Blog
Nov 13, 2012
“A crisis is a terrible thing to waste” – Stanford Economist Paul Romer, speaking to a group of venture capitalists, 2004
The U.S. education system is facing a public crisis of confidence. Students at the K-12 level consistently underperform in math, science and reading compared to peers in China, Japan and Australia1. School tuition is prohibitively expensive for many, and graduates of U.S. higher education institutions today carry more than $1 trillion in collective student debt. Those who do graduate from college often struggle to find long-term employment, spurring some to question whether the return on a U.S. higher education merits the investment—particularly in a difficult economic environment where the quality of classroom education is increasingly threatened by lay-offs, downsized curriculum, and shut-down facilities at institutions struggling to survive. With the prospects for over 75 million students and our economic future at stake, the U.S. has no choice but to confront these challenges. We must reform and revive our education system, and everyone must do their part.
The venture capital industry has a longstanding history of bringing U.S. innovation to market—fueling industries like the Internet, computing, telecommunications, semiconductors, biotechnology, and many more. However, the industry that catalyzed the creation of companies such as Apple, Intel, and Google has been largely absent from the classroom, investing less than 3% of its dollars in education every year. Today’s education crisis calls for more than politics and policy changes, but for a revitalization and re-imagination of our education system for the 21st century. At New Enterprise Associates (NEA), we see a unique opportunity to invest in entrepreneurship and technology in this education crisis and believe that now is the time for our industry to step up and do its part. Working hand in hand with entrepreneurs, we are already seeing amazing results today from schools investing in technology to transform their campuses and classrooms. We are inspired by what teachers and students can do through innovation, and are confident that we are on the brink of a renaissance in education technology.
Entrepreneurs and investors have historically proceeded with caution in education, for two major reasons. First, selling new technology directly to schools is expensive. There are over 100,000 schools in the U.S. alone, with unique and often complex buying processes. Second, measuring the value of new technology in classrooms has been challenging in a sector that has diverse and often subjective methods of assessment. It has been difficult for schools and vendors to demonstrate the efficacy of new learning technologies without prohibitively expensive long-term studies requiring years of data collection. These hurdles have made it difficult for small start-ups to reach economies of scale without significant capital, resulting in only a handful of VC-backed success stories in education over the last 15 years.
These historical perceptions are changing in an industry that is rapidly embracing new technology and reinventing its methods for teaching and learning. Advancements in cloud computing have made it possible to run courses online for free. The mass proliferation of tablets and smartphones has made it possible to introduce new educational content to millions of teachers and students without working through traditional publishers. Furthermore, low-cost bandwidth around the world has made it possible for anyone with an Internet connection to pursue a world-class education. These significant advancements have led to a Cambrian explosion in education start-ups here in the U.S., with VC dollars invested in the sector more than tripling over the last five years.
There are four major themes shaping and disrupting the education industry as we know it today, which we believe create compelling investment opportunities:
1. Disappearing Classroom Walls
The classroom has traditionally been a broadcast-like experience confined to a physical space and time. Teachers lecture, and students listen and learn (hopefully). Homework is assigned, and class is dismissed. This dated traditional model is being transformed by online and mobile platforms. Schools today are adopting “always-on” virtual classrooms that facilitate interactive learning anywhere, anytime. Campuses are rapidly deploying wireless infrastructure to support laptops, tablets, and smartphones, enabling teachers and students to bring their own devices to class. Instructors can host their content online, poll students on their laptops in class to see if they understand key concepts, and adapt their lessons in real-time based on student feedback. Teachers can connect on social learning sites like Edmodo, which reaches nearly 15 million users globally, and exchange K-12 content and curriculum. Students can collaborate any time, day or night, just by touching an app on their phones, and discussion forums can be joined by anyone with an Internet connection. The virtual classroom has transformed how teachers and students engage, both within and beyond physical classroom walls, and has invigorated schools to rethink the way they teach.
