The Business of Ed-Tech
“Education is broken, and someone should fix it.” It’s not a new narrative. Nor is the pressure for schools to adopt practices from the business world so as to improve outcomes and efficiency (or to outsource services to the business sector entirely). And so the story goes in 2013. Much like it did when I wrote about “the business of ed-tech” in 2012. Much like it did when I wrote about “the business of ed-tech” in 2011. Etc. Etc. Etc.
By many considerations, the business of ed-tech flourished this year, with both investment and revenue continuing to grow. VC investment was up by 6%, according to NewSchools Venture Fund; and revenue in the K–12 market was up by 2.7%, according to the Software & Information Industry Association. The global education market, as calculated by IBIS Capital, has reached $4.4 trillion; e-learning, a $91 billion chunk of that. Forecasts predict strong growth around the world in mobile learning and data markets in particular.
The arguments, once again, are that these investments will bring about more innovation, better outcomes, and, of course, heftier profits.
Much of that investment flowed this year into companies that provide products and services around the ed-tech trends I’ve highlighted over the past few weeks: data, MOOCs, hardware, CS instruction, the Common Core State Standards.
According to one survey, for example, 68% of school districts say they plan to purchase new instructional materials so as to meet the CCSS requirements. It isn’t just CCSS-aligned content that’s a vibrant business. Companies vied for multi-million contracts to fulfill various infrastructure elements of the new PARCC and Smarter Balanced assessment consortia as well. In order to comply with CCSS mandates for computer-based testing (and of course in order to help prepare kids with “21st century skills”!), many districts bought new hardware too. This year saw huge deals – and as a result, huge drama – in Maine, California, North Carolina, and elsewhere surrounding hardware rollouts.
At the higher education level, MOOCs (and the technology they’re quickly coming to resemble, learning management systems) were the big investment schools and startups wanted to tout.
Who's Funded? Who's Funding?
I’m not going to detail here all the companies that raised venture capital in 2013. I have, however, created a spreadsheet that contains a partial list. It’s a work-in-progress, clearly. But feel free to leave a comment (and if you’d like editing privileges, send me an email).
It’s part of a data journalism project I plan to pursue in 2014 with Kin that will give us a better sense of who is raising money and who is investing in ed-tech. (I’d like to be able to answer questions like “What success do teacher founders have in raising money?” “Who funds founders of color?” “What incubators are successful in matching startups with investors?” “What trends are getting funding? What aren’t?” and so on.)
According to the investment analyst firm CB Insights, the top ed-tech funding rounds of 2013 were:
1. Laureate Education $150,000,000 (investors: International Finance Corporation)
2. Lynda.com $103,000,000 (investors: Accel Partners, Spectrum Equity, Meritech Capital Partners)
3. OpenEnglish $65,000,000 (investors: Insight Venture Partners, Flybridge Capital Partners, Technology Crossover Partners)
4. Coursera $63,000,000 (investors: New Enterprise Associates, Kleiner Perkins Caufield & Byers, International Finance Corporation, Learn Capital, GSV Capital)
5. Knewton $51,000,000 (investors: Atomico, GSV Capital, Accel Partners, Bessemer Venture Partners, FirstMark Capital, Founders Fund)
6. Sympoz $35,000,000 (investors: Foundry Group, Adams Street Partners, Tiger Global Management)
7. Instructure $30,000,000 (investors: Bessemer Venture Partners, Epic Ventures, OpenView Venture Partners, TomorrowVentures)
8. Pluralsight $27,500,000 (investors: Insight Venture Partners)
9. Jumpstart $26,800,000 (investors: Azure Capital Partners, Telesoft Partners, Random House Ventures)
10. creativeLIVE $21,500,000 (investors: Greylock Partners, The Social+Capital Partnership)
10. WyzAnt $21,500,000 (investors: Accel Partners)
As you can see from the list of investors, there are several VC firms who participated in more than one of the largest rounds – notably the International Finance Corporation, which is the investment arm of the World Bank. (It’s worth thinking here about education, colonialism, and “international development.”)
And as I noted above, these investments follow dominant trends: tutoring, online training, language learning, MOOCs, adaptive learning, and learning management systems.
