Published Online: June 9, 2014
Published in Print: June 11, 2014, as Ed-Tech Market Concerns Bubble to the Surface

Investors Debate Possible Bubble in the Ed-Tech Marketplace

A sharp rise in investment flowing into K-12 educational technology and a flood of new startups entering the market have longtime players cheering the attention to what they call a previously undervalued sector, but have also spurred concerns that this surge could foreshadow a boom-to-bust phenomenon.

Over the past several years, K-12 educational technology—once an unlikely area for significant venture-capitalist attention—has become a hot new investment opportunity. That continuing trend has prompted a whole industry around creating and promoting ed-tech startup companies and an intense focus on figuring out why some succeed while most fail. It's also meant that schools and districts have opened their doors wider to for-profit companies, new technologies, and sometimes-untested products, creating a risk for educators.

"The uptake on technology in the education sector is jaw-dropping," said Deborah H. Quazzo, a founder and managing partner of GSV Advisors, a Chicago-based education investment bank.

The debate over whether an ed-tech bubble, akin to the late 1990s dot-com bubble in which many tech-related startups received huge financial support from investors only to later fail, is heating up as established companies grow and new players enter the market. At GSV's Education Innovation Summit in April, considered a bellwether for where education investment is heading, several high-level speakers said they believed a bubble existed, while others said those concerns were exaggerated.

Ms. Quazzo sides with those who think the market is active, but healthy, though she acknowledges that some companies may be overvalued and many existing startups will fail. But Ms. Quazzo, and her colleague Michael Moe, an adviser to GSV, argue that the current atmosphere feels more like a dynamic marketplace than a bubble lacking substance and ready to burst.

"Because capital is flowing into this market, people cry wolf and say there's a bubble," Mr. Moe said. "But what's happening now doesn't correspond to what a bubble really is—where people lose their heads and there's not economic reality tied to the value of capital allocations."

Investors Jump In

There's no question there are more dollars flowing into the ed-tech sector. New York City-based investment research company CB Insights reported overall ed-tech investment hit a record high in the first quarter of this year, with $559 million flowing into the sector via 103 investment deals. By comparison, the company reported total investments of less than $100 million in just under 60 deals in the first quarter of 2012.

Infographic

According to GSV Advisors, the number of disclosed transactions in which companies are raising money primarily in K-12 education and concentrated mainly in ed-tech, went from 18 valued at $121 million in 2007 to 145 transactions valued at $629 million in 2013.

Other analysts are deconstructing the market in different ways. The Oakland, Calif.-based NewSchools Venture Fund, a nonprofit that has invested in many educational technology startups, reported that from 2012 to 2013, venture-capital funding in the K-12 ed-tech sector increased only 6 percent. However, venture-capital firms that once generally avoided the K-12 market are now diving in. In February, Remind 101 Inc., a free mobile-messaging service for teachers, raised $15 million in a funding round led by venture-capital company Kleiner Perkins Caufield & Byers; and educational analytics company BrightBytes raised $15 million in funding through Bessemer Venture Partners.

There's a lot of buzz around this area that never existed before, said Frank Catalano, the principal consultant and analyst for Seattle-based Intrinsic Strategy, a consulting firm that specializes in educational technology. "We are in the middle of a hype bubble, no doubt," he said. "Suddenly, ed-tech is the hot property."

'Get Rich Slow'

Mr. Catalano said the question of whether there's a bubble when it comes to valuation is a separate issue. While there is increasing investment in educational technology, analysts are finding that investment in the sector relies heavily on seed money and angel investors in the initial stages of company-building instead of the higher-dollar investments in later funding rounds more common in other sectors.

To Mr. Catalano, that shows ed tech is a "get rich slow" business and whatever bubble may be forming on the investment side will take a long time to grow.

But Jennifer Carolan, a managing director for the NewSchools Venture Fund, sees that emphasis on seed money as a reflection of a less mature, but growing, investment field. As those startups gain experience, she predicts increasing investment in later funding rounds. As it is, Ms. Carolan said there's still not enough investment money flowing into the K-12 ed-tech market.

"The sector has been underfunded for so long," she said. "If people say there's a bubble, we need more of a bubble then."

From the inside, the ed-tech world looks much different to Adam Frey now compared to 2005 when he co-founded Wikispaces.

"If the question is, 'Is there more investment, companies, and activity going on in the ed-tech space?' there's no question there is," said Mr. Frey, who recalls that at the time WikiSpaces, an education oriented web-hosting company, launched it was difficult to raise any money or catch venture capitalists' attention. Earlier this year, Wikispaces was purchased by London-based digital-publishing giant TSL Education (bought in 2013 by private equity firm Texas Pacific Group) for an undisclosed sum. "There are a lot of stories right now about people having money thrown at them," Mr. Frey said.

Even though the investments may be smaller than in other sectors or concentrated at the seed stage, that may fit well with K-12 ed tech, he said, where a small amount of money can go a long way. But he and others acknowledge that many of the startups in the market now will not be around in the near future. Whether you view that as a problem or as part of a healthy, competitive market depends on your perspective, said Mr. Frey, who emphasized that ed-tech entrepreneurs need to learn to handle themselves in this new type of environment.

"Don't sign up for a mission that isn't yours," he said. "Don't let your goals get co-opted by a venture capitalist and the games they want to play."

That's what Adam Geller, the co-founder of ed-tech startup Edthena, is trying to avoid. His company, which provides video tools to teachers and those training to be teachers, has generated income from the start. He's taken investments from some angel investors and an undisclosed amount from NewSchools, but he says he has been discerning about where his money comes from and how it's used.

Mr. Geller said the investors he's been meeting with are generally knowledgeable about the education market, not just looking for a quick buck through the investment of the moment. "I haven't encountered someone jumping into the education area because it's hot and exciting," he said, noting that most education investors seem to have a personal or family connection to the education field, or want to solve a particular education problem. "It's more that they have a particular reason or desire to be investing in education," he said.

Even so, Mr. Catalano argues that the risk of creating an ed-tech bubble is real and could have major implications for schools if it were to happen. "We run the risk of over-promising that we can solve everybody's problems with ed tech and setting up unrealistic expectations," he said. "There could be a rush by schools or districts to start using a bunch of new tools that may not be around in a year."

Vol. 33, Issue 35, Page s6

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