The Business of Ed-Tech
Part 2 of my Top 10 Trends of 2014 series.
I usually end my yearly analysis of all the trends in ed-tech on the topic of “the business of ed-tech.” (See: 2013, 2012, 2011.) Because “the business of ed-tech” really (sadly) sums up so handily most of what has happened in education technology over the course of the past few years.
“The business of ed-tech” is also the “politics of ed-tech.” The business and the politics of ed-tech together dictate almost all the other trends that I’ll cover in this year-end series. MOOCs. Big data. Learning analytics. Privacy. Competency-based education. Buzzwords.
One way to identify the dominant ed-tech trends is to look at what venture capitalists are funding. Another is to look at what government policies are demanding. The state of Maryland, for example, said this year that it would need to invest $100 million in technology upgrades in order to be ready for the new online testing mandated by the Common Core State Standards.
So… who benefits?
Who’s Funded? Who’s Funding?
For a long time investors purposefully avoided the education sector, but funding for ed-tech companies has been on the rise in recent years. According to the investment analysis firm CB Insights, 2013 “saw the highest amount of seed VC deals since 2009. Seed VC deal activity in 2013 jumped 11% from 2012 levels and a whopping 173% from 2010.”
The first quarter of 2014 was even better. “Education technology-focused startups raised over $500 million already in the first quarter of 2014, marking the single biggest quarter for capital committed to the sector in the past five years,” reported Techcrunch in March. $559 million across 103 deals, according to CB Insights. Much of that investment (44%) happened at the “early stage” – that is, seed or Series A funding.
But by the second quarter of 2014, investments had “cooled” somewhat, with about $327 million dollars in VC funding. In June, Techcrunch reported that, “Investments Decline As Education Technology Grows Up.” (Ed-tech “grew up” in 2014? Like, it turned 18 or something? LOL.)
The biggest ed-tech investments of the year (so far):
- Pluralsight - $135 million
- TutorGroup - $100 million
- Dude Solutions - $100 million
- Desire2Learn - $85 million
- Yik Yak - $72 million
- Teacher Synergy - $64.12 million
- Craftsy - $50 million
- Kaltura - $47 million
- Minerva Project - $45 million
- Renaissance Learning - $40 million
- Remind - $40 million
- Udacity - $35 million
- General Assembly - $35 million
- AltSchool - $33 million
- Udemy - $32 million
- Edmodo - $30 million
- Clever - $30 million
The most active investors in education technology this year: NewSchools Venture Fund, 500 Startups, Learn Capital, LearnLaunchX, Kapor Capital, GSV Capital, TechStars, Andreessen Horowitz, the Bill & Melinda Gates Foundation, and Deborah Quazzo.
The most well-funded ed-tech companies, according to CB Insights include Pluralsight, Desire2Learn, TutorGroup, OpenEnglish, Craftsy, Knewton, Lynda.com, Edmodo, Coursera, and Kaltura.
What happened to ed-tech startups who’d raised money in previous years? Where are they now? As CB Insights’ data shows, 75% of venture funded companies are “orphaned” (that is, they don’t receive follow-on investment). (Education technology ranks as one of the sectors most likely to have “orphans.”) Most startups fail and close their doors. 21% of venture-backed startups get acquired. I’ve got more details on closures and acquisitions below.
Ed-Tech Funding Beyond VC
Of course, VC funding isn’t the only game in town. In September, the XPRIZE organization announced it was offering a $15 million prize to “build Open Source software to teach a child to read, write, and perform arithmetic, by themselves, without a teacher.” It’s one of those great examples of how the tech and ed-tech press mostly just parrot press releases and refuse to ask any questions, such as “Um, can software actually do that?” Or “Is that really a good idea?” NPR’s Anya Kamenetz, to her credit, asked great questions. Me, I just ranted in response.
What’s interesting too about the XPRIZE isn’t simply that it’s a terribly exploitative ed-tech idea foisted onto the developing world by techno-solutionists; but that folks – “regular folks,” I suppose – are crowdfunding for this to happen. The organization and its founder Peter Diamandis have deep pockets, thanks in part to corporate connections. But XPRIZE also opted to collect money via IndieGoGo so that its experiments can be conducted on more villages. There it raised almost a million dollars, offering special packages whereby donors could hang out with the likes of Tim Ferris or Tony Robbins.
