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).

Summary

  • Most entrepreneurs in education build the wrong type of business, because entrepreneurs think of education as a quality problem. The average person thinks of it as a cost problem.
  • Building in education does not follow an Internet company’s growth curve. Do it because you want to fix problems in education for the next 20 years.
  • There are opportunities in education in servicing the poor in the US and building a company in Asia — not in selling to the middle class in the US.
  • The underlying culture will change and expose interesting opportunities in the long term, but probably not for another 5 years.

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:

  • Chegg – A company that is in education and sells to consumers. A $1 billion valuation and growing quickly. But, Chegg sells you the same textbook experience for much cheaper. It’s a great consumer focused business with offering real savings to students. Note that even in 2011, the “Netflix of education” is booming because of the equivalent of its DVD (physical textbook) business. Digital, personalized learning online or tablet based, interactive, social textbooks aren’t anywhere to be found.
  • University of Phoenix – $6 billion market cap. They make it easier to get a degree because it’s convenient and subsidized by government backed loans. Consumers make the decision but ultimately the government is footing the bill. They aren’t a consumer company and they are a marketing machine. They are a company that makes it easy to get the same quality diploma that you would get at the local college. They don’t compete with Harvard, they compete with the local university that costs more and only has on campus night courses. They weren’t an overnight success either; UofP was started in 1976 and they IPO-ed in 1994.
  • Kaplan – they didn’t get huge because of their test prep business, which is a consumer business and (arguably) delivers educational value. They became huge because they started following the University of Phoenix model for Kaplan University. Again, the primary value they offer is not quality of education, but convenience.
  • K12 – they are not a consumer, online education company. They sell to school districts and their model revolves around being able to drive down costs for school districts in their high cost students — special needs, gifted, rural, etc. They have built an interesting consumer business overseas — in the Middle East and Asia.
Here are a few examples of companies that tried to do consumer Internet style education plays and how it worked for them:
  • TutorVista – started by offering online tutoring to Western students using tutors in India. All you can eat for $99/month or so. They burned millions on search engine marketing and were able to build a business that generated eight figure revenue — nice but not enough to IPO on. So they pivoted and opened education centers in India and were acquired for $213 million by Pearson. A $200+ million acquisition in India is unheard of.
  • Tutor.com – started a decade ago to offer online tutoring to the masses. Never went mainstream, even after 5 rounds of funding. They’ve built a niche business that survives through deals they’ve struck with various government bodies — libraries, schools, etc.
  • GlobalScholar – started by the CEO of Drugstore.com, tried initially to do a direct to consumer play. Realized it wasn’t working and bought an electronic gradebook company that works with schools and was sold to Scantron that has great distribution with schools.
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.

An Aside: Being Asian or poor changes your perspective

Yes, this section is a little hand wavy and full of generalizations. These are observational insights with some data points that show the generalizations are directionally accurate at the end. This is not a rigorous sociological study, so take the generalizations for what they’re worth.

If you’re living in most of Asia (South Asia included) and you don’t get an education, you’re screwed. Part of this is cultural (you have no social capital if you’re not well educated) and a lot of it is economic (if you don’t have an education, you will do menial labor and not have enough money to feed your children). Consider the difference between some random person in China vs. some random person in Kansas. If the Chinese person doesn’t get an education there’s a good chance they will not get a job. They will die poor, unable to adequately feed their children, and unable to take care of their parents (since the model is that the young take care of the older members of the family). But if they do get an education, they have a shot at a good life — call centers, banks, government jobs, the army, etc. And if it’s too late for that individual, they know that they can give a good life to their children. The non-college educated person in Kansas probably won’t have a great life and a secure retirement without an education. But they, their children, and their parents probably won’t die hungry and homeless on the streets of Topeka. This cultural mentality is carried over to many Asian Americans via immigration. This is not universally true, of course, of Asian Americans but there is no denying there is a strong correlation. So if you want to start a consumer education company in Asia, you can make it work and make it scale — MegaStudy and Kumon are two great examples. However, there are not enough Asian Americans to support the same scale of business in the US.

