Education Week - Navigating the Ed-Tech Marketplace - S6

CONTINUED FROM PAGE S4
Ed-Tech Market Concerns
Bubble to the Surface
BY MICHELLE R. DAVIS
A
sharp rise in investment flowing into
K-12 educational technology and a flood
of new startups entering the market have
longtime players cheering the attention to what
they call a previously undervalued sector, but
have also spurred concerns that this surge could
foreshadow a boom-to-bust phenomenon.
Over the past several years, K-12 educational
technology-once an unlikely area for significant
venture-capitalist attention-has become a hot
new investment opportunity. That continuing
trend has prompted a whole industry around
creating and promoting ed-tech startup companies
and an intense focus on figuring out why
some succeed while most fail. It's also meant that
schools and districts have opened their doors
wider to for-profit companies, new technologies,
and sometimes-untested products, creating a risk
for educators.
"The uptake on technology in the education
sector is jaw-dropping," said Deborah H. Quazzo,
a founder and managing partner of gsv Advisors,
a Chicago-based education investment bank.
The debate over whether an ed-tech bubble,
akin to the late 1990s dot-com bubble in which
many tech-related startups received huge financial
support from investors only to later fail, is
heating up as established companies grow and
new players enter the market. At gsv's Education
Innovation Summit in April, considered a
bellwether for where education investment is
heading, several high-level speakers said they
believed a bubble existed, while others said those
concerns were exaggerated.
Ms. Quazzo sides with those who think the
market is active, but healthy, though she acknowledges
that some companies may be overvalued
and many existing startups will fail. But
Ms. Quazzo, and her colleague Michael Moe, an
adviser to gsv, argue that the current atmosphere
feels more like a dynamic marketplace than a
bubble lacking substance and ready to burst.
"Because capital is flowing into this market,
people cry wolf and say there's a bubble," Mr. Moe
said. "But what's happening now doesn't correspond
to what a bubble really is-where people
lose their heads and there's not economic reality
tied to the value of capital allocations."
Investors Jump In
There's no question there are more dollars
flowing into the ed-tech sector. New York Citybased
investment research company cb Insights
reported overall ed-tech investment hit a record
high in the first quarter of this year, with $559
million flowing into the sector via 103 investment
deals. By comparison, the company reported total
investments of less than $100 million in just
under 60 deals in the first quarter of 2012.
According to gsv Advisors, the number of
disclosed transactions in which companies are
raising money primarily in K-12 education and
S6 | NAVIGATING THE ED-TECH MARKETPLACE
EDUCATION WEEK * June 11, 2014
concentrated mainly in ed-tech, went from 18
valued at $121 million in 2007 to 145 transactions
valued at $629 million in 2013.
Other analysts are deconstructing the market
in different ways. The Oakland, Calif.-based
NewSchools Venture Fund, a nonprofit that
has invested in many educational technology
startups, reported that from 2012 to 2013, venture-capital
funding in the K-12 ed-tech sector
increased only 6 percent. However, venture-capital
firms that once generally avoided the K-12
market are now diving in. In February, Remind
101 Inc., a free mobile-messaging service for
teachers, raised $15 million in a funding round
led by venture-capital company Kleiner Perkins
Caufield & Byers; and educational analytics company
BrightBytes raised $15 million in funding
through Bessemer Venture Partners.
There's a lot of buzz around this area that
never existed before, said Frank Catalano, the
principal consultant and analyst for Seattlebased
Intrinsic Strategy, a consulting firm that
specializes in educational technology. "We are in
the middle of a hype bubble, no doubt," he said.
"Suddenly, ed-tech is the hot property."
'Get Rich Slow'
Mr. Catalano said the question of whether
there's a bubble when it comes to valuation is
a separate issue. While there is increasing investment
in educational technology, analysts
are finding that investment in the sector relies
heavily on seed money and angel investors in
the initial stages of company-building instead of
the higher-dollar investments in later funding
rounds more common in other sectors.
To Mr. Catalano, that shows ed tech is a "get
rich slow" business and whatever bubble may be
forming on the investment side will take a long
time to grow.
But Jennifer Carolan, a managing director for
the NewSchools Venture Fund, sees that emphasis
on seed money as a reflection of a less
mature, but growing, investment field. As those
startups gain experience, she predicts increasing
investment in later funding rounds. As it is, Ms.
Carolan said there's still not enough investment
money flowing into the K-12 ed-tech market.
"The sector has been underfunded for so long,"
she said. "If people say there's a bubble, we need
more of a bubble then."
From the inside, the ed-tech world looks much
different to Adam Frey now compared to 2005
when he co-founded Wikispaces.