Crowdfunding once positioned itself as a way in which “the little guy” could fund “the other little guy’s project.” But it’s also become a way for famous and wealthy people to get “the masses” to fund their enterprises without having to pay back loans, VC funding, and the like. Disruptive!
Perhaps the best example of this is this year’s Reading Rainbow crowdfunding campaign. Rights to the much-beloved public television show were acquired by the for-profit company RRKidz (co-founded by former host LeVar Burton), which posted a crowdfunding campaign on Kickstarter looking for money to make its proprietary e-book materials available on the Web. Something that, ya know, it could probably have done with the $3 million it had already raised in venture capital. Instead, it successfully cashed in on our nostalgia, and RRKidz raised $6 million, setting the record as the most popular Kickstarter campaign ever.
Similarly, Code.org, a non-profit founded by two Silicon Valley angel investors that has raised over $12 million dollars in donations from Silicon Valley billionaires and companies, is running a crowdfunding campaign for its Hour of Code program.
Ed-tech astro-turfing perhaps. There's a lot of that going on...
Of course, there’s nothing new about education technology and education reform having their direction dictated by powerful people and powerful philanthropists – most famously, Bill Gates.
Following in Gates’ footsteps, Facebook CEO Mark Zuckerberg has made major donations to education reform efforts. His $100 million donation to the Newark school system has been widely panned, notably in a New Yorker article this year. That didn’t stop him from announcing shortly after that story's publication that he was giving $120 million to schools in the Bay Area. (For what it’s worth, Facebook paid zero taxes – to the feds or the state of California – in 2012, the last year for which I can find records. Shrug.)
Lest you fear that all this funding of education companies and education reform efforts will damage education institutions themselves, don’t worry! Harvard received a $350 million gift this year – its largest ever – so it will be able to keep the lights on.
Oh wait. But what about public education, you ask? According to the Center on Budget and Policy Priorities, “At least 35 states are providing less funding per [K–12] student for the 2013–14 school year than they did before the recession hit. Fourteen of these states have cut per-student funding by more than 10 percent.” These cuts, let’s be clear, do not hit all students and all schools equally. Every state except Alaska and North Dakota is spending less per student at the higher education level as well. As state funds are cut, public universities raise tuition in turn; and again, this feeds the larger cultural narrative that school has become too expensive, that it isn’t “worth it.”
Buying technology for schools, however: totally “worth it.”
One signal of a flourishing ed-tech industry – in addition to all that funding – is the number of education-specific startup accelerators. The number grew rapidly in 2013, and in 2014 the programs continued to launch and to churn out cohorts (with various degrees of success). Even Disney started doing an ed-tech accelerator. Well, light on the “ed-,” heavy on the “-utainment” I’m sure.
Many of these accelerator programs boast the number of “teacherpreneurs” they include. “Edupreneur” and “teacherpreneur” – two terrible, made-up words that really crystallize a lot of the “business of ed-tech” crap.
So, What’s the Business Model?
So with all this money flying around in ed-tech, business is good for companies, right? Well… maybe.
I frequently ask this about education technology, particularly when startups insist that their product is free. What about the business model?!
What happens to a startup – even one with the best of intentions about education – once it has raised a million, ten million, twenty million, one hundred million in venture funding? Is there a plan for sustainability, let alone profitability?
I worry about this a lot, and I try to caution educators when they adopt and endorse products that are free or that have no obvious business model or that have some revenue but also have an incredibly high rate of burn. There are a lot of culprits I could point to here, many of which have raised a lot of money: Remind, Edmodo, Coursera, for starters.
I’m going to pick on Edmodo here, partly because I’ve got a whole separate blog post coming up about MOOCs and partly because every time I criticize Remind, I feel bad since founder Brett Kopf is such a nice guy. (Plus, I’ll be talking about Remind in an upcoming post on data and privacy. Sorry, Brett.)