Being poor also changes how you think about education. Interestingly, in the US, the people who are most willing to try new things are the poor and uneducated because they have a similar incentive structure to a person in rural India. Their default state is “screwed.” If a poor person doesn’t do something dramatic, they are going to stay screwed. Many parents and teachers in these communities understand this. So the communities are often willing to try new, experimental things — online education, charter schools, longer school days, no summer vacation, co-op programs — even if they may not work. Why? Because their students’ default state is “screwed” and they need something dramatically better. Doing something significantly higher quality is the only way to overcome the inertia of already being screwed. The affordable, but poor quality approaches just aren’t good enough. These communities are on the hunt for dramatically better approaches and willing to try new things. Unfortunately the poor don’t have a lot of money to spend so servicing this community requires selling to the schools, which is an enterprise sales type of business — not a consumer business.

Consider Kumon, which is worth almost $1 Billion. They started in Asia, they are essentially a franchise model that caters to well educated parents, and a key part of the value proposition is in giving students a place to go and be supervised (babysitting!). It’s a great business that serves 4.2 million students worldwide. Of this, about 200,000 are in the US. The overwhelming majority are in Asia.

It’s not a perfect dataset but the Quantcast data for Khan Academy’s US demographics support this. The people going to the site are:

  • the already well educated who value education and want supplemental resources
  • Poorer (which unfortunately correlates with being African American and Hispanic)
  • Asian

Khan Academy Demographics

Education is a huge market and there are opportunities

Clearly education is billions (trillions!) of dollars. There are lots of opportunities, especially if you take a long term view of it and want to build something meaningful for the next 25 years. However, don’t make the following mistakes:

  • Don’t believe that building a better product will make you successful. Delivering something for cheaper will. Even if that cheaper thing is lower quality. This is usually repugnant to most well-educated entrepreneurs.
  • Don’t start in developed, western countries because that’s where large, Internet businesses have been built. Asia is a much better education market if you want to target consumers.
  • Don’t take VC funding because the growth curve in your education business will not live up to VC expectations early on. Take angel money from people who want to make a difference in education. Then take private equity money once you’ve figured out how to get to $10 million in revenue on your own. Even better, don’t take any PE money and grow it on cash flows. Successful education businesses are often not capital constrained.
  • Don’t target suburban or urban, middle class users with disposable income. You’ll build a niche business that can’t go mainstream. Target poor students in the US and get to charter schools who are desperate to try new things. Target families in China and India where a family will put down half of their monthly income on education. Or target people who really value education and will pay 10x more for something that is higher quality. That’s where there are big businesses to be built and a willingness for new solutions.
  • Don’t expect a quick flip or quick growth. Building a large, successful education company will take 20 years. The growth curve will not be like an Internet technology company until you hit $10+ million in revenue. Then things will ramp  quickly because you will have identified your core market and built the beginnings of a brand; the education industry is small and people will know if you deliver real value.

Some Additional Reading

I threw some numbers in here. A lot of it just stuff I’ve read over the years but I tried to track down some stats on things that I thought would be harder to believe for the people who will find this article.

Thanks to Curtis SpencerKaran Goel, Jon Bishke, Elad Gil, Dan Siroker, Christine Tieu, Aditya Koolwal, and Yin Yin Wu for reading drafts of this and providing input.

Marvel MMORPG

Marvel should license their brand and all of their superheroes to a video-game company or hire a good video game company to create a massively mult-play online role playing game. World of Warcraft is huge these days and to get into that world you have to learn all of this backstory and character types and blah blah blah. With the Marvel Universe, thanks especially to their movie success in the last 10 years, everyone knows the main characters. The X-men characters, Spiderman characters, Hulk characters, the Avengers, the Fantastic Four…you could be one of those people, customize your character, get level upgrades and special body-armor and things like that for going on quests.

Given their brand names I bet they could get a million people on that thing pretty quickly. I know I would consider that and I really wouldn’t consider World of Warcraft.

Inverse Social Network

In thinking about what I really want out of a social network (that is not currently available), I really want the inverse of what a typical social network currently is.

