Twenty five years after Silicon Valley promised to disrupt education and $10 billion of venture investment later, the stables of Sand Hill Road have now sired exactly 1 (one) EdTech unicorn, the DC-based 2U 1)Blackboard might qualify as another Silicon Valley unicorn; however, this other denizen of DC was actually funded by local Beltway investors Carlyle, Novak Biddle and AOL. Chegg would have been a better candidate as a Silicon Valley funded Bay Area company, but its market capitalization has fallen under $1 billion. Silicon Slopes based Instructure is sufficiently Silicon to join these ranks upon their next mark-to-market, but please don’t suggest long-bootstrapped companies like Cornerstone OnDemand, Healthstream, iParadigms, Lynda or PluralSight – these are the antithesis to Silicon Valley..
Education is Eating Silicon Valley
As we wrote previously on EdTech Unicorns, even at a lower $500 million threshold (in cash or paper), education has now seen just 53 “mini unicorns”. Echoing our lede, just 12 were funded early and successively by venture capital — Blackboard, Chegg, 2U, Instructure (its uni-horn is still growing in) and then an alphabet soup of companies that have since been decimated, delisted or are outright defunct — more goats than unicorns — see APUS, BPEI, K12, SABA, SUMT, ONE, QNST, and the original MOOC, UNext. 2)It has been brought to my attention that I am overlooking the talent and performance management sector and Silicon Valley successes like Oracle/Taleo/Learn.com or Successfactors/Plateau.. These are just the (woeful) financial results of Silicon Valley and speak nothing to venture capital’s frequent issues in education around product-market fit, as detailed by Ben Stern in his EdSurge piece “Software Will Not Eat Education,” or their fund and foundation-led moves to either bypass or “disrupt” our public schools and educators. Boom or bust, the financial vagaries of Silicon Valley plays an outsized role in this mom-and-pop and district dominated market — skewing perceptions of what actually works in education along with it.
All apologies to Mr. Marc Andreessen for abusing his good name in this post’s
click bait headline, but we have borrowed upon his and Ben Horowitz’ call to eat education as a stand-in for all the Silicon Valley bluster in education, especially in considering countervailing headlines like last month’s alarmist “Investors Rethink EdTech as Dealflow Declines” (Techcrunch). Of course, Techcrunch drops in the requisite “slow sales cycle” observation (though the particularly galling remark that education doesn’t “show the same sense of urgency that the corporate world does” was a new one). Relative to the whims of such investors, at least Andreessen Horowitz has remained consistent with their co-founder’s original thesis for education, “I wouldn’t want to back a business that’s selling to public schools or characterized by public financing, unions, or government-run institutions” (EdSurge, 2011). Even in his fund’s recent participation in the $133 million feeding frenzy for Alt School, it’s important to delineate that this is a private school bypassing all that bureaucracy — and it even has a bit of software to eat those classrooms 3)Truth be told, Alt School is really just some Silicon Valley “full stack” branding applied to the stacks on stacks of blended learning schools and technology providers already in market. Do we really need another school trying to license their proprietary LMS to everyone else?.
Hot Money Flows
Six months ago at the close of 2014, it all looked so much brighter: New Schools Venture Fund cited venture investment in K-12 education was up 32% in their year end review. Moreover, they noted with glee the seeming return of Silicon Valley investors to this bellwether sector (see chart to the right). They also claimed that 2o14 marked the first K-12 forays by the leading Silicon Valley investors (those “long sales cycles” again) and that their “increased and/or renewed participation has been a driving factor in the growth of Series A and B round sizes (relative to Seed)”.
However, in actuality, K-12 led all edtech markets in investment over 2011 to 2014 (excluding the temporary Higher Ed insanity of MOOC-mania in 2013) with many of these supposedly prodigal investors investing in K-12 and B2B education before (see LearnBoost, Everfi or TutorVista). Moreover, it’s important to note that in any observation on relative growth of Series B rounds, less than one third of industry deal flow comes from Series B rounds and later – compare this to Clean Tech where early stage venture capital is but a small minority of the market (see PwC MoneyTree). In fact, for a market that attracts less capital than that of Clean Tech, the Internet of Things, Food Tech or even Uber(!), venture investment is just too susceptible to the infrequent $50 million round (especially when you include the hundreds of millions of dollars in China related investment) — education is a market of minnows and its a fool’s errand to try to extrapolate upon one year, let alone the five months of YTD venture flows.
And still in my monthly outreach to venture capital investors on behalf of my own start-ups, I have noted that for every fund returning to education or dipping their toe in for the first time, I hear from another three on Sand Hill Road that they are just not finding the “non-linear” growth opportunities so richly available in Uber, food delivery start-ups and the rest of the Sharing Economy 4)Its actually kind of odd that we’ve only seen one college based food delivery start-up and one AirBnB for college football (and they’re both based in the Midwest!), but no doubt Silicon Valley is working on dormitory room cleaning and keg delivery apps.. I was particular disheartened to hear from a fund that has made three investments that actually serve K-12 school districts (including a Series B just last month!) that they will stop making new investments in the sector.
The Second Derivative (aka the Canary in the Coal Mine)
So I decided to put together my own Logo Table. Starting with the dozen most respected venture capital funds, I listed their education investments, highlighting those that have raised over $50 million or from syndicates featuring multiple “elite” Valley investors. Of course, its not fair to compare the past 18 months of 2014 – 2015 YTD to the previous 5 years, but, hopefully this indicates something of the current direction or momentum (i.e., the proverbial canary in the coal mine). Indeed, it is telling which funds have not found new investments in the sector as well as which funds have ceased making new / early bets and focused on the later stage (thank god, for Social Capital!). Some of this is clearly related to broader technology investment trends with many investors understandably shifting focus from seed to later stage as our current bull market begins to age or waiting so as to better ascertain a given sector’s ultimate winner (see Andreessen Horowitz, again). But some of this is likely driven by all the red font (or soon to turn red, with apologies to CRV, Greylock and Benchmark).
