Visas for entrepreneurs

http://www.economist.com/node/21556636

Where creators are welcome

Australia, Canada and even Chile are more open than America

Jun 9th 2012 | from the print edition

MOST governments say they want to encourage entrepreneurs. Yet when foreigners with ideas come knocking, they slam doors in their faces. America, surprisingly, is one of the worst offenders. It has no specific visa for foreigners who wish to create new companies. It does offer a visa for investors, but the requirements are so stiff—usually an initial investment of $1m, or half that if the firm is in a depressed neighbourhood—that the annual quota of 10,000 visas is seldom filled.

Other countries are more open (see table). Singapore offers visas to people who invest $40,000; for some, the government provides additional investment. Britain gives visas to entrepreneurs who meet certain conditions and attract £50,000 ($77,000) of venture funding. New Zealand has no specific capital requirement but offers residency to entrepreneurs whose firms are deemed to benefit the country. Chile is wildly generous: its government gives selected start-ups $40,000 without taking any equity in return. All these schemes have been introduced or expanded since 2008.

Where an entrepreneurial visa is not available, other routes may be. Australia and Canada use a points system that emphasises youth and skills. Since 2007 Australia has curbed the total number of permanent-residency visas it issues, but expanded the number of visas for skilled workers and their dependents from 103,000 to 126,000 a year. That is nearly as many as America (140,000), though America’s population is 14 times larger.

A similar side door let Mohamed Alborno into Canada. The young Egyptian-born entrepreneur incorporated his company, Crowdsway, in Delaware. He had done well in a contest for budding entrepreneurs. But getting a visa to live in America is slow, confusing and unpredictable.
In the end he went to Canada instead, where setting up a company is just as easy as in America, but the visa process is much more straightforward. He now says he is very happy to have settled in Vancouver. His firm, which connects online video-makers with clients, has just launched a beta service.

America’s scorn for skills is extraordinary. The share of permanent visas granted for economic reasons (as opposed to kinship) fell from 18% to 13% between 1991 and 2011. In Canada it rose from 18% to 67%. The Partnership for a New American Economy, a pro-immigration group, warns that America is “falling behind in the global race for talent.” China, meanwhile, offers some highly skilled returners not only free homes but also cash to buy furniture.

Venture capital in emerging markets: Making money by bringing old ideas to new markets

http://www.economist.com/node/21556269

SOME venture capitalists call it “geo-arbitrage”; others know it as “tropicalisation”. The term refers to the practice of backing start-ups that take an established business model and adapt it to an emerging market. Whatever you call it, it is becoming a bigger part of the venture-capital industry as competition at home forces Silicon Valley investors to look farther afield.

Julio Vasconcellos, one of the founders of Peixe Urbano, a Brazilian site offering users discounted deals, is thrilled by the “huge flood” of American investors he has noticed coming to Brazil, for instance. No wonder. Some of them, including Benchmark Capital and General Atlantic, have invested in his own company alongside Brazilian venture capitalists. The financiers have reason to be upbeat, too. Peixe Urbano is a clone of Groupon, an American start-up that went public last year; its business model is one they know can take off.

The idea of tropicalisation has been around for a while. It has already been lucrative for venture capitalists in India and China. Take Baidu, a Chinese interpretation of Google, which made early venture investors a killing; or Alibaba.com, a Chinese version of eBay, an online-auction site. Now venture capitalists are looking at other markets, including Brazil, Indonesia, Russia, South Africa and Turkey. Last year $3.4 billion of venture-capital deals were done in emerging markets, more than double the amount in 2008.

This push into emerging markets has gained momentum because venture capital is experiencing problems in its traditional markets. Silicon Valley was once so inward-looking that venture capitalists used to say they would not back a start-up unless they could cycle to its office. But valuations in North America have risen for both early-stage and later-stage investments (see chart), making it much harder to make great returns.

That is partly because there are too many firms; 369 of them are currently in the market trying to raise $50 billion, according to Preqin, a research firm. There is a lot less competition in emerging markets. The pressure from investors is also rising. A damning new report by the Kauffman Foundation, an outfit which promotes entrepreneurship, analysed its venture-capital portfolio and concluded that 62 out of 100 funds failed to exceed the returns offered by the public market.

Most venture-capital firms do not head abroad with the sole aim of looking for copycats, but plenty of their investments end up that way. Douglas Leone of Sequoia Capital, a big venture-capital firm, reckons that in emerging markets like China around 50% of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil it is closer to 70%.