It doesn’t appear in this Top 10 as the organization is a non-profit and doesn’t take venture capital, but let’s not overlook Khan Academy which continued to rake in millions in investment. It raised money this year from the richest man in the world. No, not Bill Gates. Carlos Slim. It also received funding from the Helmsley Charitable Trust (which I personally found to be hilarious since her will said that the billions in that trust were meant to support her dogs. But I digress). And in addition to money from the Queen of Mean (well, her estate. RIP Leona), Khan Academy also forged financial partnerships from Comcast and Bank of America.
To help put all these financial dealings in perspective: I give you the Football Performance Center at the University of Oregon. A $68 million investment. Because learning. That’s why we’re all in this business. Clearly.
Wait. What’s the Business Model?
While education technology startups have become increasingly successful at landing (early stage) investment, the path to profitability hasn’t been as clear. Indeed, as Coursera co-founder Daphne Koller told The New York Times when the company announced in July that it had raised another $43 million, "We hope it’s enough money to get us to profitability. We haven’t really focused yet on when that might be.’’
It’s a fairly common practice these days: release your product for free. Gain users. Monetize later. If that doesn’t work out, if you need more time to figure a business model out, simply raise more funding. You can see this attitude at play in the Edsurge coverage of NoRedInk’s $2 million investment this summer:
“I am super excited that we’ll be able to share all the resources we’re building with teachers,” [founder Jeff] Scheur told EdSurge. Some 12,000 schools are already using the free version of NoRedInk. Scheur had previously planned to offer premium accounts, priced at around $10 per student per year to schools. Several hundred schools had signed up to be on a waiting list for that paid version. Now Scheur is sending them cheerful notes with a simple message: “We won’t be taking your money.”
Cheerful messages. Right up until…
Closures and Pivots and Bankruptcies
At this stage in this particular ed-tech (hype/startup) cycle, I’m not sure that the amount of investment in the sector is really a compelling story. Indeed, if we date the beginning of this recent resurgence in ed-tech entrepreneurship to 2008 or 2009, one of the more revealing things might be what’s happened to those startups that are several years in to their VC funding.
The clock starts ticking once you take venture capital, and at some point investors pressure startups for a return – “an exit” perhaps. (You can send “cheerful messages” to teachers convincing them that “free” is great; but investors are less likely to receive cheerfully the message that there’s still no revenue.)
To that end, there were a number of prominent startups and tech products that pivoted or closed this year: Inigral (although they called it a “makeover” and not a pivot); Alleyoop (a Pearson-incubated startup – closed); Formspring (closed); Yahooligans (closed); Google Reader (closed); Fidelis (pivoted); LearnBoost (pivoted); Xtranormal (closed); Wander (closed); Stixy (closed); Tutorspree (closed); Sliderocket (closed); Posterous (closed); Claco (closed); Grockit (formalized its pivot to Learnist, selling its test-prep business to Kaplan - see below) – to name just a few.
As that list highlights (hullo Google and Yahoo!), shuttering products isn’t something that plagues startups alone. Even major players in the education business found themselves having to refocus this year. Textbook publisher Cengage, for example, declared bankruptcy. And language learning giant Rosetta Stone declared the end of its airport kiosks. The end of the Rosetta Stone airport kiosks, people! This is what all that disruptive innovation has wrought!
Startups for Sale
One possible “exit” that entrepreneurs and investors look for: an acquisition. And wow, we saw a lot of them this year.