The State of Today’s Social Networks

Roughly speaking, today’s social networks are all about allowing an individual to share information with the rest of the world (pictures, contact information, blog-like thoughts, etc. ) and communicate with “friends” (or receive communications from friends). Clearly, there are different flavors of these networks — LinkedIn serves a different purpose than Facebook — and so the features they highlight and the usage patterns of these features are going to be different.

What’s the problem and what is missing?

The problem here is that people will automatically filter what they’re willing to share to the lowest common denominator. If you are “friends” with your boss, your mom, and your best friend and you don’t want to share everything with all of them, chances are you’ll pull back and limit what you share. Clearly this is an issue unto itself but I won’t touch that because I think you can get around this with groups and group level privacy settings.

This lowest common denominator effect does highlight something else though, and that is that there is clearly a lot of information missing from someone’s profile. More precisely, all of the information I know about someone else is missing from their profile and in many cases this is the really critical information about someone.

For example, if I know my boss’s kid’s name but he doesn’t want to reveal that for the whole world to see on his LinkedIn profile, I actually have a unique piece of information that is quite valuable. Or, if I have a casual acquaintance who has let me know his hometown but who has not publicly offered this information, again I have some unique knowledge about that person that I may want to remember.

Inverse Social Network

Rather than seeing a page of what someone is willing to share there is a lot of information that I know about people that I would like to merge with the information they’re willing to share. This way what you end up with when you’re looking at a profile page of person A is a complete snapshot of everything you know about that person. With a simple search and tagging feature I think this could be really powerful because I would be able to remember everything I ever knew about someone. If I’m going to have a meeting with a client, I can pull up their page and see everything I know about them. If I’m going to see a friend from out of town that I haven’t seen in 6 months and I have no idea what his brother’s name is, I can look it up.

And I may even want to share what I know with other people who may find it useful. So if I have a group of friends whom I trust, I may want to share information about my boss or one of our mutual friends so that we all have access to the same information. I think this sort of sharing would make people afraid but there isn’t much you can do to stop it in the first place. If I tell my friend what my boss’s kid’s name is and he happens to remember it, that pretty much accomplishes the same thing today.

I could imagine this being integrated with an email client as well so that I can easily reference information about people I’m emailing, and perhaps being a browser plug-in so that the information is available while I’m viewing their facebook profile, myspace profile, or linked-in profile…maybe with some greasemonkey or just a simple window overlay that slides in and out easily with a key combination on the keyboard.

I think this would be a huge win for anyone who has a lot of meetings — namely anyone in the business world.

Who Should Build This?

I think he best candidate is probably LinkedIn. They have the right demographic of users and it would fit in nicely with their existing social network. It would also allow them to move into having more of a browser and desktop presence, and if it gets popular enough on the desktop/browser they would end up with the really interesting side effect of knowing which profiles on different social networks are actually the same people so you’d end up with an uber-graph of people connected to each other.

The other type of company that might benefit from this is a startup, exactly because if they end up with good penetration, they would be able to overlay friendships across different social networks on top of each other and create linkages between different social networks. I don’t know how you would monetize that off the top of my head but it seems like useful data.

So someone please go build it. Thanks.

A high quality news program on the Internet

Someone should put together a good comprehensive summary of the news and post it on YouTube. The problem with network news is that they have to fill it with feel good stuff, celebrity junk, and have commercials that take up 30% of the on-air time.

You could even exploit the long tail and do some fancy personalization if you recorded say 100 short segments that covered the major headlines of the day. You could then have standard transitions that you use between segments that are also pre-recorded. Based on a profile people create you could you could automatically slice together different segments that might be of interest to that user.

You could also have a few “stock” compilations for things like world news, US news, politics, entertainment news, etc. People could just come to these and hit play without having to sign in or save/create a profile.

Why is this better than reading the news? For the same reason that going to a lecture is better than a book. If you can see it AND hear it, it’s far easier to stay engaged and just reading on your own is a lot more effort. There are a lot of people out there who would rather listen and watch the news than read it and have to hunt around for the most relevant stories.

