Education Companies Invest Time, Money in Startups
This fourth-floor office space bears all the signs of a startup company’s habitat—young professionals clustered around tables or sprawled out on the floor, typing on laptops, sketching on whiteboards—except for the name of the organization overseeing it all.
The activity underway here is being hosted by Kaplan Inc., one of the most widely recognized company names in education, as part of a program designed by the test-preparation and college-course provider to give fledging education technology startups the tools to make it in the complex K-12 market, one that for many entrepreneurs often seems impenetrable.
Kaplan’s business “accelerator” effort, launched this year, is one of a handful of ventures created recently or being planned by major education companies—including Pearson and McGraw-Hill Education—that provide direct financial or operational support or guidance to school-focused startups. Backers of the companies’ involvement in accelerator programs say those efforts can take advantage of the reach and influence of big companies to bring new sources of innovation to schools.
For the startups, the opportunity to connect with big players such as Kaplan offers many advantages, from receiving informed advice about an opaque market to securing access to the larger company’s resources.
For companies like Kaplan, there are also advantages, most notably exposure to new ideas and business strategies, and the potential to form relationships with startups that could lead to partnering with or even buying them.
Some observers of the startup space warn that the ties between corporations and education startups could prove unhealthy, if entrepreneurs lose sight of their original vision for improving schools, or feel compelled at some point to comply with the larger company’s ambitions.
Even so, executives at Kaplan and other education companies see the potential to learn from the creativity and nimble nature of startups, while helping them get on their feet.
A large company such as Kaplan tends to focus more on “organic” innovations—improving or refining products that are already on the market, said Bernardo Rodriguez, the chief digital officer of Kaplan’s test-prep group, who is helping guide the startup program. Changing those products can affect hundreds of thousands of students, and millions of dollars in revenue, he said, making it “hard to build an environment where motivation can be channeled to produce internal innovation.”
Working with startups reminds Kaplan officials of the “the intensity that is required to launch a new product,” explained Mr. Rodriguez, and “the mentality of making a viable product, of pitching your ideas, of, yes, I can do something interesting and important.” Referring to the entrepreneurs at work around the corner from his office, he said: “Those guys are not afraid to make mistakes.”
Kaplan is not the only corporation that has committed to nurturing education startups. This year, Pearson, the worldwide publisher and provider of education products, announced a partnership with 1776, a Washington-based organization that supports startups in education and other areas.
Another big player in education publishing, McGraw-Hill Education, is planning to partner with as-yet-unnamed university in providing education startups with financial support and mentoring, Peter Cohen, president of the company’s school education group, told Education Week.
McGraw-Hill Education officials hope to learn from startups’ fast-paced work launching and refining products—and possibly recruit entrepreneurs they meet to work for the company.
“The people who get involved in these startups may be great,” said Mr. Cohen. “We might identify people who can join us.”
Each of the startups participating in Kaplan’s accelerator program were offered $20,000 from the company’s partner in the project, Techstars, which received a 6 percent equity stake in the companies in return. In addition, all 10 startups were offered a $100,000 convertible note from Kaplan, though company officials say that does not obligate the entrepreneurs to cater to Kaplan’s wishes in any way. (The convertible note is a loan that is either to be repaid, or converted into an equity stake in the startup when the companies finish their next round of fundraising.)
Ten startups were chosen to participate from a group of 350 applicants for Kaplan’s program, known as the Kaplan EdTech Accelerator. Over the course of three months, from this past June through September, teams of startups have worked out of one of Kaplan’s facilities, a polished office in the West Village in Manhattan.
Gary Hensley is a co-founder of Edbacker, a startup company that seeks to help K-12 schools raise funding through the power of crowdsourcing. The entrepreneur spoke to Education Week from the Washington, D.C., headquarters of 1776, an organization that provides mentoring and resources to startups with the help of education provider Pearson and other companies.
Techstars, an organization that runs accelerator programs around the world and is backed by more than 75 venture capital firms, is a key player in the program, having been charged with managing its day-to-day operations.
Don Burton, Techstars’ managing director, has worked out of Kaplan’s office during the three-month period. He coordinates much of the support that goes to the startups, including arranging small teams of mentors, who serve as de-facto boards of advisers, for each of the companies. He also arranges on-the-fly mentorship and advice for companies on issues ranging from technological design to acquiring customers to ideas on how to sell specific products in schools.
Kaplan assigned the teams of entrepreneurs a corner of the office that now bears a loft-like design. Startup officials, some dressed in slacks and sport coats, others in jeans and T-shirts, work alongside a line of tall windows in small groups across an open work space, occasionally ducking into glass-enclosed rooms for private conversations.
A basketball hoop is set up to one side. A few paces away, the startup space ends and an expanse of cubicles begins, occupied by Kaplan employees.
In addition to being given a place to work, the companies have access to many of Kaplan’s resources, including some of the company’s proprietary products.
