
Educational technology startups, on the other hand, usually take little technology risk. Most set out to do things that are known to be technologically achievable, and they fail only if they are unable to raise money or unable to sell their products in a cost-effective manner. Starting a company and testing an idea has become a lot less expensive. Even a decade ago, the first thing an internet startup had to do was buy a server for hundreds of thousands of dollars, find a room for it with appropriate wiring and cooling, and then hire a full-time administrator for it, not to help code the product but just to handle the care and feeding of the server. Now, of course, Amazon, Rackspace, or Microsoft will offer you web services for $2,000 a month, and if you go to the right incubator you can get those services for free. Generally, with an educational technology company it doesn't take a huge amount of money to figure out that a business model isn't working. A team can then decide either to pivot and try a new business model or shut the company down and hand the remaining cash back to investors. Of course, almost all management teams opt to pivot if they can continue to raise cash, and after three or four pivots the price tag starts to mount.
Selling to school districts is notoriously difficult. The sales cycle can easily be two years long, and the decision-making process can be political, opaque, and irrational. But things are getting better. Districts have attracted some extraordinarily talented staff members and superintendents, consortia of districts are working to streamline the evaluation process, and a number of groups including the Gates Foundation, the Dell Foundation, Edmodo, Engrade (a startup I invested in), Learnsprout, and Clever are trying to make it easier to exchange data among different tools. Districts are understandably reluctant to add new tools when they have to provision each new one manually. We are moving rapidly toward a world in which a new tool can be seamlessly and easily integrated into a district's toolkit, with a single sign-in giving teachers, students, and administrators access to all of their tools and a single dashboard integrating data from all of those tools. When this happens, it will be bad for large companies with aging soup-to-nuts offerings and good for nimbler small companies with better solutions to particular problems.
My partners and I are incredibly lucky to be investors in educational technology companies at this particular point in history. We expect to lose money on at least a few of our projects, but we see many excellent opportunities. And we see the chance to improve the lives of millions of children, teachers, and administrators. Some startups are scaling at a staggering pace. Edmodo has now signed up over 10 million users, and Engrade has signed up over five million. Educational institutions have been slow to adopt new technologies, but the pace is accelerating rapidly. We live in exciting times, and I am grateful that the editors of Education Week have given me the chance to enter a conversation with you about what you are seeing and experiencing.