Edtech Startups burn Money

Are Investors Reluctant or do Edtech Startups not need the Money

Edtech Startups burn Money

Yesterday, Frank Catalano pointed me to a report by Ambient Insight titled The 2012 Boom in Learning  Technology Investment. It’s a quick read, only 18 pages, and Ambient did a good job in breaking down the investments into the different verticals between 1999 and 2012.

In my opinion however, Ambient Insight draws the wrong conclusions when stating that

Investors are funding a lot more companies, but are increasingly reluctant to risk large funding amounts.

I think investors don’t need to invest large amounts and many startups don’t even want the money as you cannot compare the investments in education that were done before and after the dotcom bubble with the investments we saw in 2012 as the landscape for launching a startup in e-learning has totally changed.

Let’s break it down.

1) The cost of building a startup is a friction of what it used to be

Back in 1999 and even up to the middle of the past decade building a startup involved huge costs. From licensing software to buying or renting server racks, a web based startup had to invest tons of cash before it even got a service up and running.

Amazon Web Services which today hosts a huge part of web companies was officially launched in 2006 and from then on even the tiniest bootstrapped startup was able to afford scalable hosting. You did not need to invest intro infrastructure beforehand, it now grew with your userbase and hopefully your revenue.

Web technology has also come down in cost, in most cases to $0 as you don’t need to buy licenses for MySQL, Java, php, Ruby on Rails and so on and so forth. Developers don’t need to be hired in New York or San Francisco from the start. Sites like Odesk can get you a development team in Romania or Vietnam at the friction of the cost and instead of hiring a web designer for the looks you can auction your project at 99designs.

All of the points above illustrate that the same idea that cost millions of dollars in venture capital to realize in 1999 now is nearly free and can be financed with credit card debt, a family and friends round or through crowdfunding.

This also means that startups today, if they are clever, have a much lower burn rate than those that launched 1999. Also many startups today follow the lean startup mentality which is exactly about that, preventing a second dotcom burnout for early stage startups.

All in all, most edtech startups won’t ever need more than $500k, many probably much less. For comparison on how it used to be around 2000, I suggest to watch the documentary Startup.com.

2) Most edtech founder teams work on small ideas

Though I don’t want to diminish the efforts of those edtech founders, I assert that many (most) of them are working on projects that solve a very specific problem. This is especially true when we are talking about those in the mobile learning and app space. I often quote Mark Suster here who called these kind of products FNACs, feature not a company.

And that’s probably the plan for most young founders who are often diagnosed with “being on a mission” (if this mission is to flip the startup). Those FNACs are aimed to attract big, or at least bigger, players in the market that will hopefully acquire them like we recently saw with Livemocha being acquired by Rosetta Stone (though that wasn’t the plan, I think) or Lore being acquired by Noodle Education.

Also, we should take into account that many of these founders are in their mid-twenties, they only want to spend a few years working on one idea in a hot and promising market and then move on to the next idea. How big is the chance that you’re working on your biggest idea at age 26? Not very high. At 26 I was about to “disrupt” urban party life with a cocktail delivery service. You get the idea.

Again, the financial infrastructure and ecosystem allow very young founders to get small ideas off the ground. Again, to achieve such a plan and make an interesting exit for the founders and (angel) investors you don’t need to raise a ton of money. For how long this strategy will work is of course disputable.

On the other hand, in every market there is always only a limited number of big ideas to work on. Right now I tend to put startups like 2U, Edmodo or Chegg in this group as all of them are building platforms that could easily create aspects of FNACs on their own and that probably won’t get acquired by a competitor or bigger player in the market. Which means that they need to go the IPO route.

3) The rise of Edtech Incubators

Another aspect which is fueling the growth of edtech startups are dedicated incubators like Imagine K12, NewSchools Venture Seed Fund, Startl, DreamIt Ventures etc. Imagine K12 alone have incubated and funded 19 startups in 2012 during their Winter and Summer cohorts.

And with new incubators like Macmillan Digital Education, Kaplan Edtech Accelerator and Pearson Catalyst 2013 will see even more. Like I wrote in February, we are entering the era of the flipped edtech startup.

4) The concerned Silicon Valley Moms and Dads

Education has become a huge topic in the Valley and beyond among the tech / geek elite. Since the hype around Salman Khan and now MOOCs tech executives and founders who have been around the block once or twice are now pretty open to angel invest into education startups that help create a better world.

Why? Because most of them got children and don’t want them to cope with a broken school and university system. Take Jason Calacanis as an example. The moment he got a daughter his interest has started shifting towards the education space. When I met him in London and Paris we talked a lot about online education and where it is all going. He is now going to host the second edition of the LAUNCH Education & Kids Conference in June and he also interviewed Sebastian Thrun, Anant Agarwal and Salman Khan for his webcast This Week in Startups.

The tech elite essentially took the education matter into their own hands as they strongly believe they can do a better job than anyone else. Well, we are going to see how that goes but it is definitely another part of the puzzle.

5) “(Communications) tools don’t get socially interesting until they get technologically boring.”

Last but not least the above quote from Clay Shirky is also true for what we see in terms of adoption of elearning in the mainstream today. Back in 1999 PCs were still hard to handle and quite expensive, let alone the additional cost of a (somewhat) fast Internet connection.

Like for founders in edtech cost has come down for consumers. And thanks to Apple and the iPhone / iPad we learned about the joys of mobile Internet and consumption. All these things are now technologically boring. Your parents and grandparents are on Facebook, use a smartphone or tablet and so do your children. Therefore, the potential market for elearning products is much bigger than 1999 or even 2005, two years before the launch of the original iPhone.

And with mobile devices being technologically boring we got used to the idea of buying small learning applications for $0.99 or even up to $5. It’s a proven model and though successful startups like Mindsnacks, Voxy, busuu or babbel.com raised up to $10 million they all created their products at a friction of the cost compared with startups during and after the dotcom years. Also all of them had a working business model and raised money for scale and growth, not for development or infrastructure.

Bottom line: the Ambient Insight report gives you a nice overview about the money that went into each vertical, but I think you need to take the points above into consideration to get a clear picture of the online education market.

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Kirsten Winkler is the founder and editor of EDUKWEST. She writes about Social Media, Digital Society and Startups at KirstenWinkler.com and the future of learning at Disrupt Education. You can follow her on Twitter, Facebook or Google+

  • Jenny Rankin

    This is a really awesome article. I’m so impressed with your knowledge and really liked your points. For example, it’s so true startup costs are lower now with all these great, free resources (and with so many companies creating open source aspects to products, I think those that truly are open source and realistic to use will help drive startups expenses down, as well) and outsourcing is so common. Also, I like your mention of startups focusing on smaller problems, as I agree that’s a definite reason for lower costs. For example, my husband had investors for his 1st company, which focused on a single idea. After selling that company he started another that tackles a much bigger idea, but by then he was successful enough to not need any investors. If he had been a startup needing investors, he wouldn’t have tackled such a big idea that was so expensive to build. I imagine this happens a lot.

    • http://kirstenwinkler.com KirstenWinkler

      I am pretty sure that this is the case. But those stories don’t sell on the tech blogs or mainstream media. We want to read about 13 year olds who sell their first company / idea to Yahoo for $30 million :)

      Over the years I became a big fan of decent, solid build-on-revenue startups and those, as you said, are often created by seasoned entrepreneurs who have been around the block.

      • Jenny Rankin

        So true! :-)

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