On the 12th floor of an office building a few blocks from the White House, an incubator for technology start-ups, called 1776, is holding an important meeting.
Well-dressed middle-aged professionals mingle with young hipsters wearing plaid shirts and thick-framed glasses, sipping from cans of Pabst Blue Ribbon. The crowd matches the hodge-podge-but-stylish décor, which features large open spaces, a wooden swing on ropes, and a floor painted to resemble a giant American flag, its faded colors ripped from the dirt-stained Americana of a Levi’s commercial.
They’re here to meet with representatives of the publishing and education giant Pearson, as a part of a new partnership between the company and 1776. Among those listening attentively to the panel are the minds behind some 20 new education-technology start-ups.
There’s CollegeAppz, an online platform that guides high-school students through the college-admission process, and CollegeSnapps, a mobile app that provides a series of alerts and messages to encourage students to seek help when they’re struggling. There are start-ups devoted to online tutoring, Big Data, and cloud computing. One meta start-up, VentureBoard, helps student entrepreneurs build start-ups of their own.
These start-up enterprises represent a small sampling of the companies collaborating with 1776, and an even tinier fraction of what’s taking place across the country. As American higher education faces growing scrutiny over costs, and criticism that it is in need of vast reform, ed-tech start-ups are booming, and now make up a billion-dollar industry.
“Entrepreneurs are a bit like sharks,” says Donna Harris, one of 1776’s two founders. “When they smell blood in the water, they tend to come around.”
Her company is by no means the only start-up accelerator to focus on ed-tech companies. From San Francisco to Boston, ed-tech incubators—which support and mentor young companies, and help connect them with investors—are popping up wherever there are pockets of perceived innovation.
Brent Grinna is a founder of EverTrue, a fund-raising platform that connects alumni with their alma maters. (When naming a company, start-ups seem averse to the space bar.) He went through an accelerator called Techstars in 2011, which focused on a broader range of tech start-ups, and is now a mentor with the Kaplan EdTech Acclerator, which is itself powered by Techstars.
“One of the themes that I think has been very prominent lately has been this onset of accelerators,” Mr. Grinna says. Within that trend there has been a push for “vertically focused” accelerators, which pinpoint a specific market, like education technology, he says. “Ed tech is a major one of those.”
The word “acceleration” is not just applicable to the incubators. The industry as a whole has been zipping along, swelling in size at a pace that seems to quicken each year.
According to the National Venture Capital Association, $146-million was invested in education technology in 2002. Many new ed-tech companies seemed to survive the recession, and even more money began flowing their way. In 2011, some $429-million was invested in ed-tech companies. A year later, according to CB Insights, a venture-capital database, that number was $1.1-billion.
A sizable chunk of the money has been going toward companies that create or serve as platforms for massive open online courses, or MOOCs. The free online courses have caught the imagination of many entrepreneurs and backers and show little sign of letting go. Coursera, one of the most prominent MOOC platforms, has so far raised $65-million in financing, with $43-million of that coming from investors just this year. Its main competitor, Udacity, has raised more than $22-million.
But not all the money is going to MOOCs. Over the summer, Civitas Learning, the company behind a cloud-based Big Data analytics platform, closed its most recent round of fund raising with nearly $9-million from investors. It had already raised $4.1-million in 2012. An adaptive learning start-up called Grockit has raised more than $24-million since 2011. Then there are smaller, yet still significant, investments being made, like the $1-million raised by Thinkful, a provider of cheap, online coding courses.
So why the sudden explosion of interest in education-technology companies?
Diane Stepner, head of future technology at Pearson (which, in addition to its partnership with 1776, has its own accelerator, called Pearson Catalyst), thinks a confluence of factors is at work.
“Education is now more consumer-centric,” Ms. Stepner says. “More people are going to college, meaning there are more venture capitalists with kids in college who are putting money behind this. And more and more students are starting companies, because it’s now cheaper to do that than ever before. All those are merging.”
Mr. Grinna of EverTrue also points to a combination of reasons. The first, he says, is the challenge higher education faces in keeping up with changing technologies used by students and professors. Entrepreneurs are looking at virtually every facet of higher education and finding ways to enhance or replace it with something new. Course-selection software, e-textbook providers, online mentoring services—there’s very little about education that someone isn’t trying to replicate or improve with technology.
Then there are the many investors and entrepreneurs who are familiar with higher education—having experienced its challenges firsthand—who want to be first with solutions.
“On one hand, it’s a huge market,” Mr. Grinna says. “On the other hand, all of us have lived through it and have our own perspective of how it can be improved.”
Not everyone sees the amount of money flowing toward education-technology companies as a good thing.
