Edtech Business Models

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Edtech Business Models (7/8)

Funding Gets You Started, Revenue Sets You Free

There is increasing pressure on business models and the landscape for edtech entrepreneurs is changing. Which companies will survive?
K-12 Edtech Funding, '10-'15
K-12 Edtech funding increased by 5x over the past five years

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Source: EdSurge

So much has changed—yet there’s still so much to prove.

In 2015, investment in edtech businesses boomed. Investors put more than $1.1 billion into K-12 edtech companies (according to EdSurge Ka’Ching data), the most significant year of investing ever for the sector. Sure, measured against the rest of the venture world, overall edtech investment is still tiny, about 2 percent of the $58.8 billion invested by the venture industry in 2015. Yet that’s a big increase from the 0.9 percent of the market that overall education (just not technology) investing represented between 1995 and 2011, according to GSV Advisors.

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Even investors who are fans of education want returns, however. And so edtech startups are working harder than ever to find sustainable business models.

The business models of hundreds of edtech companies started since around 2010 fall into two main buckets: “free for teachers” (which includes both “totally free” and “freemium” models) and “sales to administrators”. There are some notable outliers, Clever, for instance, effectively sells to other edtech companies by taking a cut of their sales to districts. Other edtech products primarily target consumers or parents.

“Free for teachers” companies aim to grow their user base aggressively by offering their products for free and so rely heavily on venture financing. Some of the best-known edtech companies that have taken this path include Edmodo (60 million users), Class Dojo (35 million users), Remind (more than 30 million users). But while consumer companies—Google, Facebook and Twitter and such—monetized their free products by putting ads in front of users, education companies were resoundingly advised in 2015 that they have to protectprotect, not sell, users’ and students’ data. That will lead, inevitably to “premium” services that schools and districts must pay to support. “Freemium” companies start here, offering a portion of their product for free (frequently to teachers), in hopes that schools or districts will pay for a full subscription.

Edtech User Base (2015)

How do edtech companies stack up with the total # of US teachers and students? Edmodo now has more global users than the two audiences combined and ClassDojo and Remind aren't too far behind

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Source: Getting Smart, ClassDojo, Remind, National Center for Education Statistics

Companies built around the “sell to administrators” approach aim to drive revenue from the moment they launch. They require energetic sales outreach and tightly defined products. Because the sales cycle to districts can be painfully long, they, too, need outside funding but that initial boost may be smaller than their “free” cousins—and may last longer.

Raising subsequent rounds of capital is increasingly heavy lifting for edtech companies: they took 50% longer (from 2011 to 2015) to raise a Series A round after their seed round and 50% longer still to move from Series A to Series B. That makes the “sell to admins” model popular, particularly among financiers.

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MATT HANSON
Partner with GSV Capital
“The freemium model proliferated in a much looser funding environment.”
“The freemium model proliferated in a much looser funding environment,” says Matt Hanson, a partner with GSV Capital. Referencing the sentiment in January for investors, Matt adds, “we are in the part of the funding cycle where terms and funding conditions have tightened considerably.” And more experienced entrepreneurs are entering the industry, too. “Increasingly seed stage companies have a lot more figured out and a lot more revenue traction,” says Michael Staton, a partner at Learn Capital. “The community has grown, the learning has grown…. You have more impressive entrepreneurs brought to the stage and that learn more before they start a company.”
Accelerating Innovation in Edtech

The AT&T Aspire Accelerator aims to enhance education by supporting and mentoring the most promising and innovative startups in edtech. The Accelerator’s mission is to support innovations that can help every student achieve a bright, successful future—exponentially and at scale. For and non-profit organizations chosen to participate in the program receive financial investment, access to expert services and mentorship. The inaugural 2015 class of five edtech ventures have already impacted more than two million students, 200,000 teachers, and 4,500 schools throughout the United States.

Failures will come and consolidation is inevitable in a landscape with more than 160 math products, for example. The fact remains, the industry is still searching for that paradigm of success. “The real question is, is there anything new here? Is there a new business model that is going to be significantly better than what Pearson does? If there isn’t, then the modest successes will just get eaten up by the big publishers” warns Zeal’s John Danner.

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Timeline

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TEACHERSADMINSCOMPANIESINVESTORS

Teachers

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MARCOS ALCOZER
Director of Technology at Intrinsic Schools
“We acknowledge that if it’s a free product and if not a lot of people are talking about it, the company might not be on the path to success.”
Can I Count on You?

Think about the last time your internet went out and the frustration that rushed through your veins. Now imagine you’re a teacher attached to an education technology tool and the company goes out of business. If the notion of “9 out 10” startups fail actually holds true in edtech, there will be profound implications for schools and their usage of edtech products. Marcos Alcozer of Intrinsic Schools suggests that talking to other administrators can help mitigate this: “we talk about minor programs that maybe are not necessary but maybe fits a niche that would be nice for a teacher. We acknowledge that if it’s a free product and if not a lot of people are talking about it, the company might not be on the path to success.” Aileen Owens of South Fayette Township discusses a similar methodology: “[We] always do background checks, we call other districts. The first step is who’s using this and then we make personal phone calls. How is it working for you? What suggestions do you have?” Not all companies will succeed; educators have a personal responsibility to investigate before purchase.

Paradox of Choice

The massive number of K-12 edtech products available combined with pressure on entrepreneurs to expand their footprint means that competition is likely to increase and a market for new potential adopters will open up. This puts more pressure on educators to learn how to navigate the diversity of choice. Criteria like “is the product really adaptive” or “does the product meet interoperability standards” are key questions that educators must consider. Bart Epstein of the Jefferson Accelerator emphasizes the strong progress that educators are making in this regard: “Consumers of edtech products are getting more sophisticated. There was a time when they were impressed with any product dashboard. Now, growing numbers of savvy educators ask which data elements are in the dashboard, how configurable are the dashboards, and how do various dashboards interoperate with our LMS and SIS? That is an important part of a maturing market." With far more choices than a teacher could ever use in the classroom, this sophistication is critical for users and buyers.

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