Tips for Edtech Entrepreneurs: Looking at Success Past & Present

“Tips for Edtech Entrepreneurs: Looking at Success Past & Present” by John Danner first appeared on Beyond Schools.

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

Grind It Out – These are typically the bootstrapped companies, they survive the valley of death because they just aren’t burning much money.  A lot of husband and wife teams and others.  Probably the best example here is Renaissance Learning which sold the popular product Accelerated Reader (AR).  Renaissance basically figured out the school-level sale.  They priced AR at $1500, a price at which just a little lobbying from teachers would make a principal buy it to get rid of them. Great strategy, well executed, got to over $100M.  The challenge here is that getting this type of traction takes a decade and requires you to bootstrap the entire time,because investors just aren’t very interested in these businesses until they become cash cows.

Subsidized Growth – A number of companies in the space have benefited from federal subsidies during their Valley of Death years.  These include companies like Wireless Generation and Edusoft, benefiting from the passage of No Child Left Behind and Reading First subsidies to create assessments for schools, districts and states.  This is a very effective way of funding through the valley of death, because buyers are relatively price-insensitive (it’s found money, so why not spend it).  The challenge with subsidized growth is that the money runs out and the old reality sets in. A superintendent that paid $100/student for your product because of federal subsidies may love your product, but since he has a tiny line item for curriculum or assessment online in his budget, may only be willing to pay$5/student once the subsidy ends.  So you build 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 have figured out how to go around the institutions and direct to folks who buy rationally.  One good example of this is Rosetta Stone with language learning, though my guess is that a lot of the buyers of this product 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

Subsidized Growth

Direct to Consumer

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

Three important examples in this category of current companies are Edmodo, Class Dojo, and Motion Math. Edmodo provides teachers with a Facebook-like interface to manage their class, make assignments, etc.  They gave the product away for free to teachers and now have a couple million monthly users.  Class Dojo, an application for managing classroom behavior is an iPhone app which teachers get for free.  They have also gotten to several million students being managed every month. Motion Math sells a series of rich mathematics apps for the iPad.  They sold initially to parents and have since started to follow the iPad into schools and sell whole classroom and school sets.  None of these consumer-oriented companies have figured out how to monetize their large user bases yet.  On the other hand, they have none of the problems 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.