Saturday, October 27, 2012

Health care is already blended

Its funny how life gives you insights. Yeaterday afternoon, my wife had some severe stomach pain, so we went to urgent care at the palo alto medical clinic. During our five hour visit, i was struck by four huge similarities between healthcare and high quality blended schools. First, technology was used in several ways throughout the time we were there. The first and the one my wife was most thankful for were painkillers. True, this is relatively old technology, but it is striking how little the adults can do to help your pain and how immediately the medicine helps. So its better for the patients and better for the staff because they dont have to spend time calming you down. This is alao true for the antiobiotics they finally prescribed. Even after five hours and a lot of pain killers, by the time we got home, my wife was in pain again. So i went to the 24 hour pharmacy and picked up the antiobiotic prescriptions. Within 30 minutes of taking the antiobiotics, she was starting to feel much better. Imagine the amount of time that the staff would have had to spend with my wife if they didnt have this simple technology. This is strikingly similar to what happens when we have the right online learning program for the right gap in a childs knowledge. It just works and they learn what they need almost every time. The amount of remediation time from the staff this saves is incredible, and the outcome for the student is better, they learn it faster and better. We dont have enough of the right online lessons to prescribe yet, but that is improving very quickly.

The second striking similarity is the use of technology for diagnosing what ails you. Our entire five hours at the cljnic was basically a process of collecting data thru blood samples/etc and most importantly through a ct scan. Once these were done, the situation was pretty clear. She had an infection in a part of her intestine. This is so similar at rocketship to our focus on using technology to gather data on exactly what a student knows so that we can identify gaps and change their individualized learning plan to specify what activity is next in their developmentally appropriate sequence. The centrality of the ct scan in my wifes healing process and of the assessment and analytics we do to identify and remediate gaps is a direct parallel and the most important aspect of both health and learning.

The third area of the visit that struck me as incredibly similar is the central importance of the adults in the process. The ed industry has somehow come to think of technology as disempowering, thretening to jobs, etc. using healthcare as a corrollary, it is just the opposite. Because people dont have to spend time on low value things, they can focus on making sure you get the meds and assessments you need to prescribe medicine which will make you feel better. That probably works 80% of the time and the last 20% more significant things like operations or therapy need to happen. But because you have taken care of the 80%, the staff has time to focus on the last 20% which is high value add. Exactly the same is true in a good blended school. Much of the assessment and remediation is just part of the day to day system, saving master teachers the mental space to work on the tough challenges. Within the human caital side of health care, the differentiation of roles is incredibly valuable. The ratio of doctors to patients has got to be 1 to 100. Of the 600 minutes we spent there, we robably only had 5 minutes of the doctors time to determine what assessments needed to be done, prescribe the pain meds, and make the prescription once the assessments were done. But we didnt feel bad about that, because there were plenty of senior and junior nurses making my wife feel comfortable, getting the iv going, wheeling her down to her ct scan, etc. in education, we have this idea that if the teacher doesnt do everything herself, it wont go well. Nothing could be further from the truth in a blended school. Because you have associate teachers and paraprofessionals doing a variety of tasks to make sure students are learning, the master teachers play the role of doctors - triaging problems, looking at data, working on the tough problems, and helping the student to apply their knowledge to critical thinking problems (getting even healthier).

The final observation i had is how completely individualized this sophisticated system allows healthcare to be. You are never in a situation where the doctor says - everyone take this medicine right now or im going to gove you a ct scan because thats what we do for every patient. The opposite problem is true in most of public education - we group students regardless of need and teach to the median, clearly a recipe for failure. In blended schools, we focus on dynamically grouping students based on what they need next developmentally. Individualization clearly works better for both health and learning.

It is striking when you are thrown into a foreign situation like we were yesterday, how much perspective it can give you on what you do every day. It reaffirms for me that we are headed in the right direction in education with blended schools. Now we all need to scale it up.