IAC acquired Tutor.com. Haiku Learning bought ActiveGrade. Desire2Learn acquired DegreeCompass (its first acquisition since raising $80 million late last year). McGraw-Hill bought a 20% stake in Area 9. Lynda.com acquired video2brain (its first acquisition since raising $103,000,000). Edmodo bought Root1 (its first acquisition). Rosetta Stone bought Livemocha. Noodle acquired Lore (the startup formerly known as Coursekit). Desire2Learn bought Wiggio. Leading Capital SGPS bought SchoolRack. Apollo Global Management bought McGraw-Hill (and Hostess! Yay! Twinkies and textbooks! All under the roof of one private equity firm!) Demand Media acquired Creativebug. Macmillan acquired Late Nite Labs. Babbel bought PlaySay. Amazon bought Goodreads. Credo bought onlinetutorsolutions.com. Elsevier acquired Mendeley. Ashai Net International acquired the Sakai Division (that is, the learning management system division) of rSmart. Houghton Mifflin bought Tribal Nova. Echo360 bought Thinkbinder. Pearson bought Learning Catalytics (a startup founded by Harvard prof and peer instruction advocate Eric Mazur). LingApps acquired CourseDirector. Yahoo bought Tumblr. Autocad bought Tinkercad (saving it from closure). McGraw-Hill acquired ALEKS. Stratasys acquired Makerbot. Yahoo bought Qwiki. Renaissance Learning bought Subtext. Hobsons bought National Transcript Center (from Pearson). Laureate Education (an investor in Coursera, as well as the most-funded startup this year) bought Thunderbird School of Management. TPG Capital LLP bought TSL Education (TSL’s best-known product is TES (Times Education Supplement) Connect, which serves as the platform for a partnership with AFT for its ShareMyLesson product). Skyview Capital acquired Mimio and Headsprout (from Rubbermaid). Rosetta Stone acquired Lexia Learning. Flashnotes acquired Noteutopia. Kaplan bought Grockit (The test-prep business, that is. The rest lives on as Learnist). Amazon CEO Jeff Bezos bought the Washington Post (the newspaper, not the education division of Kaplan). Turning Technologies bought eInstruction. Civitas Learning acquired Hoot.me. Demme Learning acquired KinderTown. Pearson acquired BioBehavioral Diagnostics (because ADD is big business). Microsoft bought Nokia. Desire2Learn acquired Knowillage Systems. Livefyre bought Storify. Automattic bought Learnboost (which, as noted above, had pivoted to CloudUp). Junyo bought RedRock Online. Amazon bought TenMarks. Datamark acquired Altius Education (the startup sold its assets after a Justice Department investigation). Gilfus Venture Partners (Blackboard co-founder Stephen Gilfus’s firm) acquired Adrenna (a company that makes an LMS. Because LMS – suckers keep buying that shit). Academia.edu bought Plasmyd. Intel bought Kno. Houghton Mifflin Harcourt acquired Choice Solutions. Discovery acquired Espresso Education. BC Partners bought Mergermarket (from Pearson, which promised to focus even more mono-maniacally on education. Whee). STI bought Chalkable. Pearson acquired Grupo Multi. Rosetta Stone acquired Tell Me More. Rosetta Stone acquired Vivity Labs. Apollo Education (parent company of the University of Phoenix) acquired Open Colleges.
Also Penguin and Random House merged, sadly failing to choose “Random Penguin” as the new company’s name.
IPOs and Other News from the Stock Market
Another possible ending to a startup’s story – that is, if it doesn’t shut its doors or get acquired: the (elusive) IPO.
IPOs hadn’t been all-too-common in the education technology sector ’til recently (interestingly, 2013 was the best year for the IPO market since “the bubble burst” back in 2000). But this year the textbook rental company Chegg and the textbook publisher Houghton Mifflin Harcourt both went public in the US. (Anima Educacao and Ser Educacional S.A went public in Brazil.)
Chegg’s IPO raised $187.5 million. Shares were priced at $12.50 but fell to a low of $8.56 on opening day. HMH raised $219 million. Shares were initially priced at $12 and didn’t drop below that on opening week, hitting a high of $16.20.
As I write this post, Chegg is now trading at $8.41 a share. HMH is trading at $17.89 a share. (Such an interesting comparison, I’d argue, between the traditional textbook publisher and a textbook distributor – both of whom are struggling to adapt to a digital future.)
A few other mentions for publicly traded education stocks: Apollo Education Group (parent company of the University of Phoenix) is at $26.68 a share. Pearson is at $21.38 a share. K12 is at $21.73 a share.
The K12 story was a particularly amusing one this year, as education reformer and investor Whitney Tilson pronounced this fall that the stock was his “largest short position.” Tilson catalogued a number of issues with the K12 stock (the for-profit handles online education across the K–12 market, running virtual charter schools across the US) that involved not just its precarious enrollment figures, but more importantly, its abysmal education practices. He made it very clear: “I am not bearish on K12 because I am short the stock. Rather, I am short the stock because I am bearish on K12.” In a lengthy presentation at an investment conference, Tilson thoroughly demolished the company:
- its targeting of at-risk students (ones that it knows are going to fail): “They will sign up anyone – as long as that warm body signs in periodically, K12 can draw enrollment money from the district. It isn’t for some noble reason – it’s because these kids demand the least amount of education.”
