Why Education Startups Do Not Succeed
I co-founded PrepMe in 2001. We were one of the first education companies online and the first purely online, personalized platform. We were acquired in 2011 by Providence Equity-backed Ascend Learning. In the last month, I’ve had 3 VC firms bring me in to chat with their partnership about education and 6 independent entrepreneurs reach out to me about their new education startup. This is a summary of what I tell them in person.
Note: I am going to make some generalizations below. Clearly there are nuances around education policy, economic policy, technology, and more. But this is a blog post, not a book, so take it for what it’s worth. These views are my own, not PrepMe’s (or Spool’s).
What Entrepreneurs and VCs Think
“Education is ripe for disruption. Technology and great products could make education so much better. If a product like Blackboard or University of Phoenix can succeed, then imagine how great a company you could build if built educational products like Apple does for consumer electronics!”
First, let’s qualify what they’re saying here. Almost always what they are really saying is “consumer, Internet, online education in the Western world is ready for disruption. Everyone is online now and everyone gets an education, so clearly there are massive businesses to be built.” They probably aren’t talking about education in Asia because the companies in that space are started on the ground in Asia. They most likely aren’t selling to schools, districts, the government, or universities. VCs usually don’t like to invest in businesses that sell to the government until those businesses are big (at which point it’s really a private equity deal, not a venture capital deal). Angels will invest in education companies because they’re more motivated by making a difference, not by making a big return in 5 years. For now, let’s focus on US and European online education targeted at consumers.
Why they are wrong
The average person in a developed country does not think about education the way a well educated VC or entrepreneur thinks about education.
VCs and entrepreneurs tend to be well educated. Well educated people think about education as an investment. You put as many of your resources in to an investment as you can. It may take 20 years to pay off, but if the return-on-investment is high (which it is for education) then you invest. This group of people — if you’re reading this, you fall into this group — generally understand that education is an investment, and as a result are price insensitive and will optimize for quality (a higher return on investment). For this group of people, quality is the primary driver of a purchasing decision, not cost.
The average, middle class person thinks about education as an expenditure, not an investment. It’s something they have to do because it’s mandated and the lack of the highest quality education hasn’t negatively impacted their lives in a meaningful way. Step back for a second before you judge. Imagine it’s 2005, and you live in a small town in the middle of Ohio (where I grew up) and you don’t get a college degree. If you get a factory job and make $25k/year and your wife gets a factory job and makes $25k/year, you’re making $50k/year. But houses only cost $90,000 and food is affordable and you can get a loan for a car for $300/month. So you’re not doing terribly and the default state for your children is the same life. You can afford a house, food, have a car, and have weekends off.
So, what has the lack of an education done to the typical American’s life? It’s removed job security, screwed your retirement, and maybe set you up to go bankrupt if you get sick. There are no immediate consequences, there are no immediate consequences for your children, but there is an immediate cost. So the average person thinks of education as an expenditure. If you get sick when you’re 70, you’re screwed. Or if you don’t save in your 401k, you may have to work till you’re dead. Or maybe your children won’t be as competitive in a global workforce 30 years. Don’t believe me? Only 15% of kids taking the SAT pay for an out of school test prep course like Kaplan. Over 50% of Americans don’t have beyond a high school degree.
This fundamental investment vs. expenditure mindset changes everything. You think of education as fundamentally a quality problem. The average person thinks of education as fundamentally a cost problem.
What does this mean for education companies?
Educational companies that focus on delivering higher quality solutions to consumers will not scale to the mainstream. Educational companies built around driving down costs to the end consumer will scale. Or a corollary, an enterprise sales or government sales company that taps into government revenue streams will scale but will not have a consumer Internet growth curve.
Let’s look at some data from the marketplace:
Here are a few examples of companies that tried to do consumer Internet style education plays and how it worked for them:
There are dozens of examples of companies that have tried to build around quality and hit a revenue ceiling in the few millions. Think about the 10 local tutoring centers in your city that probably make $1 million each. This early traction is very misleading because you see engaged, happy, paying customers. So you assume that it will scale but it turns out that this business won’t scale because your early adopters behave fundamentally differently than the mass market.
Source : http://avichal.wordpress.com