Educational technology companies and entrepreneurs may face the risk of a 鈥渢ech bubble,鈥� similar to the massive boom-and-bust that rocked the technology market in the late 1990s, according to market analysts and a recently released paper.
A relatively new focus on K-12 educational technology as an investment vehicle, a surge of investors looking to cash in on the latest innovations, and fewer barriers to developing an ed-tech business have merged in ways that have some market observers wary of what鈥檚 ahead.
The flurry of activity is prompting comparisons to the dot-com crash of the late 1990s, which brought the failure of many technology-related businesses that had drawn huge sums of money from investors.
Analysts say it is vital for today鈥檚 money to flow to smart companies and ideas that can have a significant impact on improving schools鈥攐therwise, the prospect of an ed-tech bubble bursting will loom larger, leaving schools with fewer high-quality products to choose from.
Frank Catalano, a principal consultant and analyst at , a Seattle-based consulting firm that specializes in educational technology, said he鈥檚 pleased to see more startup activity in the K-12 arena, but has concerns about how the market is evolving.
鈥淚 worry the pendulum has swung too far,鈥� said Mr. Catalano, who addressed the issue in a paper last month for the MIT Enterprise Forum of the Northwest, based in Mountlake Terrace, Wash. The organization is a chapter of the MIT Enterprise Forum, a global nonprofit organization that seeks to support educational technology entrepreneurs, and is affiliated with the Massachusetts Institute of Technology.
鈥淧eople say this is different [from the dot-com boom],鈥� Mr. Catalano said, 鈥渂ut it鈥檚 not that different.鈥�
In the paper Mr. Catalano co-wrote with Shirley Lunde of Seattle-based Bader Martin, an accounting and business-advising company, the authors argue that interest in digital learning among entrepreneurs and investors may be rising for the wrong reasons.
Though ed-tech entrepreneurs seem to be more concerned with improving education than simply making a quick profit, money may be pouring into the marketplace based on exaggerated assessments of the growth of digital learning, the paper says.
Buzzing With Activity
The activity around investment in educational technology has certainly increased, said Karen Billings, the vice president of the education division for the Washington-based Software & Information Industry Association.
Industry competitions such as Startup Weekend EDU are proliferating and more-established ed-tech organizations, most notably the Washington-based , or ISTE, are focusing on entrepreneurs with special events at major conferences, she said.
Meanwhile, the number of incubator programs designed to nurture ed-tech startups has multiplied, as the number of companies seeking support from such programs over the past few years has spiked. In 2012, for example, the SIIA had 67 applicants to its Innovation Incubator program, compared with 15 in 2008, Ms. Billings said.
Money to finance ed-tech ventures is coming from sources like the social-financing website Kickstarter, large foundations, 鈥渁ngel investors鈥� pitching in their own money, and venture capital funds, all of which have increased their presence in K-12 startups.
In 2005, just $13 million in venture and growth capital was invested in the K-12 market, a major drop-off from the years of the dot-com bubble. In 2011, venture capitalists put $389 million into K-12-focused companies, which dropped slightly to $305 million in 2012, according to , a Chicago-based education investment bank that tracks the K-12 market.
Former math teacher Karim Kai Ani is one entrepreneur who may benefit from the trend.
Mr. Ani spent two years trying without much success to lure investors to his online education company, Mathalicious, designed to create Web-based interactive math lessons that relate the subject to the real world. He worked out of his mother鈥檚 house and sold his photography equipment to finance most of the venture. But in recent months, after Mathalicious was highlighted by SIIA鈥檚 Innovation Incubator contest, investors suddenly began peppering his inbox with offers of funding. Mr. Ani is evaluating those offers. He finds himself in a sector that is seen as hip for investors, as financiers search for the next great ed-tech startup.
Capital vs. Talent
But some investors may be rushing toward educational technology opportunities without a worthwhile place for their money, said Josh Cohen, the managing partner and co-founder of , a venture-capital firm based in New York City. He said he sees more 鈥渃apital than talent鈥� in the K-12 marketplace at this point.
Mr. Cohen said he鈥檚 not looking at first-time entrepreneurs, and he only wants companies that can grow in big ways.
鈥淲e鈥檙e not going to look at anything where it affects hundreds of people,鈥� he said. 鈥淲e want thousands or millions.鈥�
Mr. Catalano of Intrinsic Strategy said not all investors are as savvy about the K-12 market, and that sets up the possibility of lots of money flowing to unstable companies or those without a strong business model.
鈥淭he impact of the investor who basically hasn鈥檛 looked too deeply into this is that it tends to prop up products that are 鈥榤e too,鈥� when there are already better solutions in the marketplace,鈥� Mr. Catalano said.
