Right now, there are three major types of business models emerging within education technology companies: alternative institutions, new products, and services. Of these, alternative institutions and newer products may have larger presences right now, but ultimately, companies that serve existing college institutions are the ones that will be the most profitable, and have the most potential for long-term impact and growth.
From the Minerva Project to UniversityNow (and even Devry, Apollo and KIPPS), there are many companies that are re-thinking institutions from the ground up. Their fundamental assumption is that current institutions are either broken, not competitive, or not sufficiently meeting market demand, leaving room to create entirely new educational institutions, both on and offline.
While this is a legitimate type of model that’s spreading in India, China, and other growth countries, it is capital-intensive and, in general, cannot gain enough traction to meet the growing demand for education, even in the U.S. In the past 10 years, the for-profit sector of higher education in the U.S. has still only serviced 10 percent of students.
New and better products for education – such as new educational content, software, games, widgets or tools – are certainly hot right now. Inkling, Kno, Piazza, Knewton, and DreamBox are just a few examples that come to mind; they’re building slick tools and applications for use in educational environments.
These businesses look and feel like typical Silicon Valley software startups; their first round of funding is usually small, and the first $5 million goes into product development and getting initial beta customers. However, their “go-to market” plan is often complicated, and in the current climate, it’s difficult to gain enough momentum to achieve mass adoption of new products in either K-12 or higher education.
So, these companies often find themselves in the limbo state of having a great product but no revenue. In that case, the most likely outcome is that major publishers like Pearson or McGraw-Hill have to finance their distribution and eventually end up buying them. A great example is Knewton – they’re now being distributed by Pearson and most likely will be bought by that company, as most of their revenue will be coming from that channel. This is not a bad venture investment, but it’s not a “home run.”