- its low spending on teachers ($1054 per pupil for educator salaries at K12 versus $2219 per pupil, the average for US public schools)
- its manipulation of enrollment counts, truancy numbers, and withdrawals and refusal to allow external auditors to examine the data
- its refusal to allow external auditors to examine its student achievement data
- the failure of the majority of K12-run schools to make adequate yearly progress (Only 27.7% of K12 schools reported meeting Adequate Yearly Progress in 2010–2011; 52% of public schools met AYP)
- low on-time graduation rates (just 49.1% graduate on time
- poor academic achievement by enrolled students, whose reading levels and math scores are lower than state averages at every grade level
- high student turnover rates
- high dropout rates (roughly 50% in Pennsylvania and Colorado)
- possible IRS violations in its relationship with non-profit charter schools
- a failure to save states money, as promised
- and its lobbying efforts and contributions to political candidates – some $500,000 to state political candidates from 2004 to 2010
K12 stock did take a nosedive shortly thereafter, but has ticked upwards since.
Ah, the business of ed-tech. Let’s be clear: even with all the long list of grievances that Tilson laid out about the failures of K12, the end-game for all these investments – venture capital and stock market alike – is profit. It is not learning.
But hey, one of the things that we are able to glean from publicly-traded companies: their financials. We know about Pearson’s 2012 financials. We know about its plans to restructure. We know about its push toward digital. We know that News Corp has restructured. We know that Promethean is struggling. We know that Kaplan had to write down losses. We know that, Barnes & Noble‘s NOOK division, despite investment from Pearson and Microsoft, still isn’t performing well. For-profit universities’ enrollments (and revenues) are down, and Devry and the University of Phoenix profits refect that. Apple – well, yeah. Apple. We learned in one of its quarterly earnings calls that it has cornered 94% of the education tablet market. In one of its quarterly earnings calls, we learned from Facebook that teens might not be so interested in the site any more.
I’ll say it again: just calculating who raised startup funding doesn’t begin to give us a full picture of what transpired in the ed-tech industry in 2013. Another indicator – and I’ll say more about this in the conclusion of this post – was the number of changes in startup leadership.
John Danner, founder of Rocketship, left the charter school franchise to found another startup (Zeal). Kushal Chakrabarti, founder of the student loan micro-lending company Vittana, stepped down as CEO. Rafael Corrales, co-founder of the cloud-based classroom admin app LearnBoost, stepped down and became a VC. Nic Borg, the co-founder of Edmodo, stepped down, making way for Crystal Hutter, wife of its investor Rob Hutter, to take the company’s reins. Aaron White, Boundless co-founder and CTO, left the company. Paul Edelman, founder of TeachersPayTeachers, stepped aside for a new CEO. Blackboard CTO Ray Henderson stepped down. Instructure co-founder Devlin Daley left the company. P2PU founder Philipp Schmidt stepped down from his role as executive director (he’s taking a job at MIT Media Lab).
I group all these departures together, but it’d be wrong to interpret them all in the same light. TeachersPayTeachers, for example, boasted $44 million sales in 2013; Edelman handed his company over to a long-time education exec to better grow the business. Edmodo, on the other hand, wait… does it make any money yet?
I’d be remiss here too if I didn’t mention those who left their “secure” full-time gigs to join startups. Mark Milliron left Western Governors University, for example to join his startup Civitas Learning. And David Wiley just announced that he was giving up his tenured position at BYU to devote full-time attention to his OER startup Lumen Learning.
The employment news in the ed-tech industry wasn’t all sunny and changes didn’t only occur at the top. There were major layoffs this year at Education Elements, Florida Virtual School, Blackboard, University of Phoenix, and Desire2Learn for starters.
So Many Ed-Tech Accelerators
Way back in 2011, when I was still a lowly tech blogger at ReadWriteWeb, I was pretty stoked to cover the launch of ImagineK12, the first Silicon Valley ed-tech startup accelerator program. I thought it was a significant development, an indication that perhaps we could move beyond the story that investors were leery of education. And perhaps too we could design programs that would help build startups that met learning and not just consumer tech goals.
I was pretty naive.
Phew! – this year helped set me straight.
And it wasn’t simply because Pearson, the largest education company in the world, continued to extend its tentacles into the startup world (having already invested in Startup Weekend and being the largest limited partner in Learn Capital, of course). Pearson launched its own startup incubator program. (The first cohort graduated.) Pearson also invested in the DC incubator and co-working space 1776.