There are many resources from which to choose. Kaplan Inc., headquartered in Fort Lauderdale, Fla., is part of the publicly traded Washington Post Co. (The newspaper bearing that name was recently purchased by Amazon founder Jeffrey Bezos and will now be a separate entity.) Kaplan provided test-prep services to about 430,000 students and professionals in 2012, and its for-profit higher-education businesses operate on about 70 campuses in 21 states. In the second quarter of 2013, Kaplan reported revenues of $548 million, a 1 percent decline from the previous year.
The startups receiving mentorship at the New York office include Newsela, an organization that offers an online system for delivering nonfiction texts—newspaper articles—that teachers can modify to meet students’ different reading levels.
Matthew Gross, Newsela’s founder, and his small team have received counsel from a number of mentors, including Seppy Basili, the vice president of college admissions and K-12 programs in Kaplan’s test-prep operation. Mr. Basili gave Newsela officials an overview of the school literacy market, describing it as fragmented, rather than dominated by any single entity, Mr. Gross recalled.
“That provides a huge opening for companies like us,” Mr. Gross said. “It’s also a response we can give to venture capital firms that question our ability to go head-to-head against big companies. Because there is no dominant player in this space.”
The startups’ work space is designed to encourage a free flow of ideas and advice—and it often does, a number of entrepreneurs said. Companies have shared advice on many topics, from the names of experts in creative video-game design to how to defer payments to lawyers until they raise capital, recalled Adrien Fraise, the CEO of Modern Guild, an online system designed to help students more precisely hone their career ambitions.
“Everyone is tackling similar-esque troubles,” Mr. Fraise. “You have that resource next to you, and you can ask the peer-to-peer questions. Sometimes, it might not be as highbrow as you want, but sometimes that’s the most important advice.”
Kaplan has sought to bring a startup mentality into its operations in other ways. It has staged “hackathons,” inviting its own employees to work in teams, come up with ideas, and solve problems in technology and education. The company has also launched internal startup projects, in the hope of generating ideas that break from the norm.
Major education companies have long backed startups financially and in other ways, by sponsoring events and other programs. But typically those efforts were strategic investments by companies, not the sort of “very public infrastructure” of hands-on support being offered by Kaplan and others today, said Frank Catalano, an education industry analyst and former Pearson executive based in Seattle.
The benefits for established education companies include getting direct access to creative entrepreneurs, rather than having to seek them out, he said. It gives those companies a competitive advantage if they choose to acquire or partner with promising startups. And it allows major companies to announce to the education community: “We’re cool, we’re no longer dinosaurs,” Mr. Catalano said.
But there are also potential downsides to those arrangements. Startups risk getting branded as being allied with one, major company’s interests, which could discourage competitors from investing in or doing business with them, he said. “Benefits accrue to the startups, but so does all of the baggage,” Mr. Catalano said.
Another risk is that entities sponsoring accelerator programs don’t give the startups enough support when they’re trying to get off the ground and are “most fragile,” said Jennifer Carolan, a partner with the New Schools Venture Fund, a Palo Alto, Calif.-based nonprofit venture philanthropy firm.
Yet if accelerator programs can find the right corporate partners, those big companies can play a critical role in helping startups clear one of the most daunting barriers they face—breaking into K-12 markets—a hurdle that ultimately stifles innovation in schools, said Donna Harris, the co-founder of 1776, a Washington-based organization that supports startups through a variety of means. Her group is partnering with Pearson, which is working with education startups on 1776’s campus, located downtown in the nation’s capital.
“Startups can accelerate [their growth cycle] by partnering with Pearson,” said Ms. Harris, creating the potential “marriage of new ideas with existing infrastructure.”
Faster Decisions Wanted
Pearson’s partnership with 1776 is part of a broader effort by the company to connect with education startups, said Diana Stepner, head of future technologies at the company. Business deals with fledging companies could result from that activity, she said, but Pearson sees greater potential to gain ideas from young, hungry entrepreneurs about how to structure teams and develop ideas and products quickly.
“They make decisions faster,” Ms. Stepner said of startups. “There are one or two people, and they just go.”
Others who work with startups say a potential hazard in partnering with corporations in accelerators comes if entrepreneurs don’t grasp the conditions under which they are receiving support. Startups need to know if they are committing to a business arrangement with the larger entity, or accepting unfavorable financial terms, said Mandela Schumacher-Hodge, the general manager of Startup Weekend Education, an effort that invites entrepreneurs to events to share ideas and form companies devoted to solving problems in education.
“The conversation needs to be clear,” said Ms. Schumacher-Hodge, so that founders of young companies understand from those providing them with support that “this is why we’re interested in helping you.”
Mr. Rodriguez, who founded a number of startups before joining Kaplan, said the company is open about its designs. Startups are free to develop their products and services as they want. If Kaplan sees promise in them, it could offer to buy them, or form business partnerships with them, he said.
It’s also possible that the startups Kaplan helps nurture end up becoming the company’s competitors, Mr. Rodriguez acknowledged.
“It’s a risk we need to take. Otherwise it wouldn’t work,” Mr. Rodriguez said. “There are no strings attached. ...They will do things that make sense for them.”
Vol. 33, Issue 04, Pages 1, 18-19Published in Print: September 18, 2013, as Ed. Companies Nurturing Startups