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Education Opinion

The Ed-Tech Startup Bonanza and Fed Policy

By Justin Reich — April 23, 2014 1 min read

Why, all of a sudden, are VCs falling all over themselves to invest in education technology?

Is it an industry ripe for disruption? No. It’s one of the most conservative sectors of society, and virtually every edtech start-up embraces this conservatism. (Just keeping watching Udacity turn itself into Lydna.com).

Have conditions changed on the ground that finally make education ready to take advantage of new technology? Not too much. Broadband adoption is inching ahead, far too slowly. There are more mobile devices in kids hands, but schools still ban and police them. There is no massive tipping point in the context of kids and schools.

Have venture capitalists suddenly discovered a deep passion for learning and the education system? Let’s propose an alternate theory.

That alternate theory comes from a piece in last Sunday’s Times Magazine about the VC Bubble more broadly. Three features have come together in the broader economy to spur a new wave/bubble of venture capitalism. First, the Fed has agreed to keep interest rates low forever, so there is little money to be made in bonds or lending. Second, the economy is crummy, so it’s hard to figure out how to make money the more traditional forms of investment. But, corporate profits are huge, so there are giant piles of money waiting to be used. And does Silicon Valley have a deal for them.

From Lowry’s piece:

The Federal Reserve is currently keeping interest rates very, very low. They've been keeping them very, very low for a long, long time. The idea is to spur investors to spend now -- but the economy is so crummy that few know quite how to do that. A report from Standard & Poor's released this month found that 1,700 big, nonfinancial companies were holding on to about $1.53 trillion in cash and short-term securities at the end of 2013. That is enough liquidity to purchase Google, Apple, General Electric, McDonald's, General Motors and Walmart outright, with a few billion to spare. Pension funds, endowments, high-net-worth individuals and the like are also trying to figure out how to invest all their money -- and along with places like the Bakken and a few emerging markets, Palo Alto seems awfully appealing. A few million in seed funding might turn to billions in an acquisition in just a few years, after all. "Valuations are at extreme levels because you cannot get a decent return on your money doing anything else," Fred Wilson of Union Square Ventures wrote on his blog. "It's been a good time to be in the V.C. and start-up business, and I think it will continue to be as long as the global economy is weak and rates are low." In other words, the perks-laden, savior-and-ninja-saturated, TED-talking beast that has seemingly taken over Northern California in recent years might be a byproduct of high corporate profits and Fed policy as much as anything else.

Weak economy, high corporate profits, low interest rates, and Silicon Valley starts looking at every sector possible for new investments. The fields over in edtech were pretty green, and so they came over from innovating new ways for us to send naked pictures to each other and decided to work on this for a while.

I think it definitely may be possible that there are edtech start-ups and investors who genuinely believe that everything is different now and technology can transform learning if we just have the right flashcard app or way to text message parents.

But I also suspect that when the Fed changes rates, most of these folks will be gone.

For regular updates, follow me on Twitter at @bjfr and for my papers, presentations and so forth, visitEdTechResearcher.

The opinions expressed in EdTech Researcher are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.

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