Edmodo. A startup many hope is “too big to fail.”
Edmodo has raised $87 million in funding, $30 million of that this year (none of which came from previous investors – an interesting signal). While Edmodo does boast over 44 million users, it's not really clear how many of those are active. And its core product remains free. So what's its plan to profit off of all those users? In August, Edsurge reported that the company is now selling Edmodo PD to schools, as well as data dashboards to districts. Is that enough to make the company sustainable? Unlike Edukwest’s Kirsten Winkler, I simply do not see an IPO in Edmodo’s future.
But the future of Edmodo will certainly be interesting to watch…
Closures and Pivots and Bankruptcies
There were some very notable closures and bankruptcies in education this year.
inBloom, the non-profit that planned to build a massive education data repository with $100 million in funding from the Gates and Carnegie Foundations closed its doors in April after parents’ privacy concerns prompted all the states and districts involved in its pilot to back out. I’ll cover this in much more detail in an upcoming post on data and privacy, but I’ll quote Bill Fitzgerald’s take here: that it’s “only good news for the other players in the space” – players like Pearson.
ConnectEDU, a career planning company that was founded in 2002, also filed for bankruptcy in April. Shortly afterwards, the FTC weighed in on the bankruptcy proceedings, expressing concern that the data of some 20 million students might not be protected as the company sold off its assets. (A reminder to look at the Terms of Service for the products you use: what happens to your data if the company is sold?) The VC firm North Atlantic Capital Corporation bought some of ConnectEDU’s assets – specifically Academic Management Systems and its CoursEval software line. Symplicity, which describes itself as a “a market leader in enterprise technology and information systems management for higher education, government, and businesses” acquired Experience, ConnectEDU’s career services software. Graduation Alliance, which offers intervention services to at-risk students, bought Connect!, ConnectEDU’s college planning portal. Mmmm... sweet sweet student data.
Also filing for bankruptcy and/or putting itself up for sale were a string of for-profit colleges: Corinthian Colleges, BioHealth College Inc, and Anthem Education. Corinthian Colleges is still facing a number of lawsuits that accuse it of predatory lending.
Pivots: Kaggle, once a machine learning competition site (and host of a robo-essay-grader competition) now focuses on oil and gas drilling. Inkling has moved away from its focus on interactive textbooks. In May, Techcrunch reported that it had laid off 25% of its staff. Sproutkin is no longer renting books to parents.
And speaking of staying in business, Cengage reached a deal with its creditors to exit bankruptcy, agreeing to “reorganize and eliminate more than $4 billion of its $5.8 billion in funded debt.” So textbook publishers move on to the next round, I guess.
Startups for Sale
Microsoft bought Mojang (maker of Minecraft.) Insight Venture Partners bought iParadigms (maker of plagiarism-detection software TurnItIn). TurnItIn then bought LightSideLabs. Kaplan bought Dev Bootcamp. MasteryConnect bought Socrative. Bertelsmann bought Relias Learning. McGraw-Hill bought Area9. McGraw-Hill also bought Engrade. Consumer Media Network bought Edudemic. STI bought Chalkable, Learning Earnings, and Spiral Universe. TES Global bought Wikispaces. TES Global also bought Blendspace. Tutor.com bought the Princeton Review. Leapfrog bought Kidzui. 3D Robotics bought Sifteo. Sibling Group Holdings bought Blended Schools Network. Qualcomm bought EmpoweredU. Ingram bought CourseSmart. EDPlus Holdings LLC bought Unigo. Unigo then bought Cinergy Education. Desire2Learn bought Achievement Standards Network. Flashnotes bought Moolaguides. Edstart.com bought ExitTicket. Edstart.com bought ClassBadges. InsideTrack bought Logrado. TakeLessons bought Betterfly. Connections Education bought Advanced Academics, once part of DeVry Education Group. XanEdu merged with AcademicPub. WyzAnt bought the defunct Tutorspree. Weld North bought Imagine Learning and Truenorthlogic. Truenorthlogic then bought Avatar Training Management System. Pluralsight bought Digital Tutors. Pluralsight bought Smarterer. Lynda.com bought Compilr. Blackboard bought MyEdu. Blackboard also bought