Software Group Aims to Help Ed. Tech. Startups Grow
Software developer Bob Runyan thinks he invented a pretty good educational game, judging by the 200,000 copies of Real Lives that have been downloaded from his Web site.
But the Californian was a bit discouraged when he met with some Wall Street investors recently to drum up money for improving the game and marketing it nationally, to build on the limited following it now has in schools.
“There is more work to do on my end following up on leads,” Mr. Runyan said in an e-mail later.
His visit here late last month was part of an “innovation incubator” project by the Washington-based Software & Information Industry Association that is aimed at helping small developers of educational technology products and services find potential backers.
Proprietors of 16 such innovations attended a business forum here Nov. 26-27 to showcase, among other creations: a digital collection of animated scientific illustrations of the human body; a Web-based service that enables school district to hold online meetings; a four-button keyboard for children with disabilities; and an information search tool with features of online social networks and the collaborative software tools known as wikis.
The forum gave the owners, who in most cases were the inventors, opportunities to give demonstrations and make pitches to representatives of private-equity firms, venture-capital firms, and large education companies that might be looking for an investment, an acquisition, or a partnership.
Beyond the Idea Stage
The SIIA innovation-incubator project—a first for the Washington-based trade group—is hoping to spur those kinds of relationships to bring to market innovations produced at universities or nonprofit organizations, or by companies in the “pre-revenue startup stages,” said Karen Billings, the project leader and the vice president of SIIA’s education division.
The innovations were more than simply good ideas, she added.
“We chose to find those innovative products and services that were ready for commercialization,” she said. In fact, some had been developed with research grants from the federal government, and several already have hundreds or thousands of users in U.S. schools.
All the incubator participants were individuals or small organizations that lack some component—such as cash, technical skill, or a distribution network—for success in the education marketplace.
Over the past few months, Ms. Billings and a working group of SIIA members have been helping the innovators hone their presentations to potential investors and business partners.
The annual forum, held at the city’s historic Union League Club, featured sessions on the business outlook for the education marketplace, as well as advice on the ins and outs of mergers, acquisitions, and partnerships in the education sector.
The incubation innovators were the featured guests at an evening cocktail reception, at which they demonstrated their products and services. At another event, the innovators each took the floor for 90 seconds to deliver rapid-fire spiels beneath PowerPoint slides to a roomful of attendees.
A third opportunity involved prearranged, 20-minute “one-to-one business connection” meetings, which the SIIA’s Ms. Billings described as “speed dates,” with potential investors and partners.
The other conference sessions, though, left no doubt about the hurdles for small innovators in the education market.
Panels of investors and executives of large education companies said they require potential partners or investment “targets” to have compatible structures, proven economic prospects, and demonstrated market share, for example.
Potential targets must impress investors with performance that lives up to, or exceeds, their business plans. And even then, an investment company may look closely at only a handful of the partnership proposals that they receive.
A panelist at one session, Kurt Gerdenich, a vice president in charge of media-development efforts for Stamford, Conn.-based Cengage Learning, formerly Thomson Learning, observed that to many tiny, innovative companies, “the concept of a business plan, a marketing plan, is foreign.”
“A rugged challenge for pre-revenue companies is, it’s virtually impossible to evaluate them with no cash flow,” he added. “At the end of the day, most deals are financially driven.”
But perhaps the greatest obstacle for the small innovators is size.
On a panel about acquisitions, Rita Ferrandino, a Sarasota, Fla.-based principal officer at Arc Capital Development, a private-equity and advisory firm, said she was looking for education companies that already have annual revenues of $3 million to $15 million that are “looking to grow” to a range of $20 million to $30 million.
In a keynote speech, John H. Martinson, the managing partner of the Edison Venture Fund, based in Lawrenceville, N.J., said his company has made investments in the K-12 sector in companies that average $8 million to $10 million in annual revenue.
He said other investors are looking for education companies worth $10 million to $25 million that they can hope to sell later for $50 million to $200 million.
“There’s a great shortage of angel money for $250,000 to $2 million” companies, he said, adding that small innovators may be best served by tapping family and friends or persuading successful entrepreneurs to be “angels” who could invest in chunks of $50,000 to $100,000. Such “early-stage funders aren’t necessarily knowledgeable about education,” Mr. Martinson advised. “You need to bring to them a very solid business plan.”
At the forum, “there weren’t any angels floating around,” said Glen McCandless, the president of Focus Marketing Inc., in Asheville, N.C. He was there representing one of the incubator companies, EDRoom.com, which offers Web-based meeting facilities that schools can use to conduct business and public outreach. Still, Mr. McCandless said he was looking for contacts, not capital: “My interest was in showing this off to Houghton Mifflin and Pearson, doing more fishing for client opportunities and, frankly, feedback.”
Mr. Runyan, on the other hand, needs to upgrade his digital game, which he dreamed up a decade ago while “lying awake one night thinking about the Game of Life.” He saw the venerable board game as unrealistically based on a middle-class vision of educational and career choices.
In Real Lives, students are “born” at a random spot on the globe, where they can encounter challenges and opportunities typically faced by people who live there, based on demographics and other statistics.
Mr. Runyan, who operates Educational Simulations, in Loma Rica, Calif., said he was seeking a partner company that could help him add some sophisticated features, such as images of the characters’ appearance that would age as the characters aged.
In an e-mail, he said the business forum was a learning experience, but not a partnership bonanza. “There might be a bit of a disconnect between the products and services that were shown by some of the innovators and what the large publishers and investors were looking for,” Mr. Runyan added.
The developer of a keyboard for students with disabilities also said she was discouraged by the lack of interest she found at the forum.
Corinna E. Lathan, board chair and chief executive officer of AT KidSystems Inc., based in Silver Spring, Md., wrote in an e-mail that she did glean some leads, but found little investor interest in special education and “very little recognition of special ed. as a growth market.”
But Michelle S. Wornow, the vice president of sales and marketing for ArchieMD, in Miami, said the company received “great exposure” for its library of thousands of 3-D animations and interactive modules of the human body, currently used by some medical schools and universities.
She and Robert Levine, the physician who founded the company, were shopping for partnerships, “hoping to break into high school, and eventually K-6,” with versions of their images that are “a little more simplistic, brighter, more engaging for younger students in the K-12 market,” Ms. Wornow said.
Meanwhile, Jody Clarke, a Harvard University education researcher, was showing off the River City Project, a digital multiplayer game that teaches about science and history.
Ms. Clarke and the game’s inventor, Harvard education professor Christopher J. Dede, who was not at the forum, wanted a company to take over the game, which was developed from years of research with grants from the National Science Foundation.
The grant money is about to run out, Ms. Clarke said. She and Mr. Dede are researchers, she added, not business operators.
Ms. Billings said the project would continue “incubating” the current batch of innovators as well as additional ones and feature them at its “ed-tech industry summit” in a San Francisco in May: “SIIA plans to find angel investors, not just in New York but on the West Coast, so we can make some connections.”
Vol. 27, Issue 16, Page 10