Editor’s Note: This post has first been published on edcetera – straight talk on edtech.
Frank Catalano stated that we are moving towards a bubble in edtech, if we are not already in it. His post was followed up by Audrey Watters on Hack Education, Lauren Landry on BostInno, and Betsy Corcoran of EdSurge. So let me jump on the bandwagon before this bubble pops, or has it already?
All of them bring valid arguments for and against a bubble in the edtech space, from hipster attitude to mission driven entrepreneurs.
First of all, I think we need to qualify that the edtech space is much bigger than K-12 and higher education. When you consider lifelong learning — health education, early childhood, language learning, job training and so on — these fields are also partaking in the edtech space and furthermore, have one big advantage over the ‘classic’ education market. The motivation behind these products is obvious: making money. I also believe that those markets will become far more important than public education in the next decades, but that’s another story.
In K-12 and higher ed the money aspect should be secondary, but with more and more investors getting interested in the “market” it has become increasingly complicated.
If you are talking about a bubble, you’re eventually going to be talking about burning money — the money of investors or, in the worst cases, the money of regular people who have contributed.
I do agree with Audrey Watters that education, especially public education, shouldn’t be judged by financial metrics and that the value of edtech should ultimately be judged by the value it brings to learners, not investors. But at the moment, that seems to be the definition of success. The Forbes headline “The $1 Trillion Opportunity” featuring Sal Khan’s picture basically says it all. So, let’s take a look at the groups involved in this edtech bubble (if it exists) and their motivations.
Two Founder Groups, Two Motivations
For me, there are two groups of edtech founders in the space. Teachers who want to solve a specific problem and who have the skills needed to make that happen (business or programming knowledge), and people from outside of education who see potential in the relatively untapped market. I usually label them as teacherpreneurs and edupreneurs.
While both are building products for the education market, their motivations are totally different. Teacherpreneurs usually want to create a product and see it working in the classroom; they want to solve a problem they know exists and that they know fellow teachers are struggling with. The business side of things is often secondary, which sometimes leads to an early crash and burn. On the other hand, there are teacherpreneurs who just have the goal of creating a viable, self-sustained business without the mindset of hitting a homerun.
Edupreneurs are the opposite. Most of them want to create a product that is sexy enough to get accepted into an incubator and eventually get funded. Then, the next goal is to scale, get more funding, and eventually get acquired by one of the big players in the education field (look at Pearson, Blackboard etc.). Few of those edupreneurs actually started with a business plan that includes monetization from day one.
The Silicon Valley Mindset
Young founders live on technology blogs. They probably watch Andrew Warner’s Mixergy or Jason Calacanis’ This Week in Startups or Mark Suster’s This Week in Venture Capital religiously. This leads to a certain mindset when thinking about the basis of their startup. The idea from early Y-Combinator days to focus on the growth of your userbase and worry about revenue later is something you will notice when talking to most of the startups in the edtech space today.
In fact, I was shocked to find that Scott Hasbrouck of Ginkgotree follows the old “mom and pop shop” principle of being lean, agile and self-sustained early on. He does not plan to raise funding or go into an incubator. Quite refreshing.
Again, Hasbrouck’s mindset is not the typical mindset of an edupreneur; he’s not just a hungry young developer or MBA who reads that education is the next hot market. His student days not long behind him, and he knows that there is enough broken in the system that a dedicated founder can fix. What’s more, there is enough money around to raise at least a seed or even Series A round. Easy.
The Funding Clock
Now, the job of investors is to make money on their investments. Depending on where you are in the chain, you do so by getting bought out by investors who follow up your seed or Series A investment, by getting paid out when the startup gets acquired, or by selling your stock when the startup goes public. I know I’m simplifying here but let’s run with it.
The moment a startup takes outside funding, the clock for either an exit or an IPO starts ticking. In the dot-com bubble, we saw tons of startups taking their companies public and tons of regular people investing their money in those stocks. We all know how well that ended.
At the moment, the only people who are investing in startups are business angels and VCs. Let’s put it this way: they know what they are doing. Whether it’s a spray-and-pray approach, where they invest in as many startups as possible and hope that two or three of them hit it really big, or an all-in approach focusing on one company with the hunch that this one is going to be the next big thing, every investor knows about the risks involved. It’s their daily job.
And, this means that there is no real bubble right now. Investors have to invest their money, and apparently there is a lot of it at the moment. Sure, we also see that ideas and products get funded that might have fallen through the net a couple of years ago. Those will be the ones who are going to have a hard time raising a second or third round when they run out of money and don’t find a way to get profitable or at least get to break even.
The thing is, taking on funding might even kill good ideas, and not every startup needs to raise money. What about building a company based on revenue, or starting with a bank loan? Why on earth does an iOS application for the classroom need $250k from investors? Maybe crowdfunding sites will be able to change that a bit, with Indiegogo and Kickstarter becoming more widely known in the edtech space.
Building FNACs for Mergers, Acquisitions and Acqhire
I have loved the term FNAC since I first heard it from Mark Suster. Not only does it remind me of a cute little desert fox, it also nicely sums up what most startups in education are building: a Feature, Not A Company.
If you take a closer look at most startups, you will notice that their product could easily be a part of a bigger, already existing company. Honni soit qui mal y pense – but I think that’s part of the strategy of some edupreneurs. Build something that could be acquired by someone bigger in order to make your exit.
Usually those M&As are somewhere between a really big player and a smaller company, but we’ve already seen some deals amongst startups in the edtech space do this — CourseHero acquiring Cardinal Scholars from fellow edtech startup InstaEdu last July is a good example.
And we might see this more often in the months to come when well funded and grown startups from this first wave start looking for new talent and technologies among up-and-coming startups in the space. The exits will be small, of course, but still interesting enough for seed and angel investors like Imagine K12 or 500 Startups.
Making It Big – Who Is The Next Blackboard?
Hot startups that once disrupted the space are now the ones that up-and-coming startups want to disrupt. Anyone counted the number of Blackboard killers out there lately? But in order to effectively kill Blackboard or any other big player, you need to become what you despise. Call it joining the dark side, or maybe selling your soul.
The big game changers are, in most cases, the companies that go public. They are also the ones that deliver the “business model” to new startups in the space, as publicly traded companies usually acquire a ton of smaller startups.
But what are the really big ideas out there that are worthy of an IPO? Quite honestly, I can’t come up with a lot off the top of my head, but I’m pretty sure about two specifically.
I would guess that 2U, formerly 2tor, is an IPO candidate in the next one or two years. They are quietly but constantly building out their empire of top tier online campuses, and I don’t think that they will sell to another company in higher ed. And with nearly $100 in funding, there aren’t that many who could afford it, anyway.
A second candidate for an IPO might be Edmodo. Similar to 2U the platform, Edmodo is building a product and not just a feature. It’s a platform that adds new features, and has seen great traction amongst its users.
Though we have certainly seen an impressive growth of startups in the education space, I wouldn’t call it a bubble just yet. For now, professional investors are the ones who decide which edtech startups get funding, making the entire ecosystem is pretty regulated. If a startup doesn’t perform 6 to 12 months from now, it will go the way of the dodo. Call it natural selection.
The positive thing in this hot environment is that new ideas are getting tested, and even if they fail quickly, upcoming founders will hopefully be able to learn from the mistakes of their predecessors. On the contrary, other new edtech startups should take advantage of those mistakes by hiring “failed” founders to get first hand experiences and insights from the frontlines.
So even if startups fail, and a lot will, we are building a group of experienced people who may have gotten knocked out the first time, but are trying again or helping others to succeed through their experiences. All is well in edtech land.