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.

1 comment:

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