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

Slow-Growth

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.

6 comments:

  1. Great post John. I'm curious to hear if you think "Slow Growth" companies have a shot in today's market. There was a time when companies like PowerSchool and Schoolnet could attract significant VC investment with their slow-growth models but that seems to have changed.

    From my point of view, few if any of the new generation of edtech companies are attempting to take on established data management systems.

    Are we forever stuck with these antiquated SISs and other management systems, or is there a way for a new generation of SIS, Transportation, Lunch, Health, etc. systems to disrupt the status quo? We note with interest that two of the youngest and most popular SISs (PowerSchool & Infinite Campus) are 15 and 16 years old respectively. Shouldn't this market be primed for disruption?

    ReplyDelete
    Replies
    1. Agree, I think that this sector faces a huge problem. My own feeling (not to tip my hat on part 3 in the series) is that these companies are pretty much going to have to use subsidies and philanthropy for first 5 years. A notable example of how to navigate this in my opinion is Illuminate, which has bootstrapped from the beginning in the SIS and data management space. While the amount they can spend on R&D and their growth rate is I'm sure frustrating both to them and customers, they are trying to do pretty hard things. But in general, these companies that inherently have to help the institutions are going to have a lot harder time in the market than the ones that have a direct role to play with teachers/parents/students.

      Delete
  2. What do you make of the fact that Accelerated Reader was found to have no discernible effects on reading fluency, mixed effects on comprehension, and potentially positive effects on general reading achievement, and was found to have no discernible effects on reading fluency or comprehension for adolescent learners?

    http://ies.ed.gov/ncee/wwc/interventionreport.aspx?sid=12

    http://ies.ed.gov/ncee/wwc/interventionreport.aspx?sid=14

    ReplyDelete
  3. Thanks for posting Michele! We have found no correlation between product effectiveness and market success as I mentioned in the previous post. For a company with a product as great as Dreambox's to fail to get market traction is a testament to the fact that entrepreneurs who want to have a positive impact need to nail their monetization strategy, not just their product strategy.

    On a separate note (and probably later post), we have found the product effectiveness to be almost completely determined by whether the student is doing the right lesson at the right time. That is much more highly correlated than the quality of the lesson itself. For example, if we assess correctly and realize that a student needs to work on long-a sounds, then putting them on a mediocre long-a lesson increases their learning much more than putting them on a fantastic blends lesson. Using Accelerated Reader as an example, we go the extra step of making sure we know the reading level of every child, and they choose books which are appropriately leveled to read and take tests on. This fluency practice is highly correlated with their progress in reading. So I would guess that if you studied the general case of a school just letting students pick their books and taking tests, you would see no gain. But leveling correctly makes a huge difference.

    ReplyDelete
  4. A ha! I went back and read the first post. So, what are your thoughts on ARPA-ED? Also, are you familiar with the Small Business Innovation Research Program? I know that the program run in conjunction with the Institute for Education Sciences has has funded 35 projects since 2002, and 12 have developed commercially viable products for schools. Another 12 projects are working toward commercialization of a product. One SBIR-funded project, Filament Games, won the grand prize at the 2011 National STEM Video Game Challenge, and another project, Insight Learning Technology, has received some media attention. Finally, have you submitted the studies on Dreambox to the What Works Clearinghouse for review?

    ReplyDelete
  5. Hey Michele, I don't really track the federal programs closely except to lump them into the "Subsidy" bucket. I think subsidies can be really helpful to edtech startups as long as they figure out a pricing model that works post-subsidy. On DBL, I'm not sure, will ask the team.

    ReplyDelete