Perceptis. Blackboard also bought Cardsmith. Blackboard also bought Requestec. Blackboard also bought ParentLink. Junyo bought 360Ed. ACT bought Pacific Metrics Corporation. Netchemia bought SchoolSpring. Charterhouse Capital Partners bought Skillsoft. Galvanize Inc bought Zipfiann Academy. Chegg bought Campus Special. Chegg also bought InstaEdu. Chegg also bought Internships.com. Wiley & Sons bought CrossKnowledge. Lending Club bought Springstone. Cornerstone OnDemand bought Evolv. Cartwheel Kids bought Smart Toy. West Corporation bought SchoolMessenger. West Corporation bought School Reach. ECMC bought 56 of Corinthian College’s campuses. KualiCo bought some of rSmart. Houghton Mifflin Harcourt bought Channel One News. Houghton Mifflin Harcourt also bought Curiosityville. Houghton Mifflin Harcourt also bought SchoolChapters. Learning Technologies Group bought Preloaded. Hellman & Friedman acquired Renaissance Learning. Apollo Global Management bought Chuck E. Cheese. It now owns Hostess, McGraw-Hill, and a Nolan Bushnell company – the future of education all housed under one private equity firm.
Or maybe this is the future of education: Facebook bought Oculus VR. Among the potential uses for virtual reality, said Mark Zuckerberg, “studying in a classroom of students and teachers all over the world … – just by putting on goggles in your home.” Chuck E. Cheese plans to make Oculus VR headsets available to kids.
See? All this shit is weirdly connected if you just pay attention.
Anyway... as this long list of acquisitions highlights, many education and ed-tech companies and animatronic-friendly pizza joints are owned by private equity firms. Textbook companies and LMSes are also quite frequently the buyers of ed-tech startups.
What happens after a startup is acquired? Phil Hill used the two year anniversary of Moodlerooms and Netspot by Blackboard to look at what’s changed (or not).
IPOs and Other News from the Stock Market
IPOs hadn’t been all that common in education until recently. Last year, Chegg and Houghton Mifflin Harcourt both went public.
Chegg stumbled after it IPOed and its stock is down from the beginning of the year. In August, the company, known best for being a textbook rental company, announced it was partnering with Ingram Content Group which would take over the textbook distribution piece of the business so Chegg could focus on other things (such as a college counseling service). "“We’ll get the [student] data, get the credit card, and market our other products,” CEO Dan Rosensweig told his investors on an earnings call.
Houghton Mifflin Harcourt’s stock is up for the year, investors seemingly pleased with its acquisitions and its move to go “digital to the core.”
By comparison, Pearson’s shares are down for the year. In July, the company announced it had cut some 4000 jobs over the last two years as its sales had declined. It also announced it was closing its non-profit wing, the Pearson Foundation.
K12 Inc stock is also down. After much outcry about the abysmal quality of the online education it offers and after being sued by its investors and after its founder stepped down (to start a new online edu company), K 12 Inc rebranded to Fuel Education this year. That’ll fix things, I’m sure.
Perhaps the biggest – and most successful – was 2U’s. Although the online education company faced a setback in May when its Semester Online consortium failed, investors seem confident in the company, and the price of its shares has gone up since its IPO.
On the other side of the IPO roadshow, after years of lawsuits and investigations involving its financial aid practices, the for-profit college operator Education Management Corp (which runs The Art Institutes along with several other for-profits) voluntarily delisted itself from NASDAQ. It "reported a $644 million loss in fiscal year 2014, its third consecutive annual loss, as enrollment declined 7.3 percent.” But don’t worry, education startups, I’m sure your IPO will be waaaaay different.
Indeed after 2U’s very successful IPO, some suggested that the education technology sector would soon see more companies going public. But as Buzzfeed’s education business reporter Molly Hensley-Clancy has argued, there are lots of reasons why that so rarely happens, and they aren’t simply about the success or failure of previous IPOs. As the list of education acquisitions this year makes clear, much of that has to do with the big players in the sector gobbling up the littler ones.
The Politics of the Business of Ed-Tech
“What’s Big Business Got to Do with Education Reform,” asked Edsurge this fall. I mean, other than EVERYTHING, right?
The deep (deep-pocketed) connections between the business of ed-tech and the politics of education (and ed-tech) couldn’t have been any clearer this year when the Senate confirmed NewSchools Venture Fund CEO Ted Mitchell as the new Under Secretary of Education. (Mitchell was replaced at his investment firm by former Gates Foundation exec Stacey Childress.)
2014 was an election year, and education was – believe it or not – an issue in many races. (I’ll look more closely at the controversial Common Core State Standards in an upcoming post.) Voters in New York did approve a $2 billion bond measure to pay for more ed-tech. But it’s hard to say, based on that alone, that the public really endorses ed-tech or ed-tech expenditures, particularly on the heels of something like the ongoing Los Angeles Unified School District’s iPad clusterf**k. The district’s plans to give each public school student their own iPad has run into countless problems, and in August, local news organizations reported on internal emails that suggested there were all sorts of backroom deals between district officials and Pearson that greased the wheels for the 1:1 program. Situation ongoing. Situation deserving – yup – its own post in this series.
There were a couple of other notable events that tie together the business and the politics of ed-tech – affiliations that are probably only going to become more visible and more powerful as we move towards the 2016 Presidential election and a likely Jeb Bush candidacy. Bush is, of course, a huge proponent of ed-tech.
In March, Reed Hastings, CEO of Netflix and investor in multiple ed-tech companies including Dreambox Learning, expressed his belief that part of the problem with the education system in America is that school boards are democratically elected. He said that,
...The fundamental problem with school districts is not their fault, the fundamental problem is that they don’t get to control their boards and the importance of the charter school movement is to evolve America from a system where governance is constantly changing and you can’t do long term planning to a system of large non-profits…The most important thing is that they constantly get better every year they’re getting better because they have stable governance — they don’t have an elected school board. And that’s a real tough issue.
In June, a California judge ruled in Vergara v California that the state’s teacher tenure rules violated its constitutional commitment to provide “a basically equal opportunity to achieve a quality education.” The Vergara lawsuit was brought by a group called Students Matter, bankrolled by Silicon Valley entrepreneur David Welch. Welch is a ”donor" to NewSchools Venture Fund. One of the student plaintiffs in the case was the daughter of a Rocketship employee. Rocketship is a chain of charter schools, heavily reliant on teaching machines over teachers, whose investors include NewSchools Venture Fund, Neflix CEO Reed Hastings, and Facebook COO Sheryl Sandberg.
Like I said. It’s all connected if you look closely enough.
And you have to look more closely than the tech blogosphere will ever do. As Techcrunch crowed about the Vergara decision, “It also represents a key opening for startups to begin thinking about grade school in a post-tenure world.” As long as it's a boon to startups, right, who gives a shit about the rest of society. And you have to look beyond the ed-tech industry publication Edsurge, which raised $1.5 million in VC funding in February and $960,000 in May. It shares investors with so many of the startups and companies in this post: NewSchools Venture Fund, Learn Capital, GSV Capital, Lynda.com’s Lynda Weinman, and Princeton Review and 2U founder John Katzman.
“Venture Capitalists Are Poised to ‘Disrupt’ Everything About the Education Market,” The Nation wrote worriedly in September. Maybe. Maybe not. But the political power of Silicon Valley and venture capitalists are worth watching as they attempt to reshape not only our education system but, heck, our whole society, our whole system of government. It’s pretty easy to laugh at investor Tim Draper’s proposed ballot measure this year to split California into 6 states. It would have created the country’s richest state (Silicon Valley) and the poorest (Central California). The plan was silly and fairly clearly unconstitutional. But that didn’t stop him from trying.
That’s how this powerful ideology about the ascendancy of tech innovation works, after all. It’s ludicrous. But it’s loud. And it’s rich as hell.
Special thanks to Mattermark and CB Insights for data on the year’s ed-tech funding. First published December 4, 2014.