Education Technology Graduates From the Classroom to the Boardroom

Tory Patterson, co-founder of Owl Ventures, which invests in ed tech start-ups. Credit Elizabeth D. Herman for The New York Times
Tory Patterson, co-founder of Owl Ventures, which invests in ed tech start-ups. Credit Elizabeth D. Herman for The New York Times

Judging by the number of learning apps available to classrooms around the country, the education technology market aimed at elementary through high schools is booming. 

There are more than 3,900 math and reading apps, classroom management systems and other software services for schools in the United States, according to LearnTrials, a start-up that helps school districts assess and manage these tools.

The money pouring into ed tech tells a different story, however. Despite the volume of novel products aimed at schools, the biggest investments are largely going to start-ups focused on higher education or job-related skills — businesses that feed a market of colleges, companies and consumers willing to spend to promote career advancement.

Venture and equity financing for ed-tech start-ups worldwide rocketed to $2.98 billion last year, up from about $1.87 billion in 2014, according to a new report from the research firm CB Insights. Industry analysts attributed the bulk of that increase to seven investment rounds of $100 million or more, none of them for businesses focused on public schools in the United States.

The financing trend highlights the difficulties facing the numerous young companies that develop apps for school use. Many of those tech start-ups have been able raise early-stage financing, often in comparatively small amounts; a subset of those, mimicking techniques established by popular consumer apps, have grown quickly by giving away their products.

But industry analysts say school start-ups that have not yet figured out how to make money are likely to have a harder time raising mid-stage financing this year — which could lead to a bit of a shakeout in the industry.

“We have yet to see that aha business model in the space,” said Matthew Wong, a research analyst at CB Insights. “The pressure is now on those companies to show they can provide scalable revenue models.”

By comparison, companies focused on corporate training or professional skills, like those that teach computer programming languages to adults, say they have found it easier to generate revenue by marketing directly to corporations or consumers. Lynda.com, for example, markets video tutorials both to companies and to individual software developers and other professionals. It raised $186 million last year and was later acquired by LinkedIn for $1.5 billion.

Many big companies also pay for corporate learning services to administer and track internal programs like sexual harassment training. That has already led some academic-focused start-ups to rethink their audiences.

“A very simple explanation is: In corporate, they have money,” said Josh Coates, the chief executive of Instructure, an ed tech company that has broadened its strategy.

In 2011, Instructure began marketing a learning management system, called Canvas, to universities and school districts. Last year, the company expanded its business into employee training platforms for corporations. Mr. Coates said he expected that Instructure would eventually derive much of its revenue from companies, which pay higher fees than schools.

“If they can make an employee 2 percent better by paying $50 for corporate training, they are going to do that in a heartbeat,” Mr. Coates said. “A school can’t do that kind of calculation. It’s not an obvious return on investment.”

Instructure went public in November and, as of the close of business on Friday, had a market capitalization of about $490 million.

While investors currently appear averse to pouring giant sums into start-ups focused on public schools, the use of ed tech services has grown steadily over the last few years. One catalyst has been higher government subsidies for school districts to install faster Internet connections. Some districts have also increased their spending on tablet, laptop and desktop computers for students, bolstering the footprint of tech giants like Apple, Google and Microsoft in education.

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Source: The New York Times | NATASHA SINGER