Wednesday, October 24, 2012

Tips for Edtech Entrepreneurs – Part 2 – Looking at Success Past and Present

If you are still reading this blog, you have shown the mostimportant characteristic of an edtech entrepreneur – persistence!  One way to start to think about how to createa company in this space is to look at what has worked before.  As I mentioned, the vast majority of edtechcompanies die in the valley of death during their first five years, whereinitial traction just takes too long. Others make it past that (often in more than five years) but ultimatelydon’t break through to large revenues. There are a few past companies that have made it through that I thinkare important as examples.  I would dividethese into three categories:

Grind It Out – These are typically the bootstrappedcompanies, they survive the valley of death because they just aren’t burningmuch money.  A lot of husband and wifeteams and others.  Probably the bestexample here is Renaissance Learning which sold the popular product AcceleratedReader (AR).  Renaissance basicallyfigured out the school-level sale.  Theypriced AR at $1500, a price at which just a little lobbying from teachers wouldmake a principal buy it to get rid of them. Great strategy, well executed, got to over $100M.  The challenge here is that getting this typeof traction takes a decade and requires you to bootstrap the entire time,because investors just aren’t very interested in these businesses until theybecome cash cows.

Subsidized Growth – A number of companies in the space havebenefited from federal subsidies during their Valley of Death years.  These include companies like WirelessGeneration and Edusoft, benefitting from the passageof No Child Left Behind andReading First subsidies to create assessments for schools, districts andstates.  This is a very effective way offunding through the valley of death, because buyers are relativelyprice-insensitive (it’s found money, so why not spend it).  The challenge with subsidized growth is thatthe money runs out and the old reality sets in. A superintendent that paid $100/student for your product because offederal subsidies may love your product, but since he has a tiny line item forcurriculum or assessment online in his budget, may only be willing to pay$5/student once the subsidy ends.  So youbuild up a company on the subsidy and then have to respond to the crash when the subsidy ends.

Direct to Consumer – A certain number of companies havefigured out how to go around the institutions and direct to folks who buy rationally.  One good example of this is Rosetta Stonewith language learning, though my guess is that a lot of the buyers of thisproduct were older.  Another example isK12, the virtual school operator which has ramped revenue up over $300Mannually by going direct to students. These are very nice businesses, but there sure haven’t been many.

Present Companies


Dreambox is an excellent example of the 10 year overnightsuccess type of company.  It sellsdirectly to schools and districts and had to be pulled out of the Valley ofDeath in its fifth year by philanthropic investors.  Now in its eighth year, it’s executing verywell and likely to join Renaissance and others in the winner’s circle.  But it has been a long journey.

Subsidized Growth

Ed Elements andeSpark are both going down this path with remarkable success.  Ed Elements provides a common dashboardacross multiple curricula for blended schools.  It isinvolved in many districts proposals for Race to the Top District grants fromthe feds.  eSpark is doing the same withits iPad app which helps teachers and schools manage their learning.  As mentioned previously, the lift thatsubsidies bring is a tried and true strategy for getting past the Valley ofDeath, but they will have to figure out how to adjust their pricing for normalschool budgets once the subsidies end.

Direct to Consumer

It’s probably important to define consumer.  The ultimate consumer is the student ofcourse.  Since we are talking about K12,often students don’t have a lot of purchasing power.  So usually direct to consumer in this worldreally means an efficient channel to them through teachers or parents.  I differentiate teachers from theinstitutions they belong to, because they spend $1000 per year on theirclassrooms and have the ability to spend it on your product.  If you weren’t aware of how much teachersspend, take a look at teacherspayteachers, an incredible marketplace largelyfor digital instructional goods for classrooms or donorschoose, which lets outside folks fund the multitude of products that teachers buy. Likewise, parents have always cared about the learning of their childrenand are increasingly taking matters into their own hands.

Three important examples in this category of current companiesare Edmodo, Class Dojo, and Motion Math. Edmodo provides teachers with a facebook-like interface to manage theirclass, make assignments, etc.  They gavethe product away for free to teachers and now have a couple million monthlyusers.  Class Dojo, an application formanaging classroom behavior is an iPhone app which teachers get for free.  They have also gotten to several millionstudents being managed every month. Motion Math sells a series of rich mathematics apps for the iPad.  They sold initially to parents and have sincestarted to follow the iPad into schools and sell whole classroom and schoolsets.  None of these consumer-orientedcompanies have figured out how to monetize their large user bases yet.  On the other hand, they have none of theproblems mentioned in the historical market analysis I gave in my first post.

Next time we'll talk a little bit more about how some of the angels and venture firms are starting to think about analyzing companies in this space.  Of course, paying attention to investors should be only one input into your strategy.  But since the Valley of Death is the bogeyman to edtech companies, understanding investor thinking can be helpful.

