Monday, March 19, 2012

A Boom Time for Education Start-Ups

Despite recession investors see technology companies' Internet moment
By Nick DeSantis

Harsh economic realities mean trouble for college leaders. But where administrators perceive an impending crisis, investors increasingly see opportunity.

In recent years, venture capitalists have poured millions into education-technology start-ups, trying to cash in on a market they see as ripe for a digital makeover. And lately, those wagers have been getting bigger.

Investments in education-technology companies nationwide tripled in the last decade, shooting up to $429-million in 2011 from $146-million in 2002, according to the Na­tional Venture Capital Association. The boom really took off in 2009, when venture capitalists pushed $150-million more into education-technology firms than they did in the previous year, even as the economy sank into recession.

"The investing community believes that the Internet is hitting edu­cation, that education is having its Internet moment," said Jose Ferreira, founder of the interactive-learning company Knewton. Last year Mr. Ferreira's company scored a $33-million investment of its own in one of the biggest deals of the year.

The scramble to make bets on a tech-infused college revolution has led to so many new companies that even Mr. Ferreira can't keep track.

Udacity, Udemy, and University­Now all have plans to revolutionize online learning. There's the Coursebook, a young online-learning start-up. And Coursekit, a nascent challenger to Blackboard in the market for learning-management software. And Courseload, the Indiana-based digital-textbook enterprise. And CourseRank, the class-sorting outfit acquired by the textbook vendor Chegg two years ago.

This isn't the first ed-tech boom to crowd the market with companies whose names sound alike. A similar wave hit in the late 90s, during the larger dot-com frenzy. But today's investors believe this round of growth is different. Michael Moe, co-founder of the investment-advisory firm GSV Asset Management, said the first ed-tech wave had been based mostly on euphoria that anything digital would work.

"There were just a bunch of things that were, candidly, thrown against the wall," he said of the 90s start-ups. Some companies pitched ideas that had no sustainable business model. Others, Mr. Moe added, were years ahead of their time. (Courseload, the digital-textbook start-up revived in 2009, was born in 2000, but its leaders say tools weren't available to support it until more recently.) When the dot-com bubble burst, investors fled the market.

Since then, huge ad­vances in computing power at colleges have created a fertile ground for companies offering technology services. Rob Go, a partner at the Boston-based venture firm Nextview Ventures, said near-universal wireless Internet access, high-speed connections, and growing comfort with cloud-based software make it easier for today's start-ups to get traction on campuses.

"The promise may be very similar to what people were promising 10 years ago," Mr. Go said. "It's just that rolling it out was way more challenging."

Silicon Valley's strong feedback loop has also helped connect engineers sporting impressive track records from their work in other Internet sectors to investors with deep pockets. "The level of talent that's being attracted to the education-technology world today is insane," Mr. Moe said.

More Money in Play

Michael Staton, the founder of a start-up called Inigral, was early to the ed-tech party. He started the company, which offers a Facebook-powered application for universities, nearly five years ago.

"There was no ed-tech start-up ecosystem," he said. When he founded Inigral at 27, most of the networking events he attended were meant for other Internet companies, advertising networks, or gaming start-ups. At most, there were two ed-tech companies in the room. "It was kind of a lonely world to be saying, I'm starting a company in education," he added.

But recently, Mr. Staton said, "something in the zeitgeist" is giving education entrepreneurs access to money, advice, and talent that was once reserved for other sectors. And it's not all coming from for-profit outfits; last year, the Bill & Melinda Gates Foundation gave Inigral $2-million of a $4-million investment.

Mr. Staton believes that a growing acceptance of online learning, rather than any particular new technology, has allowed start-ups to gain support for new products. Now 31, Mr. Staton said he's become known as a "grandfather" in the ed-tech scene, which has changed drastically since Inigral's early days.

"There are events where it's standing-room only specifically for education entrepreneurs," he said. One example is the Seattle nonprofit group Startup Weekend's series of 54-hour EDU gatherings, at which entrepreneurs get together to pitch and create education-technology businesses in the course of one jam-packed weekend. The events began in September 2011, and their leaders announced a one-year partnership with the education giant Pearson early this year.
The market is so crowded that it even spawned its own news outlet, called EdSurge. The weekly newsletter covers the education-technology sector and recently celebrated its first birthday. Its editors have also rolled out an early version of a database that seeks to track the market's biggest players.

