In the last three month period, EdTech attracted $690 million of venture capital, reaching $4 billion of total private investment for the year, up two thirds from the previous year and quadruple two years prior.
This was the trendline for EdTech venture capital investment at the end of 2000.
After the dotCom crash, it would be another decade until 2012 when EdTech would again draw in $1 billion of total private investment, repeating in 2013 and likely again in 2014 (nearly $600 million raised in Q1 2014 alone). In fact, the leanest post-Bubble years of 2002 – 2005 would see less than $100mm of annual venture capital inflow, with 2005’s haul perhaps just $50 million, a pathetic 3.5% CAGR from the $30 million of total private investment generated 15 years prior in 1990 at the industry’s dawn.
While the Internet Bubble and its burst were extreme events, the 1997-2001 period does present several interesting parallels with the current market, with capital flowing freely across all sectors (from K-12 through the “MOOCs” of their day) and a diverse range of investors – from leading technology company founders (e.g., Microsoft, Oracle, Netscape, AOL) to education funds like Ascend Ventures or the still strong New Schools Venture Fund (backed by John Doerr and Brook Byers along with Jim Barksdale and Steve Case) to the elite venture funds of “Silicon Valley” that still lead the tech markets today (i.e., KPCB, Accel, Bessemer, Charles River Ventures, Warburg, Maveron, Sequoia, etc). Only the individual names involved differ from then: Paul Allen then and Bill Gates today; Jim Barksdale then and Marc Andreessen today; John Doerr then…and, well, John Doerr still again.
10 EdTech Startups that Silicon Valley Loved (’97-’01)
And so, if we recreated our recent Most Active EdTech Investors and Start-ups post for the turn of the Millennium, the list of elite VC beloved start-ups would read:
- UPromise (raised over $115 million from KPCB, CRV, General Catalyst, Goldman Sachs, Hellman & Friedman and GA) – a Higher Education online student rewards / funding platform which might call to mind current “2.0” student loan funding networks like SoFi and CommonBond, UPromise netted its 7 million student members a paltry $50 each in tuition credits before being acquired by Sallie Mae in 2006 (which just divested the business last year after halving its member accounts, but quintupling its assets under management). Of note, this was the last education deal by H&F until their $1.1 billion buyout of Renaissance Learning this year and the only US education investment ever made by General Atlantic (though, they have remained active in the sector internationally).
- Lightspan (raised over $100 million from Accel and KPCB) – this K-8 educational software company would still hit all the right buzzwords today with its “online subscription format” and “computer-based assessment system.” Over just four years, Lightspan raised more than $100 million from such titans of venture capital as John Doerr and Jim Breyer, culminating in a $90 million IPO, which quickly went backwards until being subsumed into PLATO Learning in 2003. Though generating a cool $50 million of revenue, the business was still burning through cash and was acquired for just 1x revenue in PLATO stock. Lightspan, as Jim Breyer said, “has not been one of the great successes of Accel Partners.”
- Advantage Schools (raised over $65 million from Bessemer, KPCB, CSFB, Fidelity, etc.) – a K-12 charter school business, Advantage was acquired by Mosaica in 2001 shortly after laying off much of its staff. (Note, while ground-based charter schools are not necessary technology-driven models, Advantage is included here to represent the $300+ million of failed venture investment in such schools as Edison, Advantage, and Chancelor / Beacon, not counting the bootstrapped Mosaica.)
- Saba Software (raised $50 million from Sequoia, Norwest, Invesco, CSFB, etc.) – the rare (relative) success on this list, Saba is a corporate learning software company that was founded in 1997, raised a massive $50 million round from a sterling syndicate of investors in 1999 and managed to go public in 2000 and even exceeded $600 million of market cap that year (though, 15 years later, its a pink sheets listed company with a market cap of half as much).
- QuinStreet (raised nearly $50 million from growth equity fund Catterton along with Sutter Hill Ventures and a number of other off-brand funds, etc.) – another (relative) success, QuinStreet is a “lead generation” online marketing company with a significant Higher Education focus that raised a massive $40 million round in 2000 before finally going public in 2011 and briefly crossing $1 billion of market cap (though valued under $250 million today). (Note, while its venture investors do not strictly qualify under the “elite” guidelines here, I wanted to include at least one more “positive” story, so as not to be accused of being overly bearish.)