As co-founder of Civitas Learning, Mark Milliron made headlines this year when he left his post as chancellor of Western Governors University Texas after less than two years to work for the Big Data company full time, following its infusion of financing from investors. Still, he and Charles Thornburgh, the company’s chief executive, have their concerns about the explosion of interest in the sector.
“People are excited about the possibilities,” Mr. Milliron says. “But, unfortunately, people jump on the bandwagon of ‘let’s burn down the village to save the village.’ There’s nothing broken in education that can’t be solved by the best of education. I do think there are people jumping for a solution to make a ton of money in the process.”
Mr. Thornburgh, who has founded several ed-tech start-ups and was once president of Kaplan Virtual Education, says that investors are looking for a “hockey-stick spike"—the one innovation that will be a quick win for higher education and a financial boon to themselves. Some investors may not be prepared to stay in the game for the long haul, he says.
Mr. Thornburgh predicts that many start-ups will continue to find it easier to get initial seed funds, only to find themselves left hanging when results are too slow.
“I think it’s easy to see why, at 30,000 feet, investors are really fascinated by that space,” Mr. Thornburgh says. “But if you jump into this industry hoping to make a quick buck, you will fail. I’ve seen it over and over again. It’s too tough, too slow moving, and requires too much time for it to be an apt place for a gold rush.”
Indeed, a 2012 University of Tennessee at Knoxville study found that only 56 percent of education and health-care start-ups were still operating after four years.
Ms. Harris, the 1776 co-founder, is excited that the industry is attracting so much new money. But she also cautions investors that growing an education-technology company is not the same as growing a consumer Web start-up.
“Structurally, it’s a highly fragmented and entrenched market, with a lot of existing factions motivated to keep the status quo,” she says. “The runway for growth can be long, the obstacles can eat away at cash flow, and the question of ‘What’s the exit?’ is still a challenge.
“How many high-flying education IPOs have we seen?”
One company that could be nearing a lucrative exit—a successful IPO is often the goal—is Chegg, a textbook vendor that now refers to itself as a “student hub.” Chegg started just over a decade ago as a Craigslist-like Web site for renting and buying cheap textbooks. In recent years, under the guidance of its top executive, Dan Rosensweig, Chegg has acquired several ed-tech companies that deal in nearly every aspect of a student’s college experience.
In July 2013, Chegg filed for an initial public offering with the hope of raising $150-million. It had already raised nearly $200-million, according to Reuters and other sources.
But is $150-million high-flying enough for investors? It’s a far cry from the IPOs of noneducation start-ups like Facebook, whose much-maligned initial public offering last year was still able to raise the company $16-billion.
Mr. Grinna, whose company EverTrue received $5.25-million from Bain Capital Ventures in April, says the lack of financial breakthroughs like Facebook in the higher-education sector could mean those investors are really just getting started.
“There hasn’t been an ed-tech Instagram or Tumblr,” he says, referring to companies that were both recently bought for $1-billion each. “There hasn’t been an ed-tech win of that scale, and ultimately investors are seeking returns on their capital.
“So we have to prove that we can’t just identify problems with education but also find solutions for years to come,” Mr. Grinna says.
A Sampling of Young Companies
NovoEd
Most platforms devoted specifically to massive open online courses (MOOCs) are fairly new companies, formed in the last year or so. But this fresh-faced start-up noticed something missing from other providers: peer interaction. NovoEd, started at Stanford University, the birthplace of Udacity and Coursera, officially began offering courses in April. Its technology seeks to put peer interaction at the front of its courses. The platform has signed deals with Stanford, Babson College, and the University of California at San Francisco, among others.
Treehouse
An offshoot of MOOC culture, companies that offer cheap or free online courses on coding are in no short supply. Treehouse is at the forefront of the pack, teaching coding through its whimsically designed platform to more than 43,000 students and companies around the world. The company received $7-million in a round of financing led by Kaplan Ventures in April, and has been used by Twitter, AOL, and Disney to teach coding to employees.
Instructure
Although it’s been around since 2008, Instructure has remained in the shadow of Blackboard, its giant competitor in learning-management systems. But things are changing. While Blackboard for years controlled 70 percent of the market, it now has only about 45 percent, and Instructure is quickly moving to increase its share. It announced in June that it had raised $30-million during its latest financing round, adding to the $20-million it had already raised, to help its more than 220 employees do just that. Instructure has had more than $90-million in contracts, and its chief executive said the company is moving toward an initial public offering soon.
InstaEDU
While MOOCs use the Internet to bring thousands of students to one instructor, InstaEDU is scaling online learning back to one-on-one instruction. The online-tutoring platform charges $25 to $45 an hour for its services. In August, it raised $4-million during its most recent financing round. In all, the start-up has raised more than $5.1-million.