"If the question is, 'Is there more investment,
companies, and activity going on in the ed-tech
space?' there's no question there is," said Mr. Frey,
who recalls that at the time WikiSpaces, an education
oriented web-hosting company, launched
it was difficult to raise any money or catch
venture capitalists' attention. Earlier this year,
Wikispaces was purchased by London-based
> www.edweek.org/go/edtechmarket
digital-publishing giant
tsl Education (bought in
2013 by private equity firm
Texas Pacific Group) for an
undisclosed sum. "There are
a lot of stories right now about
people having money thrown at
them," Mr. Frey said.
Even though the investments may
be smaller than in other sectors or
concentrated at the seed stage, that
may fit well with K-12 ed tech, he said,
where a small amount of money can go a
long way. But he and others acknowledge
that many of the startups in the market
now will not be around in the near future.
Whether you view that as a problem or as
part of a healthy, competitive market depends
on your perspective, said Mr. Frey, who emphasized
that ed-tech entrepreneurs need to
learn to handle themselves in this new type of
environment.
"Don't sign up for a mission that isn't yours,"
he said. "Don't let your goals get co-opted by a
venture capitalist and the games they want to
play."
That's what Adam Geller, the co-founder of
ed-tech startup Edthena, is trying to avoid. His
company, which provides video tools to teachers
and those training to be teachers, has generated
income from the start. He's taken investments
from some angel investors and an undisclosed
amount from NewSchools, but he says he has
been discerning about where his money comes
from and how it's used.
Mr. Geller said the investors he's been meeting
with are generally knowledgeable about the
education market, not just looking for a quick
buck through the investment of the moment.
"I haven't encountered someone jumping into
the education area because it's hot and exciting,"
he said, noting that most education
investors seem to have a personal or family
connection to the education field, or want to
solve a particular education problem. "It's
more that they have a particular reason
or desire to be investing in education,"
he said.
Even so, Mr. Catalano argues that
the risk of creating an ed-tech bubble
is real and could have major implications
for schools if it were to
happen. "We run the risk of overpromising
that we can solve everybody's
problems with ed tech
and setting up unrealistic expectations,"
he said. "There
could be a rush by schools
or districts to start
using a bunch of new
tools that may not
be around in a
year." n
the myriad of technology products
thrown their way, many district
administrators today feel "overwhelmed"
by the choices they're
asked to make, while also keeping
costs in mind, said John D. Musso,
the executive director of the Association
of School Business Officials International,
in Reston, Va.
Those decisionmakers want to put
innovative technology into the hands
of teachers and students, but they
are also unnerved by the rapid pace
of change in digital tools marketed to
them.
Only a few years ago districts were
relying on desktops, before shifting
to laptops, Mr. Musso noted. But now,
many laptops are being phased out in
favor of iPads and assorted tablet options-leaving
school leaders wondering
how quickly their next purchase
will become obsolete.
The challenge is not only to identify
needs today, but "what's on the
horizon and what kind of technology
is being developed," Mr. Musso said.
Potential Market Disruptions
While much of the market remains
in flux, it's likely that schools will
continue to demand products promising
personalized learning, and new
approaches to blended or hybrid
learning, which combine online and
in-person instruction, at school and
in homes, speculated Mr. Johnson of
the New Media Consortium.
Yet even those areas of educational
technology face volatility, Mr. Johnson
added. Unreliable Internet access in
schools and in students' homes, for instance,
can disrupt blended learning
projects, he pointed out.
Plus, much of the most valuable
work in personalized or adaptive
learning is focused on using data
about students' learning processes,
not just data about outcomes, such as
test scores, Mr. Johnson noted.
But the recent eruption of parental
concern over student-data privacy is
not about to go away. So if companies,
districts, and policymakers don't ensure
that students' personal information
is protected, he said, "the blow
back will kill the whole thing."
Many companies are also claiming
that their products are aligned
with the common-core standards,
even though a number of researchers
have cast doubts on those claims, saying
it's likely that some vendors are
merely rebranding existing materials
under a new imprimatur.
To complicate matters even more,
districts may face significant difficulties
in trying to evaluate the value of
ed-tech products claiming to promote
personalized learning, Mr. Johnson
said.
While that term is "very much in
the news," he said, "personalized
learning is not a well-defined landscape
at all."
Given those unknowns, and district
officials' overall unease about having
to make big decisions about costly
technologies, Mr. Johnson said he
sees little harm in districts taking a
cautious approach.
For many districts and schools, it
makes sense "to wait a bit and let
the market develop, so that options
are clearer," he argued. "See how this
unfolds. There's not a real penalty for
being a midterm adopter." n
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