That is not so surprising. Backing tested concepts mitigates the risk inherent in start-ups and means companies are likely to grow quickly, because the original firm has already worked out the kinks. Often the originator of the business does not have the expertise to enter new countries quickly, so copycats can get there first.

They can also gain an edge by tailoring businesses to local habits. Flipkart, an online-commerce site in India founded by two former Amazon employees, has received funding from Tiger Global, a New York-based hedge fund that specialises in this kind of investing, and Accel Partners, a venture-capital firm. Flipkart has taken off in part because credit cards are less common in India and it offers the option of payment on delivery.

Another example is Trendyol, a Turkish “flash sale” site that mimics Vente-privee.com and Gilt Groupe, which popularised the idea of time-limited online sales of designer clothing. But Trendyol, whose backers include Kleiner Perkins Caufield & Byers, also sells its own mass-market clothing line, with seasonal designs “crowdsourced” from users in Turkey.

There are different ways to play the copycat game. Rocket Internet, started by the Samwer brothers—Alexander, Marc and Oliver—in Germany, is a cloning “factory” that copies American and European businesses, hiring entrepreneurs to run them and exporting these start-ups to emerging markets as fast as possible so they are the first entrants. More traditional venture capitalists are setting up offices and selectively backing local entrepreneurs. American venture investors often prefer to bring in a local partner to provide more consistent mentorship to these entrepreneurs and give advice on how to navigate the domestic market.

Such advice can be valuable, given the specific risks of setting up in emerging markets. First, companies can take longer to get off their feet, given grinding local bureaucracy. “An eight-year fund might not be sufficient in Brazil,” says José Luiz Osorio of Jardim Botânico, a Brazilian seed investor. Second, there are cultural barriers: it can be hard to recruit employees to work for an unknown company in exchange for equity, for instance. Third, exiting through large initial public offerings is unlikely in countries like Turkey and Brazil, where IPO activity is muted and investors like to buy well-known firms; that means venture firms are reliant on strategic buyers to gobble up their creations.

Tropicalisation piles on an additional set of risks. Copycats can easily lose share when the original company eventually enters the local market. Sonico, once the Facebook of Latin America, got “pummelled” when Facebook arrived, says Nenad Marovac of DN Capital, which was behind Sonico. And even if they can see off competition, the copycats are unlikely to be mega-blockbusters because, by definition, they are not new. “With innovation you have a global upside, but with copycat innovation you have geographical limits,” says Eric Archer of Monashees Capital, a Brazilian venture firm.

It will not be long before emerging markets spawn their own innovations that can be trotted out on a global scale. That would be closer to the spirit of venture capital, which is supposed to ferret out and fund new ideas, not imitations. Until then, however, tropicalisation is set to become an ever more popular strategy. Copy that.

Video: Good Dog - Bad Dog Pitch (Modern Family)

Sausage vs. Meatballs: A Study in Start-ups

http://www.inc.com/jon-burgstone/the-epicurious-case-of-currywurst-bros.html?nav=pick

Why did the Currywurst Bros. chain fail in New York, while little Meatball Obsession is thriving? Entrepreneurs, take note.

By Jon Burgstone and Bill Murphy, Jr.

This is a story of meat, square feet, and microeconomics. It's the tale of how two food entrepreneurs opened up shop about 10 blocks from each another in Lower Manhattan. One crashed and burned. The other might just make it.

Like any good story, there's a moral. Two, actually. And since you're a busy entrepreneur we'll give them both to you up front. First, keep your overhead low. And second, at all times, do everything you can to obtain maximum information for minimum cost.

Meet the Meat Vendors
Exhibit A is Currywurst Bros., a German chain that opened its first U.S. location in Greenwich Village, not far from New York University. It served an inexpensive sausage dish, very popular in Germany, called—yes—currywurst. If you're not familiar with it, it’s basically chopped up pork sausage smothered in curry powder and ketchup.

Sorry to say, but if you haven't tried Currywurst Bros., you've missed your chance to do so in New York. The restaurant opened in May 2011 in a high-priced storefront, "after a long build-out that took many months," according to The Village Voice. But it closed for good just seven months later.