It is significantly cheaper to launch an ed-tech business in today鈥檚 market than it was during the dot-com boom. The lower cost of overhead, including hardware and Web services, means that with a few people, adequate technology, and a virtual office, entrepreneurs鈥� projects can grow quickly.
Some statistics reflect that new reality: The actual number of investments (not the dollar amount) that venture capitalists made in new and growing K-12 companies went from 48 in 2011 to 82 in 2012, despite the fact that the amount of money invested dropped slightly during that same time, according to GSV Advisors.
The higher number of transactions, paired with a slight drop in the value of the investments, reflects the low cost of starting such businesses and the need for fewer seed dollars.
That鈥檚 why Deborah Quazzo, a managing partner for GSV Advisors, said this era is nothing like the dot-com boom. 鈥淭here鈥檚 much more efficient use of capital than we saw a decade ago,鈥� she said.
Also, said Jennifer Carolan, a partner for the Oakland, Calif.-based , a nonprofit venture-philanthropy fund, though there may be more ed-tech startups, technology has not saturated schools. 鈥淭he tools teachers are using in the classroom are not up to par with what they鈥檙e using in their consumer life,鈥� she said.
To complicate matters, many of the startups may begin with a great ed-tech idea, but often don鈥檛 have a sustainable business model, said Marguerite Roza, a research associate professor of education finance policy at Georgetown University, in Washington.
鈥淔reemium鈥� business models, in which companies offer free products or services with a plan to charge for them later on, haven鈥檛 yet proved successful in the K-12 arena, she said. Others are relying on donor or investor funding with no long-term model for making profit.
Though Ms. Roza noted that there鈥檚 $600 billion a year in public education funding, she said school districts aren鈥檛 going to pay for ed-tech products unless they replace existing functions鈥攕uch as allowing districts to hire fewer teachers.
I want to grab all these ed-tech people and shake them and say they need to think about how to solve financial problems for districts,鈥� she said. 鈥淭hey can鈥檛 be an add-on.鈥�
鈥楳y Biggest Fear鈥�
The danger for education officials in a bursting ed-tech bubble is that schools and districts could be left with empty investments in new technology.
鈥淭his would leave educators and administrators with a product they can鈥檛 use, with data trapped inside it, and an increasing amount of cost to replace it,鈥� said Mr. Catalano.
Take Junyo, for example, a Menlo Park, Calif.-based company launched in 2011 to develop systems that analyze student data and help teachers improve learning. Junyo launched a blended learning platform for elementary schools, including those run by Rocketship Education, a San Jose, Calif.-based charter school management company. But in 2012, Junyo announced it would change course. Steve Schoettler, the founder and chief executive officer, said the company will no longer sell directly to schools, leaving Rocketship without the tools it hoped to use.
鈥淚t was definitely a challenge for us because they were hosting some of our programs and data,鈥� said Preston Smith, the president of Rocketship.
Rocketship didn鈥檛 necessarily lose money on the deal, however, but Mr. Smith said the charter school organization will ultimately get less for its money in terms of data analysis than planned.
Some analysts worry that too many failures among ed-tech companies could scare off school districts that finally seem willing to take a chance on new innovations, said Adam J. Newman, a managing partner for Education Growth Advisers, an education business-advisory company in Stamford, Conn.
鈥淢y biggest fear is that if there is a significant 鈥榗learing of the herd,鈥� folks will use it as a reason not to do things and not to experiment,鈥� he said.
Mr. Schoettler, who has been involved with starting several other technology businesses, said the type of shift Junyo made is common in the startup field, but 鈥渢he process of innovation is something school districts are not familiar with.鈥� School districts are just starting to be more open to working with new companies and products, and he鈥檚 concerned that talk of an ed-tech bubble will make everyone wary. 鈥淚f it scares away entrepreneurs and investors, it鈥檚 bad for the industry,鈥� he said.
And Ms. Quazzo of GSV Advisors said the circumstances are different from those in the 1990s. In particular, she said, Race to the Top and other federal programs are encouraging districts to seek out technology-based ways to improve education. And the adoption of the Common Core State Standards is giving some startups the opportunity to grow faster and more naturally.
Mr. Ani of Mathalicious said it would have been cumbersome to adapt his math lessons to individual state standards, but the common core has allowed him to create interactive curricula for all states.
Mr. Pines of the said a rush to invest in the ed-tech marketplace is no doubt under way, and that may raise some concerns. But he was quick to note that鈥檚 part of the typical progression of new industries.
鈥淎ll businesses go through a cycle of wild effervescence, and this excitement will ultimately reach a peak and plateau, and we鈥檒l probably have a downward trend as maturing takes place,鈥� he said. 鈥淲e鈥檙e experiencing that cycle with the current ed-tech trend.鈥�
