Building Effective Edtech Business Models to Reach the Global Poor

column | Entrepreneurship

Building Effective Edtech Business Models to Reach the Global Poor

By Amy Ahearn (Columnist) and Santiago Melo     Aug 8, 2016

Building Effective Edtech Business Models to Reach the Global Poor

Battushig Myanganbayar grew up in Ulan Bator, Mongolia. As a senior in high school he persuaded his parents to upgrade their internet speed so that he could stream online course videos from MIT. He managed to earn a perfect score in the edX Circuits and Electronics course and gain admittance to MIT. In 2013, he was heralded as “the boy genius of Ulan Bator” by the New York Times.

Why was Battushig so captivating? For one thing, he offered an ideal parable for technology’s ability to surface human potential and connect people to real opportunities. Students like Battushig who used free online courses to achieve world-class education motivated players like Coursera and the State Department to launch initiatives like Learning Hubs and MOOC camps from Vietnam to Bolivia. Yet, as edtech companies became laser-focused on figuring out their business models, the emphasis on serving the poorest students in the poorest countries dwindled. If students couldn’t pay for a course or certificate, startups understandably had a hard time prioritizing them.

Despite this, students like Battushig continue to beat the odds and cobble together their own educations. However these exceptional students—the kind who are willing to walk three hours to an internet café or can earn a perfect score in an MIT course—always will be a thin slice of the global market. The edtech sector needs to figure out how to build business models to serve a wider segment of the global poor at earlier ages. We need to find ways to use technology to scale learning opportunities to the bulk of students in countries like Peru and Pakistan and enable teachers in these markets to source their own content or streamline classroom operations. The question is: are there viable edtech opportunities in so-called bottom-of-the-pyramid markets?

At Acumen, we have been increasingly looking for business models with the potential to improve learning outcomes for the poor. We are an impact investing firm that funds early-stage companies tackling problems of poverty. The average customer served by the enterprises in which we invest earns less than $2.50 a day. We have funded education enterprises across India, Pakistan, East and West Africa, including workforce development programs and chains of low-cost private schools. We invest philanthropic capital with the goal of achieving a return on investment that can be used to fund more enterprises serving the poor.

In 2015 we began operations in Latin America and almost immediately began looking for edtech companies with the potential to address the structural challenges affecting schools. In recent years, Latin America has enrolled nearly all students in primary and secondary education. However, recent studies reveal significant challenges, including low completion rates and poorly trained teachers. These are evidenced by poor performances on international assessments such as the OECD’s PISA and the low rate of high school students enrolling in higher education.

Clearly, there is potential for disruption and improvement in these markets. Yet, we’ve found that entrepreneurs building edtech companies in Latin America face tough odds. Despite reports proclaiming that the edtech market there is booming, the reality is that achieving a profitable level of scale in most countries in the region is hard. If you set aside Brazil and Mexico—each large markets united by a single currency, regulatory environment and common language—the remaining Latin American countries are very small. Therefore, entrepreneurs seeking to grow an edtech company in these markets face three challenges right off the bat:

  • Cross-border scaling is necessary, but difficult: To bring a company to scale and profitability in Latin America, edtech entrepreneurs must figure out cross-border expansion. Yet each country has a different national curriculum, making it hard to build content offerings that can scale across borders. Additionally, even though most countries in the region speak Spanish, regional variations in the languages still necessitate that companies modify all the content to suit each country.
  • Government is the primary customer, but government contracts get bogged down in bureaucracy or corruption: In Latin America most parents view education as a responsibility of the government and are therefore unwilling (and frequently unable) to spend their own money on edtech products or services. Teachers earn modest salaries and can’t purchase classroom resources out of their own budgets. This means that edtech entrepreneurs need to market to the government as their primary customer if they want to achieve scale and reach the poorest students. However, contract negotiations often are stifled by sluggish bureaucracy or derailed by graft. Edtech services can also be a tough sell since they often represent incremental costs for districts and governments, and entrepreneurs currently have limited data with which to prove their products’ effectiveness.
  • Lack of market dynamics: Unlike in the United States, most of the purchasing decisions for schools are performed at the national government level. Therefore, the end users (teachers and students) have little say in what products get purchased, and the incentives for adoption do not always line up. The lack of feedback loops between students, teachers and companies hinders product development and service enhancement.

So, if you want to build a viable business model to reach the poorest students in Latin America how should you do it? Start with test prep. Counterintuitively, we’re seeing that even the most creative and idealistic entrepreneurs might need to start by building relatively boring products to improve exam scores. Rather than viewing this as a concession to rote learning and “drill and practice” pedagogy, think of it as the Trojan horse that could eventually enable the introduction of richer learning experiences.

Why? If governments are the primary customers for edtech companies, entrepreneurs need to create a product that can deliver quick and visible “wins” that can be easily tracked by officials. Additionally, because teacher performance often is judged on the basis of exam results, teachers also are incentivized to actually use the test prep products that are introduced to their classrooms, rather than seeing them as distractions from curriculum delivery.

Although there is plenty of debate around standardized tests, the truth is that in Latin America, scores on national assessments determine students’ future as learners, arguably even more than in the U.S. For instance, admittance to free public post-secondary education often is contingent on high scores. So if entrepreneurs can build a product that moves the needle on exam results for poor kids, then we see the potential for companies to layer in other features and products that promote deeper levels of learning. Test prep just might be the entry point that helps entrepreneurs achieve financial sustainability and move toward offering more robust learning experiences. Of course, companies also have to build strong relationships with teachers, schools and governments to gain traction and trust.

Take the cases of GAL&LEO, Educatina and Open Green Road, three innovative Latin American companies. Both started by offering test prep products, but have ambitions for cross selling and expanding into other learning products as they consolidate their customer base. We’re excited to watch the journey of these new players. We know that building business models for edtech products that can reach large numbers of students living in poverty—not just the exceptional ones—won’t be easy. But there are millions more kids who deserve to get their hands on relevant, high quality learning materials. This shouldn’t be something that lands them in the New York Times, but rather an event so ordinary that it doesn’t even make the news.

Amy Ahearn is a Senior Innovation Associate in Acumen’s San Francisco office where she builds online courses. Santiago Melo is a Senior Portfolio Associate in Acumen’s Bogota office where he sources investment deals in the education and agriculture sectors.

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