How Ed-Tech Companies Will Make (and Lose) a Few Fortunes

12/3/12Follow @MiroKaz

It’s bubble time in education technology. Over the past few years, investment dollars have started to flow in larger amounts. MBAs (like me and one of my co-founders) are starting to get interested, and I know of at least two separate groups in Boston alone trying to develop ed-tech incubation spaces.

But for all the interest, we have yet to see any quick, VC-type fortunes built in the last few years. As an ed-tech entrepreneur I’ve watched as the hype around the space has grown, and I’ve seen some of the magical thinking that comes with it.

Like many investors, I believe that there are opportunities for outsized returns to be made in education as technology finally infiltrates one of our slower moving industries. I also think that a couple of major traps unique to education still exist that will snare many companies. Here’s where I see the traps and the opportunities when it comes to primary and secondary education:

Trap 1: Selling classroom technologies to school districts.

This is the sexy place to be. To really make big bucks, you have to sell to school districts. To have the most visible impact on education you have to insert yourself in the teaching process. This is also the valley of death for most startups.

It’s not just that sales to districts have long sales cycles, which means it’s hard to experiment. And it’s not just that the process is political, which means you need seasoned (expensive) veterans who have sold to districts before. It’s also that every district buys differently, so even cracking the code in one district won’t help you scale. This is a near impossible market to tackle without an existing, large sales force.

Also, making an impact on the classroom teaching process is more challenging than most who haven’t been in a classroom believe. Startups live and die on their ability to experiment and make mistakes. For most Web startups, an error that only impacts 5 percent of your users leaves 95 percent of them satisfied. In a 20-person classroom, however, that one student with the error can derail the entire teaching process. Classroom technologies have to be bullet-proof in a way that most startups aren’t used to building.

And finally, one of the truths of business (which is just as true in education and even more painful to hear) is that we don’t invest in the things we don’t measure. Technologies that improve the classroom experience will have a hard time getting traction unless they make a major impact on measured educational outcomes, and proving that is a long, arduous process.

Opportunity 1a: Selling more efficient versions of services districts already buy.

While many startups try to transform education in new ways, plenty of opportunity exists to capture money that educational institutions are already spending. You just have to look outside of the classroom. Large, more flexible budgets with clear ties to results exist in areas like professional development, admissions (for higher ed and private schools), and alumni management. That’s why you see smart startups like BloomBoard, Matchbox, and EverTrue tackling these areas.

Opportunity 1b: Targeting students and teachers first to get access to the district.

Many companies have recognized the challenge of selling to districts and are trying to find new ways into school systems without going through the usual sales channels. Most of these models involve getting massive user adoption among students and teachers. Then they can go to districts where teachers and students are already using their software and sell district-wide licenses or premium accounts.

No one has cracked this business model on a large scale yet, but two of the most forward companies pursuing this are Edmodo, an education social network that boasts 14 million connections, and Quizlet, an online flashcard tool, which claimed more than 62 million visitors last year. It’s notable that Edmodo has raised more than $30 million as it builds a complex product, while Quizlet hasn’t raised any outside money at all.

In Boston, Socrative is pursuing this approach with its student polling system that uses existing devices.

Trap 2: Selling complex software to school districts.

Not everyone aims to change education from inside the classroom. If you’re like many of my business school classmates with an education background, you’ve witnessed how old, siloed information systems limit school administrators from harnessing the fully power of technology. Poorly designed and integrated software does more to keep teachers from useful data than empower them with it.

While many entrepreneurs hope to empower schools by building education-specific versions of corporate software systems (CRMs, ERPs, HRMs). The solution to overly complex software isn’t more complex software. It’s difficult to sell anything to school districts that spans more than one department, and the intersection of teaching with all technology means that almost everything of value touches more than one department.

Opportunity 2: Selling software that reduces complexity and only needs one buyer.

When someone does solve the problem of data complexity across multiple legacy systems, many of the other traps I write about may go away. It’s similar to how open source standards (and fully integrated ERPs) finally allowed corporations in the 1990s and 2000s to see some of the productivity gains technology had promised since the ‘70s.

Right now the most touted startup doing this is Clever. This company has focused solely on integrating data from legacy educational software systems and built it in such a way that it can be useful if no one other than the IT department interacts with it.

Trap 3: Selling technologies to consumers for problems with no clear outcomes.

One model of educational reform says, let’s improve our classrooms. Another model says, let’s blow them up. For those inclined toward empowering learners to find their own way, it’s appealing to develop software and solutions that disintermediate schools and put learning tools in the hands of students.

Just like making the classroom an incrementally better experience doesn’t justify the risks or the costs for most teachers, helping people learn slightly more effectively doesn’t justify the risks or the costs for most students (and their families) unless the rewards are measurable and obvious.

Opportunity 3: Selling to consumers when there are clear outcomes.

This is where for-profit education has always made its money. Test preparation, which my company, Testive, focuses on, is a good example of this. There is a clear measure of success (your score on a test) and clear benefits to achieving that goal (access to better schools and the measurable financial gains that come with that).

Educational and business opportunities exist in any situation where you have to demonstrate competence (such as on a test) in order to get access to something of value (such as certification in a certain industry). Since the value of education is already clear, in most cases these markets already exist. That means the winners have to disrupt the model somehow.

In the case of Testive, our SAT prep product, SAT Habit, uses adaptive algorithms to bring some of the benefits of in-person tutoring to the online experience. And we do our best to put that in the context of an online experience that doesn’t suck.

There’s a related consumer opportunity here for “edutainment.” Most educational toys and enrichment classes are really entertainment and diversion merged with education. As with all entertainment industries, there’s massive potential in this space and correspondingly high risk.

Miro Kazakoff is the CEO of Testive, an education technology company focused on adaptive technologies and personalized learning. Follow @MiroKaz

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  • http://twitter.com/GreenDoorLabs GreenDoorLabs

    This is a great article, Miro, thanks! It’s always helpful when people take a moment to see patterns of success and failure in ed tech. One thing I’d love to throw in there is that articles often focus on how products can serve the K-12 or college education market but your own company has seen enormous success in the (I think- unsung) space of informal education.

    Public libraries, museums, test-prep, summer schools, camps and afterschool programs are great spaces for education innovation- and don’t have a lot of these traps that you mention!

    • http://www.facebook.com/miro.kazakoff Miro Kazakoff

      Really interesting point. informal education, or education as a form of engaging positive entertainment is a really great opportunity. Especially with an aging population that is looking for ways to engage with the world after they finish their careers.

  • Guest

    Miro – one other suggestion I’ve heard is to ‘sell to buildings’ not to districts. meaning keep your price low enough that an individual principal can make the decision. smaller revenue but much shorter sales cycle. At JogNog we have found teachers desperate to find helpful tech that is completely intuitive and simple to use – we focus on friendly competitive group learning – which, while highly successful for the student, can sometimes be a foreign concept to the administration.

    • http://www.facebook.com/miro.kazakoff Miro Kazakoff

      It’s one of my great frustrations (but business realities) that lots of teachers are desperate and willing to experiment with technology, but the buyer is an administration who has very different needs and issues to address.

  • Shari Loessberg

    hi Miro–congrats on Testive; love to see old students doing what they love. any observations on edtech coming from outside the US? an awful lot of good thinking going on in emerging markets where status quo is worse than abysmal . . .
    also, my 16 year old daughter can help take Testive viral in DC:^)