It wasn’t simply because other for-profit giants wanted to get in the game too. The test prep giant Kaplan, for example, which partnered with Techstars to launch an accelerator program. (Here’s its first cohort.) Zynga (ewww! I mean, I’m sure B. F. Skinner would be a fan. But ewww!) partnered with NewSchools Venture Fund for an education gaming accelerator program.
Other new accelerator programs (and wow, there were quite a few of them this year) included Emerge Education, EDSi (University of Pennsylvania’s edu accelerator with investment from McGraw-Hill), and the Curry School Foundation Education Accelerator at the University of Virginia. These joined other programs like 4.0 Schools in Louisana and Socratic Labs in New York.
Ah. Socratic Labs. If you click that link above, you’ll see the Socratic Labs website redirects to AngelList, an investment platform for startups. A little odd, right?
Socratic Labs did graduate its first cohort in February, but I’m not sure it was such a great year for the accelerator program. I mean, it’s not a great sign when you end up in ValleyWag (the gossip mag was resurrected this year because, well, apparently the tech industry needs it).
The first rumblings about problems with Socratic Labs were anonymous, posted on investor David Cohen’s blog. An awful story, but an anonymous one. The program wasn’t named. The entrepreneur, frustrated with his experiences there, wasn’t named. But it’s the Internet. And quickly the Internet sleuths determined that the program in question was Socratic Labs. The “psychotic” “irrational” managing director, Heather Gilchrist (formerly of Grockit). The startup, Learnmetrics. Its founder, Julian Miller.
Sigh. There’s really not a clear-cut winner in this whole story, I’d say. All of this was stirred up by a note from a disgruntled entrepreneur to a competing investor (David Cohen is one of the co-founders of Techstars, which as I note above, partnered with Kaplan this year to run its own education accelerator program). Many of the accusations about Gilchrist’s behavior were framed in highly gendered language (“irrational,” “hysterical,” and so on). The incident was a lot of “he said, she said” – lapped up by a giddy tech press that loves this sort of drama.
It all served as a reminder that the business of ed-tech can be pretty ugly – no matter how much we try to wrap it in the shiny, decorative stories that we do this “for the sake of the children.”
A Few Final Thoughts on This Whole Darn Mess
When I learned this spring that Rafael Corrales, the co-founder of one of my favorite ed-tech startups LearnBoost, was stepping down and leaving the company, I cried. Really. And not just because he left to become a VC. As I wrote at the time,
LearnBoost launched at the beginning of this recent resurgence in ed-tech entrepreneurialism, and in many ways, I thought it encapsulated much of the promise that new ed-tech startups are supposed to hold: great technology, great product, great team, grassroots adoption, freemium pricing, and so on.
To me, Corrales’ departure now serves to highlight some of the serious tensions, if not grave problems, that this new “ed-tech ecosystem” is facing. Indeed, what sort of “ed-tech ecosystem” are we really building here? Will it thrive? Which startups will survive? Whose values does this “ecosystem” reflect?
I went on in that post to ask a number of questions about VC-backed companies and the expectations of growth, about the sorts of business models that startups are being encouraged to adopt, about the success (or failure) of open source in ed-tech, about Terms of Service, about lousy products continuing to triumph while great ones stumble. What sorts of ed-tech (and by extension, of course, education) do we want?
Someone recently tried to remind me that startups are supposed to fail, that closures mean “the system” is working. It's a feature, not a bug, of venture capital and business creation. (Indeed, that’s one of the arguments that we’re not experiencing a “bubble” in ed-tech investment: many are struggling to raise follow-on investment.)
But I'm not so sure that any of what I've chronicled in this post - the dollars, the deal flow - means "the system" is working well for education -- for students, for teachers, hell, for the 99%. Oh sure, the business of ed-tech is booming. But who wins here? All these promises about "disruptive innovation" - what does the business of ed-tech change, and for the benefit of whom?
As SF writer Bruce Sterling expressed so well in a talk in Berlin this year, we should think about the fantasies and the future we're building. This may all be part of "a tacit allegiance between the hackerspace favelas of the startups and offshore capital in tax-avoidance money-laundering, building a globalized networked society. ...We’re all auto-colonialized by the austerity. That’s your big dragon. That’s your actual dragon. And as long as you are making the rich guys richer you are not disrupting the austerity. You are one of its top facilitators.”
Onward to 2014...