Against this, we submit Meatball Obsession, which sells "meatballs in a cup"—one, two or three of them, plus tomato sauce and a piece of bread. According to the company's founder, Dan Mancini, the place grew out of his memories of meatballs his grandmother used to make.

Meatball Obsession opened this past week about 10 blocks from where Currywurst Bros. stood, but it has a very different setup. In fact, the eatery is, "a stall—just a window, really—embedded near the PATH train entrance on the east side of Sixth Avenue just short of 14th Street," as the Village Voice puts it..

So why did the sausage place go kaput after just seven months? And what might the meatball place learn from it? (Even more important, what can you learn?)

Pay heed to what customers need
We're using "need" in a generic sense here, but currywurst was basically new to New York City. It's a German food, and while New Yorkers are pretty much willing to try anything once, it hadn't been proven before. Who knew if anyone would really like it?

That's not the case with meatballs. Many if not most people have eaten a few meatballs in their life. More than that, Meatball Obsession isn't the first New York City eatery focusing on the humble meatball. There's The Meatball Shop, for instance, with three locations in the city.

Even more important, Mancini had been selling meatballs and sauce to New York City supermarkets for four years before he opened Meatball Obsession. He must have had pretty good information on New Yorkers' tastes before he started.

Keep überhead under control
Meatball Obsession is operating out of a window outside a subway stop. But Currywurst was paying rent for a much bigger place, around $16,000 a month, according to The Village Voice. Do the math: If you cleared $1 on every sausage you sold, you'd have to sell more than 500 of them every single day simply to pay the landlord. That doesn't leave a lot for other all your other business expenses---you know, like paying your employees and yourself.

Mind your p's: Process and profitability
Of course costs play right into profitablity, but there are other factors as well. According to The Voice, Currywurst Bros. needed 10 minutes to cook each sausage after it was ordered. That's kind of a long time to wait for a $7 hot dog substitute. (Especially, as one commenter pointed out, when you can buy a hot dog for a couple of bucks from a street vendor for about $2.)

We didn't actually eat any meatballs in the course of writing this article, but it looks as if the prep time at Meatball Obsession is much faster. And yet, one meatball goes for $4 at Meatball Obsession; $10 will get you three. There's likely a lot more room for profit with that kind of math.

The restaurant business can be brutal, and there's no guarantee that Meatball Obsession will survive any longer than Currywurst did. But their odds look more favorable. Gather the best insights you can achieve into customer needs and tastes before you launch, and keep costs low, especially before your idea is proven. It's good advice for just about any entrepreneur in any field.

The M&A Market: All the Right Conditions, but No Buyers

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2967

"Everybody showed up to the party but nobody wanted to dance," is how Dan Tiemann, Americas transactions and restructuring lead for KPMG, describes the global merger and acquisition scene in 2011.

The party he is referring to is what many consider the perfect setting for M&A: companies with ample amounts of cash on hand, record-low interest rates and countless undervalued firms waiting for buyers. And while the first half of 2011 looked strong, the second half trailed off considerably, hampered in part by the European debt crisis and continued uneasiness about the U.S. economy. Last year ended with $2.81 trillion in global merger and acquisition volume, just a 3% increase from a very tepid 2010, according to data compiled by Dealogic.

Tiemann and other observers agree that the same scene is present in 2012, and although confidence is growing, they expect only a slight increase in dealmakers to hit the dance floor. "I think it's going to be a little bit sideways," he says. "There are the same fundamentals as a year ago, but then there are other factors like the [upcoming presidential] election that are uncertain." Wharton finance professor Pavel Savor, however, is "cautiously optimistic. I see a little more [activity] in North America as the economy is doing better."

Corporate executives are feeling the same hesitation. Forty-one percent said they felt neither more nor less optimistic than last year about merger and acquisition activity, according to a recent Knowledge@Wharton/KPMG survey of 825 executives at U.S. corporations, private equity firms and investment funds. Still, seven out of 10 respondents said their company would make at least one acquisition this year, compared to just over half of the respondents in 2011.

But most of this new activity originates from the private equity and investment firms. When just corporate CFOs were queried, only 18% said they expect to participate in an acquisition in 2012, down from 26% from last year, according to a recent survey of 600 such executives conducted by Bank of America and Merrill Lynch. And with just two full months of deal activity logged in 2012, results are not looking up. Although February's global merger and acquisition activity was strong, January was the weakest in five years. Overall, both months brought in $390 billion of deal volume, down 16% from the first two months of 2011.