So start simple, do a news recap without all the crap on most news shows, put it on YouTube and get a userbase. Then launch your own site with high quality production and personalization. Done and done.

Camping Out for MacWorld

On January 8th, 2007, a group of young product managers from Google camped out on the sidewalk in San Francisco to ensure their spots in the main room for Steve Jobs’s keynote at MacWorld 2007.

What follows is a transcript of the night’s events, with photographic evidence.

December 7, 2006 (3:30 PM) – At a monthly meeting of Associate Product Managers and former Associate Product Managers (now Product Managers) a debate rages about whether anyone in their right mind would actually camp out for MacWorld. Jeff Bartelma, a PM on Google Book Search, has already committed to spending the night. Clay Bavor, PM on Google Base, and Avichal Garg, PM on Ads Quality, follow suit. Nick Baum (PM on Google Reader), Clay Bavor, Diana Ly (PM for the Associates program), and Avichal Garg become unofficial organizers of the camp out event.

Early January – Rose Yao, PM on Google’s Mac Initiatives, convinces her engineering team to join in the camp out.

Google Mac Team

(The Google Mac Products Team)

January 8, 2007 (3:00 PM) – The day of the campout! Rose Yao IMs Avichal Garg asking if we should bring tents and asks if we need a permit to sleep out on the sidewalk. Avichal Garg responds, “huh? permit?” and claims ignorance when it is suggested he should be organizing this camp out event.

January 8, 2007 (5:00 PM) – Avichal Garg goes home to pack a night’s worth of belongings. Realizing he has no need for anything beyond his laptop, he takes a nap.

January 8, 2007 (6:30 PM) – Frances Haughen, PM on AdWords, Avichal, and Aneto Okonkwo, PM on Google’s logging infrastructure, discuss how arriving in San Francisco by 8PM is a must to pick up badges that night; otherwise they may lose their spots in line the next morning.

January 8, 2007 (7:00 PM) – Frances describes how clutches can fail in manual transmission cars and the symptoms of such a failure. She mentions her car has been exhibiting some of these symptoms for several weeks and that she is planning to take it in for a checkup tomorrow.

January 8, 2007 (7:30 PM) – The clutch goes out.

January 8, 2007 (7:40 PM) – Aneto and Frances debate whether or not it is in fact the clutch or if France’s car ran out of gas. Aneto explains the detailed workings of an internal combustion engine while Frances provides irrefutable emperical evidence that her car still has gas by turning it on. The car does turn on but does not move forward. Avichal ignores them both and thanks God he brought his Edge card so he can have Internet access on his laptop.

January 8, 2007 (7:43 PM) – Dan Siroker, a PM on AdWords, drives past a stranded car on Highway 101 and wonders if they might need help. He considers pulling over to help them, but recently having seen “Signs” by M. Night Shyamalan is afraid. Instead, he curses at them for slowing down traffic and potentially preventing him from getting to San Francisco by 8PM.

January 8, 2007 (7:45 PM) – Frances calls AAA and they “will send someone immediately” because she is on an extremely dangerous shoulder on 101. At approximately the same time, Clay calls Avichal asking where he is. Avichal says, “On 101, just hanging out.” Clay laughes but doesn’t get the joke until Avichal explains.

January 8, 2007 (7:51 PM) – Clay devises a plan to get Frances, Aneto, and Avichal their entry passes for MacWorld before registration closes at 8PM. He will have other Googlers impersonate them: Clay will be “Avi-hkhaahl” – a Hebrew interpretation of his Hindi name, Ben Lewis will be Aneto, and Rose will be Frances. Avichal is skeptical that 2 White men and an Asian woman will pass for a Nigerian (Aneto), an Indian (Avichal), and a 6′ tall Sweedish woman (Frances), but trusts Clay and co. will be successful. It turns out that MacWorld registration involves neither security nor ID checking, as badges for all 3 stranded PMs are secured easily.