Sunday, October 21, 2012

Tips for edtech entrepreneurs part 1 - why is this market so difficult?

A few months ago i vowed that if i was asked the same question by more than 3 edtech entrepreneurs, i would blog about it to save myself time and spread the word faster. Since rocketship is probably the most natural lab in the country for figuring out if new edtech products deliver, i spend a lot of time talking to entrepreneurs. I also sit on the board of dreambox, which has overcome a lot of the challenges in this market. My goal here is to encourage k12 edtech founders to build great products for the market, but to go in with their eyes wide open about the challenges.

I have found that a lot of tech founders are lured by the mission of education and the vast market size. Many folks have hyped this market like it is a big greenfield just waiting for great technology. Unfortunately that is not the case. This first piece is about what makes our market so tough to crack.

Most k12 edtech success is difficult because companies attempt to sell to schools and districts. Principals and superintendents get hundreds of emails and calls about new edtech products (believe me, we do at rocketship). It is important to realize that except for charters, these sales are government sales, which are far different than sales to companies. Charter schools are currently too small a market to build most companies around, so if you are selling to schools, you are selling to the government. Anyone who has done government sales knows that the government acts in far less predictable ways than private companies and usually much more slowly. Unfortunately, startups struggle in all industries requiring government sales because the 18-24 month sales cycle time is often too long for them to survive.

Unfortunately, there are several reasons why as a market, schools and districts are much more difficult than other government sales. First, there is a strong cultural bias against technology in schools. Tech is considered threatening by many. If we automate too much, we will lose jobs. Adding to the tech averse culture, superintendents and principals are relatively senior folks, and may not have used a lot of tech in their lives prior to the last decade. This is not always true, but often.

Adding to the culture problem is the budget problem. Most any industry these days spends a fair amount annually on technology. In education, most of our tech budget has been spent on getting the right hardware and net connectivity for the last decade. The budget for software, especially learning software often does not exist at all, but comes out of a larger category like curriculum (more on the problem with that later). The budget problem is why you see such tiny deal sizes when edtech companies are selling to districts, even large ones. In traditional enterprise software, if you are selling to an organization and are going to have several thousand users there, your deal is very likely to be several million dollars. In education by contrast, you are elated to get a deal for a few hundred thousand dollars and it probably took you a long time to get it.

As if speed, culture and price were not big enough problems, there are three more killers. The first is misaligned incentives. A lot of districts buy software with no concrete expectation for effectiveness. In other words, as long as a vendor has a nice study showing that their product works, the buyer has checked the quality box. The problem with that is that it means if your product is 10x more effective, the market may not even notice. We saw exactly this with dreambox early on. Despite having the only product that adapted to always give a student the right lesson at the right time for their developmental level, dreambox had a very tough time selling the product. At rocketship, we tested hundreds of products and you could literally tell the substantial difference in dreambox within an hour or two. Yet it took a much more vigorous sales effort and a huge infusion of capital to get dreambox moving. Thankfully it is doing incredibly well now, so we are seeing the market reward their product quality.

So if districts arent buying on quality, and we know they are price sensitive, what else causes problems? Here is the killer. If you are selling to schools and districts, your competition is not the other startup down the street, you are competing against some of the most sophisticated sales teams in the world - pearson, mcgraw hill, news, etc. You are trying to take dollars out of their line item - curriculum and assessment - and they arent about to make that easy on you.

And finally, add to the other problems that most buyers would rather see monolithic products/solutions, since it is easier to buy and manage a product from one vendor not many. You will literally see a better product get booted for a mediocre product with coverage of more subjects and grades. That works for the big guys and against you because they have the resources to build large products and you are trying to pick off a specific need.

So just to recap, you have a 24 month sales cycle, anti-tech culture, small budgets and price sensitivity, quality insensitivity, a desire for monolithic solutions, and you are competing against large professional sales forces in a category they already own. That does seem a little insane when you put it all together. Despite these market dynamics, companies have made it through, created significant sales, gone public,etc. However, almost every successful edtech company is a decade long success, and the first five years were brutally difficult. I call this problem the valley of death - the first five years where most k12edtech companies die.

Ok, go out and have a beer. Its better to know what you are getting into before you start, right? And the good news is that there are ways to deal with this market. Part 2 will start to focus on ways to get through the valley of death, maybe even make it shorter or eliminate it altogether.