The Knewton Blog

Our monthly newsletter features edtech and product updates, with a healthy dose of fun Knerd news.

Is Ed Tech in a Bubble?

Posted in Ed Tech on January 23, 2013 by

Education and edtech are proving big draws at this year’s World Economic Forum Annual Meeting, with nearly a dozen panels and related events. I’ve been lobbying for this kind of commitment to education here since I started coming to Davos three years ago, but this is the first year I’ve seen it happen (there were no panels on education in the last two years).

This new focus is reflective of a much larger trend. In the past few years, the edtech industry has grown incredibly — as has the amount of money flowing into the industry. These investments have prompted continual debate about the “edtech bubble.” Namely, are we in one, and if we are, when is it going to burst?

I’ll let you know my opinion — but first a little context. Back in 2007, when I first started raising money for Knewton, there was really no venture capital (“VC”) backed edtech at all. There was Chegg and BookRenter, which were distribution companies packing books in boxes more than tech companies. There was me trying to raise VC for Knewton and Princeton Review founder John Katzman trying at the same time to raise VC for his new startup 2Tor (now 2U). Grockit was out on the West Coast. (I’m sure there were others, but those were the ones on my radar.)

At the time, not many VCs were into edtech either. A notable example: When I reached out to Fred Wilson of Union Square Ventures, he declined even to look at Knewton, saying that the education industry was something his fund hadn’t been able to get excited about. (A year later, USV famously changed its mind, deciding education would be one of the most interesting places to invest.)

In 2009, Kno and Inkling launched, along with a number of other startups. It was a sizable increase in the number of VC-backed edtech companies. That same year, Arizona State University and GSV Advisors hosted a small edtech conference bringing together startups and investors. The ASU conference started almost by accident, but it proved a surprise hit, and attendance has doubled every year. One year after the ASU conference launched, Goldman Sachs concluded that education would be one of the great growth industries of the next 20 years. They teamed up with Stanford University to host their first Global Education Conference. A year later, that conference doubled, too.

Today, the level of activity is at an all-time high. Hence all the questions about whether we’re in an edtech bubble. Some people aren’t even asking — they just take it for granted that we are.

But I can’t quite get comfortable saying that edtech is in a bubble.

Sure, lots of money is suddenly flowing into the space — relative to before — but not relative to the size of the industry.  And many of the companies getting funded will disappear within two years. They won’t demonstrate enough traction, either with their product or more likely with market adoption, and will fail to secure the all-important follow-on round of financing. This is already happening to some early edtech startups, and it will happen to many more in the next few years.

But a bubble means something quite different. For a bubble to exist, money must pour into a sector beyond the reasonable ability of that sector to return positive value to investors. In other words, if all the edtech companies that have been funded over the last five years and those that will continue to be funded over the next few years, as an asset class, have a reasonable chance of producing positive return on investment — then we are not in a bubble. (That’s true even in a case where only a few, or even just one, company delivers the bulk of the sector’s returns.)

And, in my opinion, that is exactly what it going to happen. Why?

First, the industry is massive. It’s so massive that virtually nobody I’ve met truly grasps how big it is. It’s beyond their frame of reference. The total amount of money (both public and private) spent annually exceeds all spending, both online and offline, of every other information industry combined: that is, all media, entertainment, games, news, software, Internet and mobile media, e-tailing, etc.

Right now, much of the cost of education goes to wastage — things that don’t necessarily improve the final product but are necessary for distribution. In fact, nearly all of the money spent on education goes to distribution. And yet education is arguably the most poorly distributed very large industry in the world. Even in the rich nations, there’s very little subject matter choice (what languages did they teach at your primary or secondary schools?) or choice in teachers. In the poor nations, of course, the story is infinitely worse, with most kids not exceeding a 6th grade level of education. But distribution of online learning is pretty cheap.

The entire developing world will leapfrog heavy education infrastructure much as they leapfrogged landline telephony (which is inexpensive compared to education infrastructure) for cell phone. I’m not saying developing nations won’t build schools. Of course they will and of course they should. But they will significantly average down their costs by relying heavily on online education. They will democratize access to high quality teachers, from their own nation and abroad, and powerful new educational technologies. Knewton is committed to providing our analytics and adaptive learning technologies at low or no cost throughout the developing world in keeping with our strong social mission.

So online education will revolutionize distribution, providing increased quality, choice, and access to teachers. Cost to individual students will in many cases come down, while all new markets are simultaneously opened in scale. Bottom line, the education industry will grow; margins will explode even as unit prices drop (albeit unevenly).

The shifting of education from analog to digital is a one-time event in the history of the human race. At scale, it will have as big an effect on the world as indoor plumbing or electricity. The consequence of nearly every human being receiving as much education as she wants and her ability permits will transform quality of life and global GDP within one generation, with crazily exponential effects to follow. Massive pools of human talent will be unlocked. How many of these better-educated people will raise better-educated kids? How many more great minds — future Einsteins, Curies, Da Vincis, Pasteurs, MLKs, and McCartneys — will the world produce when we can quadruple the number of high school graduates? What kind of extraordinary growth will result from the contributions of even one such transcendent genius?

It’s hard to look at the scope of likely transformation and get particularly concerned that too much money is flowing into edtech. This money is fueling the technologies and business models that will power this once-in-history transformation. There will be some hugely influential movements emerging over the next decade and some very large companies built.

As with all such great moments in history, many efforts will fail. That was true of residential electricity 100 years ago and the internet 15 years ago. For education, much of the long-lasting success will be clustered around a few dozen companies, including some existing titans that are transforming their businesses and some new entrants pioneering powerful technologies. So get involved. If you have a killer product idea and a clear path to market, start your own company. If not, join a company you think does. This isn’t a bubble — it’s just the beginning.

This article also appears in the January issue of Knerd Dispatch, the Knewton newsletter. Subscribe here.