January 8, 2007 (8:00 PM) – A California State Highway Police Officer shows up and sees if we need help. Frances turns on the car and it lurches forward 20 feet before dying again. The CHP is kind enough to stay with them until a tow truck arrives.

January 8, 2007 (8:10 PM) – The group of PMs and Engineers who now have their badges debate whether or not to start camping out and be first in line for the keynote. They decide that no one will really start camping out that early and instead opt to get food and drinks at a nearby pub.

January 8, 2007 (9:40 PM) – All PMs and Engineers meet up at Moscone Center West to start the campout to find that 3 crazy Apple fans are now first in line. They are simultaneously annoyed, amused, and grateful they won’t have to deal with bloggers interviewing them all night and asking why they are motivated enough to be first in line. Enrique Munoz Torres, a PM on Book Search, drives up on a motorcycle shortly thereafter, does not say a word, drops off a case of beer, and rides away.

Our Campsite

(The Google Campsite Outside MacWorld)

January 8, 2007 (10:00 PM) – 2 really attractive women walk by the campsite and ask what is going on. Nick and Avichal claim they thought this line was for Justin Timberlake tickets. The women laugh and walk away; Nick and Avichal debate whether the women were laughing with them or at them.

January 8, 2007 (11:00 PM) – The world’s most hardcore Apple fan comes by for a photo-op. No, seriously. Notice his tatoo. He had an LED belt that flashed “Thank you Steve!”

Uber Apple Fan

(The World’s Most Hardcore Apple Fanatic)

January 9, 2007 (midnight – 2AM) – Numerous “reporters” and amateur film makers stop by to interview the people first in line. The first-in-liners bask in their new found fame while the second-in-liners enjoy some beer.

January 9, 2007 (2:30 AM) – Shirin Oskooi, PM on Google Calendar, and Avichal go to Denny’s so Avichal can charge his laptop. Shirin is convinced that Azekial, a homeless man she and Avichal once hung out with in San Francisco, is eating at this very Denny’s.

January 9, 2007 (2:30 AM – 5:30AM) – Almost everyone sleeps. Nick and Avichal continue their debate about whether the women were laughing at them or with them.

Mac Team Sleeping

(Googlers Sleep in a Giant Clown Car-esque Tent)

January 9, 2007 (5:30 AM) – TV reporters start to wake up the campers with their annoyingly bright lights and “Live Local News at 5:30 before anyone in their right mind should be up!” interviews of the first-in-liners.

Outside MacWorld (in the morning)

(Campers Are to the Far Left)

January 9, 2007 (6:00 AM) – The campers commemorate the occassion with a group picture.

Group Photo

January 9 (8:00 AM) – All attendees are herded like animals into a giant holding pen. The campers are convinced that their commitment will result in a great seat in the main room. They are disappointed to learn that anyone with a premium pass (all 1000+ of them) will be seated before them and thus they will not have a good seat afterall. In fact, the room this year is much larger and likely there will not be an overflow room at all.

Inside the waiting room for MacWorld

(The Holding Pen)

January 9 (8:30 AM) – In a sleepy haze, Avichal finds the conference organizers and suggests they use a quality based model analogous to the Google advertising auction that takes into account not only the amount paid per seat but the amount of time invested as a proxy for user loyalty. He claims such a system would result in a more fair distribution of attendees in the main room and would generate both short term revenue while generating long term loyalty in the Apple user base, and compelling more users to camp out for even longer, thereby generating even more buzz and press around MacWorld.

January 9 (8:45 AM) – MacWorld organizers tell Avichal to get back in line before they throw him out. He gets them to agree to consider his ideas for next year’s MacWorld.

January 9 (9:00 AM) – Steve Jobs unveils the iPhone, one of the best designed products of the last decade. He is in his element. As one executive at Google put it, “Being invited to go on stage with Steve is like the kiss of death.” All you can hope is that you walk on, get off the stage as quickly as possible, and pray no one remembers you were there. If people remember you were there you know you royally screwed up.

January 9 (Noon) – PMs and Engineers return to Google in Mountain View for meetings and work, exhausted but satisfied they saw Steve in person this year.