Searching for Motivation

When a company does want to buy, the top reason this year will most likely be simply to grow. According to the Knowledge@Wharton/KPMG survey, nearly one-third of respondents said the main reason they plan to make an acquisition was to "expand geographic reach." Wharton management professor Lawrence Hrebiniak notes that organic growth is costly and time consuming, which makes buying another company a more attractive option. "Acquisition allows a company to move more quickly, acquire the technical and marketing know-how in one transaction, and avoid the retraining and capabilities enhancements needed under organic growth," he says. Hrebiniak adds that large amounts of cash reserves are also making acquisitions more attractive for some businesses in 2012. "Many companies are cash-rich -- money is burning a hole in the pockets of a lot of CEOs and CFOs."

Nonfinancial companies have more than $2 trillion of cash or other liquid assets on their books, up nearly 5% from last year, according to the Federal Reserve. This accounts for 7% of the assets of nonfinancial companies, the most since 1963. In the Knowledge@Wharton/KPMG survey, nearly half of the respondents said one of the key factors that would facilitate a deal would be "large cash reserves."

Still, the state of the economy will be the largest factor in determining deal activity, Savor says. He notes that no matter how eager executives are to grow or spend their cash, deals will not get done if another debt crisis-like scenario is looming. "It's hard to track down a single driver of M&A," Savor states. "One thing that is often a prerequisite is some minimum level of macroeconomics. When there is a stressed macroeconomic environment, there is typically much less M&A."

Savor adds that a favorable political environment also helps spur merger activity, noting that tense politics make for uncertain taxes and, typically, lower investments. Consequently, in the United States, merger activity has been slow to pick up pace because of political wrangling between the two parties and the upcoming presidential election in November.

Industry Trends

Besides ongoing political party battles, recent legislation enacted by Congress is also likely to have an effect on merger activity. For example, implications of the Affordable Care Act of 2010 will start to hit the health care industry as providers find ways to give better service while making more money, according to John Kimberly, a Wharton management professor."My guess is that it's going to come down to incentives for consolidation for the provider side of the industry, and what you are going to see is the creation of integrated care networks," he notes.

On the research and development side of health care, Kimberly expects more mergers and acquisitions -- especially global ones -- as companies are pressed to create new products. Indeed, for 2011, health care saw $228 billion of merger and acquisition volume globally, nearly the same as 2010, according to Dealogic, making it the fifth most active industry worldwide. In the U.S., it was the top industry for deals with $164 billion of volume. Express Scripts' pending deal to buy Medco Health Solutions accounted for $34 billion of that total, making it the second largest deal for the year.

Recent legislation is also likely to stir up more acquisitions in the financial services industry in the United States. The Dodd Frank Act of 2010 increased the regulatory burden for banks of all sizes, which may now prompt many companies to consider selling out or merging to achieve economies of scale. "The rules in Dodd Frank really encourage consolidation for the smaller players," Tiemann says.

Hrebiniak also makes the economies of scale argument for the mining and utilities industries as operation costs are expected to increase in both areas. The utilities and energy industries had $253 billion of merger and acquisition volume globally for 2011, up 20% from the previous year, Dealogic reported. This included the third largest deal overall: Duke Energy's January announcement that it would buy Progress Energy for $25.8 billion. Mining saw a similar increase, with $165 billion of total volume.

The technology sector should also continue its merger and acquisition streak, according to Tiemann and others. He notes that because technology is an industry that experiences constant change and development, acquisitions are expected to continue as smaller companies make it big with the latest innovations, and larger companies seek to expand their reach. In 2011, the technology sector saw a 44% increase in volume from the previous year to $222.6 billion in deals, according to Dealogic. And while the sector recorded average overall volume, the number of deals -- 5,795 --was far and away the most of any industry.

How to Move the Market

Regardless of the specific industry, experts agree that M&A growth in 2012 will be most plentiful in the U.S. In 2011, M&A activity in the country was up 18% from the previous year, topping $1 trillion in volume, and eight of the 10 largest deals involved U.S. companies. Despite the still recovering economy, Savor says that the United States will continue to dominate deals globally simply because -- together with Europe -- it typically makes up three-fourths of all global mergers and acquisitions activity. And with Europe's economy on much shakier ground, the U.S. is likely to be the main M&A arena.