- Apex Learning (raised $40+ million through 2002 from Warburg, Maveron, Vulcan, Edison and Kaplan) – a K-12 online content company that after reaching some scale and even profitability, became a target of volatile K-12 government and investor funding with its investors ultimately crammed down in a $6 million injection by the Chicago-based MK Capital in 2006 (investing a further $8 million in 2013). The business is said to be growing nicely again and is likely a near-term IPO candidate, providing an attractive return at least for MK Capital (if not for its initial “Silicon Valley” investors of 15 years ago).
- SchoolPop (raised over $40 million from Accel, Meritech, Chase H&Q, Wit Capital, Reader’s Digest) – a K-12 product and school funding marketplace (a business model that would probably find favor in Silicon Valley if dusted off again) that finally declared bankruptcy in 2005. Also, fun to note that 15 years later, Accel and Meritech would again collaborate on a massive $100 million round in the long-bootstrapped Lynda.com in 2013. (And, yes, Reader’s Digest was once a major player in EdTech, just look up Jostens Learning, now Compass Learning).
- TrainingNet (raised $40 million from Bessemer, CRV and various now defunct funds) – a corporate learning company that launched an online marketplace of training courses (though B2B, rather than current B2C models like CreativeLive, Curious, Lynda, PluralSight, etc.) which was even hyped on a call helmed by Michael Moe in 1999, before ultimately disappearing.
- Academic Systems (raised nearly $40 million from Accel, KPCB, Vulcan, Microsoft, Kaplan, Softbank, etc.) – another K-12 educational software company that sold for $44 million (just a hair above the total capital in) to Lightspan (see above) in the still frothy year of 1999, generating a perhaps 3% IRR over its 7 year holding period.
- VarsityBooks (raised nearly $30 million from Mayfield, Garage.com, Tribune Ventures, etc.) – perhaps the Chegg of its day, Varsity struggled through a “broken IPO” in 2000 (as analyzed here on VentureBeat), languishing as a pink-sheets stock even after pivoting, until being acquired by Follett for less than $5 million in 2008. VarsityBooks also holds the distinction as the last EdTech investment (along with Edu.com) by Mayfield, the one leading Silicon Valley venture fund that has still yet to return to this sector over the current bull market.
Note, many other EdTech start-ups of this era raised as much if not more, but just not with as many “elite” VCs. Allow us to share a few words here for these dearly departed names of the Bubble: Family Education Network (online K-12 community) was acquired for $150 million by Pearson in 2000 after raising over $70 million from strategic investors (AOL, Intel, Harcourt, Jostens) , an excellent 2x return on capital and estimated 70% IRR; WebCT (LMS provider) acquired for $175 million by Blackboard after raising over $100 million over 8 years from a dozen venture and corporate investors, generating a 1.7x return on capital, but likely a sub-10% IRR; CampusPipeline (Higher Ed IT Services provider) ultimately acquired by SCT in 2002 for $42 million, or half of its total $80 million raised; Chancellor Beacon (K-12 charter schools) formed by the 2001 merger of two venture funded groups; Classroom Connect (K-12); JuniorNet (K-12); Docent / Click2Learn (Corporate LMS), which ultimately became the publicly traded SumTotal (which later went private with Vista Equity for $100 million in 2009); netLibrary (eBooks provider that raised over $100 million and neared a $500 million valuation on paper in 2000 before ultimately being acquired by OCLC in 2002 for $10 million, after which it continued to burn money for 8 years); Scientific Learning (K-12 software), long a nano-cap stock; SmarterKids (K-12); Smartthinking (Higher Ed online tutoring); ZapMe! (K-12 internet services); and many, many more.
In addition to the leading roles played by KPCB, Accel, Bessemer, CRV and Knowledge Universe (UNext, K12, Leapfrog), Warburg Pincus deserves special recognition as the largest investor in these failed EdTech plays, having invested over $150 million in 8 portfolio companies, including Apex Learning, Chancellor Beacon (Chancellor Academies), Kids.net, ProNet, SpectrumK12, Scientific Learning as well as relative / later successes like PowerSchool (sold to Apple in 2001 for $62 million and later Pearson), Workscape (sold to ADP in 2010), and Bridgepoint (IPO).
Of course, there were EdTech winners from the 1997-2001 funding period and some even originated from the Bay Area, however, the local success stories were bootstrapped (e.g., iParadigms) or funded by strategics and other non-Silicon Valley / venture investors (e.g., DigitalThink, Leapfrog), while other Silicon Valley-funded successes were based outside the Bay Area and only funded after lengthy periods of bootstrapping (e.g., Cornerstone OnDemand).
Internet Bubble Investments in EdTech by Sector
In a further echo of today, the majority of the dotCom era investment capital also went into the K-12 sector (before reverting behind the post-secondary sector over 2002-2010). And in another funny similarity, the Bubble period had its own Big 3 MOOCs: UNext (led by Stanford and Chicago, with $150 million invested, as re-imagined in our recent April Fool’s Post), Fathom (led by Columbia with 13 other institutions until it folded in 2003 after having accumulated $25 million of investment, 65,000 students and 2,000 courses) and Cognitive Arts (Columbia, Northwestern).
That being said, there was one key difference from today: of the $2.7 billion specifically invested into online learning in 2000, an even amount (roughly $800 million) was invested into the three sub-sectors of School District K-12, Institutional Post-Secondary and B2B Corporate Learning: however, surprisingly, just $200 million was invested into consumer learning companies. As noted in our previous post on current VC beloved EdTech Start-ups, B2C and open learning is far and away the most popular investment thesis across Silicon Valley today. Now, before, the reader contend’s that Silicon Valley’s Bubble-era B2B focus was reason for its past failings, please read on below.
Why Silicon Valley Sucks at EdTech
To be clear, EdTech was not the only market to crater along with the dotBombs 15 years ago and Silicon Valley was not the only pocket of “irrational exuberance” (indeed, its interesting to note the number of strategic investors during the Bubble). But it does stand out that of the many hundred education start-ups funded by Silicon Valley back then, none have emerged as sustainable, scaled successes. Said in another way, of the EdTech “Unicorns” identified in another recent post that emerged from the 1997-2001 cohort (e.g., Blackboard, Skillsoft, K12, Higher One, Wireless Generation, SchoolNet, Connections Academy, Archipelago, etc.), none were typical case studies on Silicon Valley venture capital (with the possible exception of DC-based Blackboard which raised money largely from DC-based investors Carlyle, Novak Biddle, AOL, etc.).
The Blackboard case is telling as that other Bay Area (i.e., the Chesapeake of Washington DC and Baltimore) continues to outpace Northern California in spinning investor gold into scaled EdTech exits (actually, the I-94 corridor between the Twin Cities and Chicago outranks Northern California as well). And yet, Silicon Valley investors and start-ups (including those in the highly correlated “Silicon Alley” of NYC) continue to drive and draw the majority of the $1 billion of annual private investment in EdTech today (Silicon V/Alley based start-ups represented 30% of all EdTech investment in Q1 2014 per CB Insights).
Therefore, I would like to offer my own hypothesis for the EdTech failings of Silicon V/Alley: simply put, the business models favored by Silicon Valley investors and entrepreneurs run counter to the demands of education. More specifically, these models are flawed in: 1) the lack of applicability / acceptability of B2C ad-supported and freemium social web apps; 2)Enterprise SaaS (i.e., ERP, CRM) will always outdraw eLearning SaaS for top engineering and sales talent; 3) an over-reliance upon often over-engineered product and a general disdain for services revenue; and 4) an over-investment (given all that engineering) relative to typical industry exit opportunities.
- Ad Supported and B2C models rarely work in education and in the case of the K-12 markets (the primary market for investment in Silicon Valley today), they are largely forbidden by schools (see failures Channel1 and JuniorNet, though Scholastic has been more successful) or face limited paths to monetization (i.e. parents, at least outside of magazines like ePals’ Crickets). Far too often, Silicon Valley investors confuse their own household budgets/motivations with the actual mass addressable market. And in the Higher Education market, all the slick new search marketplaces (see my recap from SxSWedu’s LAUNCHedu) have already been beaten to the punch by a broad range of (varying quality) players, from directory spam to large foundations (e.g., College Board), while Google has further stacked the deck against new entrants (see more in our post Why All Education Lead Gen Sucks).
In the end, there have been just two scaled B2C online / social marketplace models in the very broadly defined online learning market (namely, About.com and Quora, at least on paper) as well as two far less capital efficient online retail businesses (Chegg and the 50 year old SchoolSpecialty). Indeed, the real B2C opportunity in education has always been in online proprietary colleges (over half a dozen achieved scaled exits in the 2000s) and virtual charter schools (2 scaled exits), though, following a heap of public and regulatory scorn, such models have drawn just three new investments in the current cycle (i.e., UniversityNow, P2PU and Singularity U). Additional, related plays today would include the adjacent (and disruptive) models of the Schools as a Service, alternative “pathways” providers (i.e. American Honors, Fullbridge, StraighterLine) and the theoretical moves of the MOOCs.
As Michael Crosno once observed at the outset of MyEdu, there has still yet to be a true B2C EDU success: successes have either sold to administrators or just sold textbooks. Today, Silicon Valley still has yet to find out how to break through entrenched publishers, intractable institutional delivered / contracted education and strained / disinterested consumers. Of course, if they can, there are a few billion dollar conglomerates that will be watching to co-opt any new tactics (see HMH”s dual May 2014 B2C acquisitions, Chegg’s serial, small deals or Kaplan’s continued experiments with Grockit’s corpse).
- Other Enterprise SaaS may outdraw Corporate Learning SaaS in Silicon Valley, though SV certainly had its share of Corporate eLearning successes in the dotCom era (see Saba, DigitalThink, Docent) and would seem to benefit from all the local expertise in adjacent SaaS models (e.g., Marketo, NetSuite, Salesforce, Workday, etc.); however, nearly all of the recent Corporate Learning SaaS successes have been based outside of the Valley: Cornerstone OnDemand in Santa Monica; Healthstream in Nashville; Outstart in Boston; Plateau Systems outside DC; and GeoLearning in Iowa. This also extends to all of the emerging Education LMS plays (e.g., Instructure in Utah, D2L in Ontario) and Higher Ed CRM (e.g., TargetX in Philadelphia, Technolutions in New Haven). Of course, with the opportunity to reap billion dollar exits in general enterprise CRM, ERP, SCM, and HR — all without even having to ever show a profit — I cannot blame entrepreneurs, developers and sales leaders from skipping over the more challenging online learning markets.
- Silicon Valley’s exclusive focus on shrink wrapped software product for its inherent scalability and margins (and greater exit multiples) ignores the value of services and customer funding to find and fit a solution to a real market problem (particularly with constrained, but creative school budgets). Forced to customer-fund given the minimal angel funding available, start-ups out in the “flyover land” between the Bay Area and NY also happily avoid piling up a preference stack that only serves to increase their product’s pricing and exit price hurdles (see below). It is telling the number of scaled EdTech companies which started as consulting or services driven operations (see SunGard, SCT, Quality Computing, WiGen, etc.) and then continued under decades more of bootstrapping (again, my list of Unicorns took a median of 14 years to achieve scale). In this way, slow moving and constrained end institutions provide these bootstrapped companies a “Briar Patch” type defense against their fast money Silicon Valley start-up competitors.
- Silicon Valley start-ups are ultimately just too expensive. Related to the above long-gestation periods and judo tactics available to bootstrapped plays, returns are further impacted by limited industry M&A capacity, with average transaction values falling below $100 million in nearly every year since 2002 (aside from some particularly large publisher and proprietary school deals in 2006-2007). Indeed, sub-$50 million deals account for 80% of all activity (the average deal sized hovered between just $25 million and $50 million over 2003-2005 and again in 2008). The vast majority of all historical M&A activity in Education comes from consolidation amongst for-profit post-secondary institutions and publishers as well as LBOs. And with rising size thresholds in the public markets, EdTech has not been able to keep pace, effectively closing the IPO window. Aside from 2U and Chegg (HMH was public long before its recent return), there have been just 9 IPOs since 2001, with most of that activity from proprietary schools (i.e., Bridgepoint, Capella, Grand Canyon, and Strayer) and just 3 coming from the K-12 markets.
- What has worked for Silicon V/Alley? The 2U and Chegg IPOs are notable in that they represent the two cases where EdTech start-ups raised early and large successive rounds of venture capital and were able to scale rapidly to large exits that generated large returns on capital. So that leaves us with (generously) 9 examples over 15 years: 2U, Bridgepoint Education, Chegg (down 50% from its IPO price), DigitalThink (briefly a $1.6 billion stock in 2000 before being acquired for $120 million in 2004), QuinStreet (a micro cap stock today), Family Education Network (acquired by Pearson for $150 million), Saba (another micro cap stock today), Skillsoft (though that was a tangled mess of deal making), TutorVista, Instructure (though that is still based on paper, and the company itself is actually based in the “Silicon Slopes” of Utah) and potentially Knewton (again, based on paper).
As much of this analysis is backward looking (with all the related limitations), it seems appropriate to close with a few 2000 era quotations from those titans of venture capital. As Jim Breyer cautioned, “the education market is highly cyclical and seasonal, and it’s been very hard to build an Internet education leader that has critical mass” and John Doerr echoed, “there’s not easy money, there’s not quick money, there’s not Internet-bubble money, but you can do good and make money. It takes longer, but the markets are big and the revenues are recurring.” And so, with many operators motivated by those social outcomes and their business models requiring long, volatile paths to scale, one is left to wonder if this is really an ideal investment market for Silicon Valley.