Last October, Mr. Staton did his own legwork to help other start-ups get off the ground. He teamed up with Educause, the education-technology group, to organize a new exhibition area called Start-Up Alley at the association's annual conference. Eighteen emerging companies participated.

The lucrative investment climate for education-technology companies enticed the young founders of one Start-Up Alley outfit, OneSchool, to leave Pennsylvania State University and focus on their enterprise full time.

"There's a reason that we got in our car, we drove 3,000 miles across the country from Happy Valley to Silicon Valley, and that's because we knew that there was a lot of opportunities in terms of talent, in terms of advisers, and also in terms of investors," said David Adewumi, 24, a OneSchool co-founder. The company, whose mobile application was inspired by a cellphone photo of a homework problem, pulls in publicly available data to connect students with real-time bus maps, faculty directories, and local eateries near their campuses. It has raised $750,000 in seed money so far. Some of it came from Learn Capital, a firm investing in education start-ups that counts Pearson among its partners.

Mr. Adewumi's group saw opportunity in the ubiquity of smartphones, since he said few official college apps put all their students' campus-specific needs in one place. OneSchool chose to market primarily to students instead of brokering deals with administrators, betting that thousands of users would adopt its applications.

Bureaucratic Hurdles

The cultural differences between education and business can present challenges to these upstarts, and to their investors.

Mr. Ferreira, Knewton's foun­der, said educational institutions sometimes harbor "reflexive skepticism" toward for-profit enterprises, making it hard for education start-ups to earn trust through official partnerships. So some venture capitalists choose to circumvent the college bureaucracy, investing in companies that market informal education products like tutoring services or language-learning programs directly to consumers.

And Mr. Ferreira said the typical venture capitalist's approach—investing seed money that allows a young company to cobble together a bare-bones product—usually leads to piecemeal improvements that aren't big enough to attract institutional interest.

"Education start-ups have to think big," said Mr. Ferreira. "I don't think they can try to produce something that's incremental, which is a little bit antithetical to the way venture capitalists think." He added that future investments in emerging companies that have secured early-stage backing might not appear if those firms don't make enough progress.

Mr. Staton is undaunted by the bureaucratic hurdles he faces in selling to colleges. He said his company believes that in two or three decades, students will still be attending traditional colleges. But he doesn't refrain from warning administrators that they will hobble innovation if they move too slowly along the way.

"Universities are actually shooting themselves in the foot within this market transformation by being slow in their procurement decisions," he said. "There would be a lot more investment in companies that are figuring out how to serve schools if schools simply streamlined the process of making decisions about whether or not to adopt technology." Colleges have students' best interests in mind, but "in a world full of good intentions, our biggest competition is indecision," Mr. Staton said.

Colleges are hampered more often by student-privacy concerns than they are by slow buying cycles, according to Shelton M. Waggener, associate vice chancellor for information technology at the University of California at Berkeley. In making their purchasing choices, Mr. Waggener said, universities have to navigate privacy questions that don't always occur to executives courting institutions or students lobbying their administrations to adopt their favorite tools.

"Our goal is to get out of the way wherever possible," said Mr. Waggener. Yet administrators' hands are tied by laws they don't have the power to change, such as Ferpa, the Family Educational Rights and Privacy Act. "As an institution, you can't sign an agreement endorsing a consumer tool that violates your own policies," he added. Some of the outdated privacy regulations are due for an overhaul, Mr. Waggener said; as they're written, those laws don't allow institutions to use good products that they could otherwise adopt with very little risk. For its part, Inigral says its Facebook application complies with the privacy law.

Mr. Waggener believes investors are backing education-technology companies because they can cater to institutions and students at the same time, developing both "enter­prise" versions to sell to institutions and consumer products to offer to individual students. Companies no longer have to stake their sales strategies on a single tactic because the higher-education market is "not one thing, it's not one model," he added.

Mr. Staton said his fellow entrepreneurs had also flocked to education because they know its chal­lenges better than any other industry.

"When you ask a 19-year-old what problem in the world they want to solve, it's highly likely that the problems that they're most familiar with are problems from their own education," Mr. Staton said. By the time they graduate, he added, many of those students are "looking two opportunities in the face: a substandard job market, or creating their own company and trying to be Mark Zuckerberg."

And entrepreneurs like to solve problems that they care about, Mr. Staton said: "There are a lot of people that are passionate about this, that know it, that want to do something about it."

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