The First Crack of EdTech 2.0: The EdTech Hype Bubble of 2011-2013

Cracked Egg

Mark November 2013 as the first crack of the current 2011-2013 EdTech Hype Bubble.  In the same 30 day span that saw Chegg chip away at its eggshell with an amended S-1 filing in its eventual emergence as a public company, Chegg’s co-founder Osman Rashid was dismissed from his follow-up act Kno as its financial investors turned it over to strategic investor Intel for “pennies on the dollar”.  This now brings to three the number of casualties amongst the current, over-hyped Silicon Valley EdTech Darlings.

Regular correspondents of Educated Ventures will be familiar with my highlighting of the “Seven Sisters” of EdTech (originally just “Five Horseman” before the addition of two MOOCs), but for new readers, there are seven start-ups which have each raised capital from at least two of the top decile returning venture funds: Grockit (Benchmark / Atlas); Knewton (Accel / Bessemer); 2U (Bessemer / Highland / Redpoint); Edmodo (Benchmark / Greylock / NEA); Altius Education (Charles River Ventures / Spark); Coursera (KPCB / NEA); and Udacity (CRV / Andressen).  To clarify, the Seven Sisters nomenclature is not necessarily pejorative as several of these companies offer much scaled potential: 2U will certainly generate a sizeable IPO or M&A exit; Udacity’s massive degree offering with Georgia Tech (if profitable and replicable) can truly disrupt the market; and Coursera should be able to follow 2U and Udacity with their own scaled online degree programs) — however, this grouping does reflect the high degree of correlation (or “herd thinking”) among these venture investors in EdTech.  And while Kno does not strictly follow the above definition (as Andressen Horowitz was its only so-defined top tier VC), its voracious consumption of $73 million of capital exceeds all but 2U’s $120 million take and included an investment from GSV Capital (which has a penchant for these plays having also invested in Grockit, Coursera and, through one of its related parties, Altius).

In the last 30 days, Altius Education also completed its own firesale to Datamark (a veteran of EdTech 1.0), which, in combination with Grockit’s earlier flip to another legacy player Kaplan, leads me to call out the first cracks of the EdTech Hype Bubble (presumptuous or perhaps overdue).  Our current market peak has seen over $1 billion invested annually into this sector between 2011 and 2013 — as compared to less than $100 million annually over 2003-2006 and $400-600 annually over 2007-2010.  (Of course, over $1 billion was invested annually in the sector during the last 1999-2000 era EdTech Bubble).

Taken together, these companies also offer lessons for entrepreneurs, investors and strategic acquirors / investors / competitors.

Hype BubblesKno’s consumer-focused model, seeking to sell what is ultimately a feature for an entrenched oligarchy of suppliers, was doomed from the beginning — just ask 2000 era startup Questia which raised $160 million to digitize content before Google went and scanned all the books at the University of Michigan for free (leading to an asset sale a decade later to Cengage / Gale).  Indeed, if the publisher-owned CourseSmart is at death’s door (as is much rumored) and Inkling has investments from Pearson and McGraw-Hill, what chance does an independently-financed upstart  have here?  Kno was wise in structuring its company and capital structure for a rainy day take-out by Intel, though apparently fetching just $15 million per Om Malik.  From even the public description of Kno’s sale to Intel, its clear that its investors would not fund the business further, its founder and CEO would be excluded from its future and the primary value was in its technology and 95 employees (conveniently based in Intel’s home town of Santa Clara). This is actually Intel’s second bail-out of Kno having also assumed their tablet / hardware assets as part of Intel Capital’s $20 million April 2011 investment (a decision made by its then CEO Paul Otellini after a phone call with Marc Andreessen and then handed on down to Intel Capital for paperwork).  The fact that Intel is recycling the new software for its low-price, internationally-focused tablet (the old StudyBook) further reflects Kno’s lack of monetization success or traction in the US.  Indeed, in applying his lipstick  to the press release, Andreessen lauded Kno as “a very successful experiment” [my italics], cold comfort to all the investors who bought stock on SharesPost.

Though an unrelated business model, Grockit’s arc has followed closely that of Kno, including in its sale of its legacy test prep assets to Kaplan for perhaps $10 million after consuming nearly $20 million of investment from Benchmark, Atlas Venture, Integral Capital Partners, GSV, and (in an oddly later stage deal) New Schools Venture Fund.  (This does not include the $20 million raised in December 2012 by those same investors along with the strategic Discovery Communications to pivot to its new “Pinterest for Education” idea).  The sale did at least provide some nice EdTech PR for Kaplan at the height of their summer EdTech Accelerator with Techstars.  And the new investment by Discovery in its Learnist pivot sets up another rainy day take-out.

Faced with the dissolution of its own unprofitable core business by accreditor HLC, Altius Education turned its Helix platform and employees over to Datamark along with a commitment from their owner Oakleigh Thorne to further invest over $10 million (or $11 million, to be specific).  (Fun fact: Oak got to keep Datamark in the very successful sale of his prior business eCollege to Pearson).  While already well covered in editorials on venture sites like BuzzFeedEdSurge and Forbes (and a neat interactive timeline on the education site InsideHigherEd), its important to note that Altius still heedlessly overlooked the adverse outcomes (i.e., grades, graduation rates, and cohort default rates) of associates degree students and their impact upon its proprietary school cousins (see University of Phoenix and its disastrous Axia College investment) while also overstepping their bounds in the LLC entity it established and owned with its not for profit partner which it then sought to separately accredit under WASC (wholly out of step from the definite lived, arms length tuition share partnership contracts employed by its “School as a Service” peers — watch Educelerate’s related February 2013 panel discussion here). Compare this model to Quad Learning‘s consultative American Honors program, which does not take on such “principal risk” in serving these at-risk students.

The word is still out on Edmodo and Knewton, but I have to think that Knewton’s strategic investor Pearson is closely watching the student (and financial) outcomes on their MyLab partnership, while I would also not be surprised if Kaplan seeks to reunite with their former tutor (and Knewton founder / CEO) Jose Ferreira.  As the above start-ups would show, neither exit would necessarily suggest a win for investors.

Post Scriptum: there are other start-ups and segments caught up in the current EdTech Hype Bubble as my above graphic illustrates, but for every such bubble, there is also a corresponding Building Block which promises a more balanced investor-exit equation, including in overlapping markets like Schools as a Service (see Academic Partnerships, All Campus and the nascent efforts of Udacity), Course Content, Content Platforms, Informal Learning Networks,  Credentialing, and the New Proprietary Schools, but these insights will have wait for another post — or you can always write me for my thoughts @cnyren.

What do you think?

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