As Europe digs out of a far-reaching debt crisis and continues to experience a very difficult borrowing environment, experts note that deal activity there will continue to be very sporadic. For all of 2011, merger and acquisition volume in Europe was up 4%, to $811 billion, compared to the previous year. However, it was down 25% when comparing the fourth quarters of both years, according to Dealogic. "My sense is there is a lot of pent up M&A activity, and my guess going forward would be that levels are going to pick up in the U.S.," Kimberly says. "But it's not going to pick up in Europe bcause [that region] is still struggling."

Tiemann notes that China will also be a "big player" when it comes to mergers and acquisitions, adding that the government recently added $30 billion to the Chinese Investment Corp., a state-run fund that invests in companies around the world. In 2010, China had $188 billion of deal volume, up 5% from 2010, making it a very distant second to the U.S. when it comes to country rankings for merger activity.

The emerging markets are also places to watch in 2012, Tiemann adds. He notes the growing number of private equity funds in Brazil that are looking to buy companies in other parts of the world. In 2011, Brazil was the seventh most active country for deals, with $83 billion of volume, although it was down 45% compared to the previous year. Overall, emerging markets saw a 17% decline in mergers and acquisitions from 2010 to 2011, Dealogic reported. According to Tiemann, this is partly because there is more local competition in emerging markets, which means that global interest in these areas has leveled off. "The story around the emerging markets is how much capital is flowing out of these countries," Tiemann says. "It used to be how much was flowing into them."

Entrepreneurs create jobs, but that is not their chief virtue

http://www.economist.com/node/21548258

A MAN walks into a conference room at the W hotel in downtown Austin. The setting, sleek and hushed, says business. The trainers—red, puffy, and paired with a sports coat—add a wink: new business.

“There are crazy awesome start-ups happening in every nook and cranny in this country,” says Scott Case, the man in question. He is the boss of the non-profit Start-up America Partnership, which means to help fledgling entrepreneurs by smoothing their access to private-sector money and mentoring. The idea is that as these young companies grow, they will create jobs—new jobs, good jobs—and related economic activity that enriches the entire community. Some of the start-ups may even be “gazelles”, companies that grow by leaps and bounds.

Last year the Kauffman Foundation, a think-tank focused on entrepreneurship (and which provided initial funding for Mr Case’s partnership), released a report explaining that new firms typically create about 3m jobs in America each year. Between 1980 and 2005 they contributed some 40m net new jobs—as many as the country’s entire private sector managed over that time.

So people are keen to help. Barack Obama announced a start-up initiative at the beginning of last year, and last month he renewed the call. Congress is considering a bipartisan Start-up Act that could provide some tax credits, regulatory exemptions, and so on. Regional economic development groups have taken up the idea of economic “gardening”. The philosophy there is that regions should focus on core strengths and home-grown businesses, rather than squabbling with their neighbours in an effort to win a new car plant.

This is mostly sensible. Many of the proposals mooted for start-ups—expanding the number of visas for highly skilled immigrants, for example—are generally sound. And some start-ups do turn out to be gazelles. Next month, for example, will mark five years since Twitter came to national attention at SXSW, Austin’s annual internet festival.

Still, there is cause for caution. For one thing, there is some ambiguity over what sort of companies the policymakers are trying to promote. Mr Obama talks about “start-ups and small businesses”. Private-sector people, however, seem to have less interest in the latter. They would rather live in Silicon Valley than on Main Street. But high-tech concepts are not the only viable business ideas. The Austin metro area, for example, is home to just two Fortune 500 companies, Dell and Whole Foods; both, oddly, were founded in the early 1980s by dropouts from the local university.

Another issue is that the effects of start-ups on employment may be modest. Perhaps as a result of the recession, the number of new companies that actually employ people is declining. The cohort of companies born in 2009, according to Kauffman, created only 2.3m jobs.

Last month the White House invited Mike Krieger, the co-founder of Instagram, to attend the state-of-the-union message to show off America’s fastest-growing social mobile start-up. “What began as a small, two-person start-up working out of a pier in San Francisco has grown to a dozen employees,” Mr Krieger wrote. Even the bigger companies may not be labour-intensive. There is a danger that start-up jobs will be the next variant of “green jobs”: worthwhile, but slightly overhyped.

A Boom Time for Education Start-Ups

http://chronicle.com/article/A-Boom-Time-for-Education/131229/

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."