2. Democratizing Educational Content
The textbook industry has been traditionally dominated by a handful of major publishers, concentrating control over the distribution of educational content to schools. The emergence of tablets and smartphones, coupled with free distribution channels such as YouTube and iTunes, has created an open marketplace for educational content of unprecedented scale. Schools today can create their own content at low cost, or source content from thousands of publishers offering both free and paid libraries of interactive educational material. As one example, the non-profit Khan Academy today offers over 3,000 free classes and has grown to six million monthly visitors in just four years. EverFi has delivered financial literacy and substance abuse courses for free to more than 4 million students, one of a growing number of companies that are creating quality content online in partnership with corporations and foundations. Education apps represent the second-largest category in Apple’s app store, with over 70,000 active applications from thousands of publishers. Parents and students now subscribe to education services such as BenchPrep to access hundreds of standardized test prep courses for just $20 per month. This democratization of content enables schools and students to choose the best product, from the best publisher, at the best price, forcing traditional publishers, non-profits, and aspiring entrepreneurs to compete on a more level playing field.
3. Learning from Big Data Analytics
Amazon.com, a pioneer in “Big Data” analytics, can recommend the best products for each customer in real-time based on prior behavior, and can even predict when you will abandon your shopping cart. Using similar technology, schools can improve student outcomes based on personalized learning pathways and can aid struggling students well before it is too late to act. Using platforms such as Desire2Learn, administrators can aggregate learning analytics at the school district, state, or even national level, enabling best practices and insights to be shared among stakeholders. The State of Tennessee recently demonstrated the power of Desire2Learn’s statewide predictive analytics, lowering their annual dropout rate by 25% across 45 university campuses by looking at historical student data and identifying opportunities for faculty and administrators to intervene. This is one of the most promising frontiers in education technology, only recently made possible by shifts to more competency-based (or outcomes-based) education (CBE / OBE), standardized curricula (e.g., Common Core) and analytic technologies such as Hadoop.
4. Transforming Local Campuses to Global Institutions
Though the U.S. today is the largest market for education globally, it is far from the fastest growing. China, India and Brazil are rapidly increasing their investment in education and have national aspirations and mandates to catch up with the developed world. China already graduates more college students with math, science and engineering degrees than the U.S., and Chinese citizens spend 3.5 times more of their disposable income on education than Americans on a percentage basis. The U.S., particularly in higher education, is home to the most respected learning institutions on the planet, and the emerging markets have seemingly insatiable demand to access it. More than one million students have registered for free for online classes through Coursera, which partners with more than 30 leading institutions like Stanford, Penn, and Michigan. Today the vast majority of those students are from outside the United States, forcing schools to rethink the boundaries of their campuses. Technology has made distance learning effective and economically feasible, and schools must embrace a global student market if they are to thrive in tomorrow’s education economy.
These four trends indicate a seismic shift in the education landscape, and they are creating unique opportunities for entrepreneurs and venture capitalists to develop innovative technology that can bring about a critical transformation in education. Through our growing portfolio of companies in this space, we can see what is possible when educators and entrepreneurs work together. We are not naïve regarding the challenges ahead, and the obstacles that will be faced in reviving our education system. But venture capitalists are by definition optimists, and we believe the technology we are helping to build today will empower the transformation of the education industry over the next decade. We believe we can improve learning outcomes and decrease education costs. We believe in our teachers and our schools. And most importantly, we believe that we must invest in our entrepreneurs and education system to confront and address the challenges we face today. We see amazing opportunity in this education crisis. And, after all, a crisis is a terrible thing to waste.
Jon Sakoda is a partner at New Enterprise Associates (NEA), one of the world’s largest venture capital firms with over $13 billion in committed capital. NEA’s education portfolio includes Benchprep, Bridge International Academies, Coursera, Desire2Learn, Edmodo, Edupath, Everfi, Learnup, and Subtext. Jon’s perspectives on VC and entrepreneurship can be found at www.oneblockoffsandhillroad.com or on Twitter @jonsakoda.