We Don’t Need Another Course Hero
If just 12 of EdTech’s “mini-unicorns” have been reared by Silicon Valley funding schemes, that means 41 have been funded otherwise (i.e., bootstrapping, angel investors, off-brand regional funds, strategic partners and later stage growth equity). And so, one is left to wonder if changes in elite venture fund interest in education even matters. There is a clearer path to scaling in education that does not call for Silicon Valley hype and a massive $20+ million early round predicated by a founder’s cult of personality.
There is also another profile of venture investor that remains highly active within education and is seeing positive results. Just two years after raising $60 million for their first fund, Rethink Education has already generated three sizable exits including Engrade (McGraw-Hill) and Smarterer (PluralSight), where they hold stock in both acquirors. Indeed, Rethink expects to count well over half a dozen portfolio companies with over $10 million of revenue by year-end – and less than half of these with cap tables led by Silicon Valley (Silicon sexy exceptions include Everfi, NoRedInk, and GA). Instead, their Series A deals have been smaller rounds formed with education savvy investors like New Schools, Mitch Kapor, Floodgate, SJF, Social Capital (yes, they also appear in the above Logo Table), Learn Capital, City Light, and FirstMark or core B2B Saas investors like Emergence Capital.
This more GARP-minded, “Inside EDU”-led path does not necessarily limit start-ups to humdrum $30 million exits to legacy textbook publishers or distributors. In fact, upon scaling to $10 million of revenue, education companies find a whole new class of institutional capital eagerly awaiting them. Later stage venture growth funds like IVP, Insight, Spectrum, Stripes and TCV and later stage venture funds like Bessemer have collectively invested over a billion dollars in education companies (including once and future unicorns like Embanet, K12, Lynda.com, PluralSight, TeachersPayTeachers). Not to be confused with your grand dad’s growth equity funds up in Boston, these later staged investors all seek and support hypergrowth opportunities at high valuations.
However, this path does require edupreneurs to think differently from Sand Hill Road or the Flatiron District:
1) Pragmatic founders would do well to avoid the (over)funded Silicon Valley cesspools of viral consumer led apps and upside down SaaS. With no real path to monetize or money-losing attempts of alchemy that only funnel investor gold into high CAC, low LTV lead balloons (hows that for a mixed metaphor!), these models can not survive such investors’ fickle tastes for education. For everyone involved in one of the 35 different online content marketplace models I track here (and this is distinct from the 19 lesson planning content sites for K-12 teachers I track here), you need to know the iTunes of EDU already exists — its called iTunesU (and no, no one is going to build a Beats1 of EDU). As New Schools observed in their above post (as a positive trend, oddly), there are now 15 School to Home Communications Tools (I built a Twitter list for that too). Unfortunately, for all these eager young founders, Facebook Messenger cannot acquire you all; especially when we already have two dozen legacy school district notifications businesses (ever heard of BLI Messaging.com, West’s SchoolMessenger or Edulink’s InTouch — if not, what does that tell you?). Of course, I would be remiss in not mentioning Matt Greenfield’s favorite punching bag of the dozens of eReaders and textbook distributors, but I think Silicon Valley has already figured that one out now after burning $400 million on just three such ventures.
2) EdTech founders will know they are focused on something schools actually need because they will pay for it. As we shared in our bootstrapping in K-12 post, founders should embrace the discipline of the market and intentionally seek initial funding (and client-market fit) through services and initial school client funded build-out. Such capital efficient founders will then have available all the school client and education investor financing they will ever need. If education, social impact, and enterprise SaaS focused investors can support these more linear growth, monetizing models, edtech start-ups won’t ever need an early $20 million round with Andreessen Horowitz, Benchmark, Highland, KPCB or Peter Thiel — which will also save on a heck of a lot of dilution!
For everyone that says edtech needs a singular Silicon Valley genius like a “Bill Gates” or “Mark Zuckerberg”, it already has them — they’re just investing billions in education innovation through their foundations. For everyone that says we need a leading Silicon Valley platform like an Apple or Google in edtech, we have those too as Apple Education and Google for Education are supporting mobile / online learning and productivity at massive scale. And for anyone that says we need more investors in education, I would say we have those too — just look outside Silicon Valley.
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|1.||↑||Blackboard might qualify as another Silicon Valley unicorn; however, this other denizen of DC was actually funded by local Beltway investors Carlyle, Novak Biddle and AOL. Chegg would have been a better candidate as a Silicon Valley funded Bay Area company, but its market capitalization has fallen under $1 billion. Silicon Slopes based Instructure is sufficiently Silicon to join these ranks upon their next mark-to-market, but please don’t suggest long-bootstrapped companies like Cornerstone OnDemand, Healthstream, iParadigms, Lynda or PluralSight – these are the antithesis to Silicon Valley.|
|2.||↑||It has been brought to my attention that I am overlooking the talent and performance management sector and Silicon Valley successes like Oracle/Taleo/Learn.com or Successfactors/Plateau.|
|3.||↑||Truth be told, Alt School is really just some Silicon Valley “full stack” branding applied to the stacks on stacks of blended learning schools and technology providers already in market. Do we really need another school trying to license their proprietary LMS to everyone else?|
|4.||↑||Its actually kind of odd that we’ve only seen one college based food delivery start-up and one AirBnB for college football (and they’re both based in the Midwest!), but no doubt Silicon Valley is working on dormitory room cleaning and keg delivery apps.|