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Why VCs can’t afford to ignore EdTech any longer

Image Credit: http://www.flickr.com/photos/apoptotic/2540055580/

Andrew D’Souza is COO of Top Hat Monocle

Two years ago, most top-tier VCs would not have touched an education technology company with a 10-foot pole. That’s all about to change – in fact, it’s already changing.

Take a look at some of the recent bets placed by big-name firms on exciting education companies over the past 12 months: Accel with Lynda, NEA with Desire2Learn and Edmodo, Emergence with Top Hat, a16z with Udacity, Benchmark with Minerva and the list goes on.

The education space is massive, very broken, barely touched by technology and has been largely underserved by entrepreneurs and investors. The opportunity for disruption, significant value creation and outsized returns is huge.

Companies that are focused on the education space right now have arguable advantages over their consumer and enterprise technology peers:

Advantage #1: Ability to attract high-caliber talent

With consumer web falling out of favor, top talent is beginning to look elsewhere for career opportunities.

Horizontal SaaS companies may be lucrative in the short-term, but those companies always run the risk of being commoditized by lower-cost providers or outsold by more focused vertical players. More importantly, horizontal SaaS providers can have trouble articulating a compelling vision, which is what the most passionate talent needs to perform their best and why consumer web companies often have an advantage attracting high-profile talent.

Passionate employees can see themselves working for a company out to “make the world more open and connected” than one trying to “transform how businesses operate so they can achieve their business vision”.

Vertical SaaS companies, on the other hand, can present a vision for a particular industry that resonates deeply with those who care about that space. There are fewer industries that draw a more passionate response from a broader swath of the population than education. Almost everybody has a view and almost everybody would jump at the opportunity to have a significant positive impact on the space.

Historically, executives have thought about “getting involved” in education through board affiliations or philanthropy in the twilight of their careers. That perspective is changing as more talented individuals earlier in their careers are realizing that they can build successful, highly lucrative careers while impacting a space they care deeply about (vs. say, hawking daily deals).

Advantage #2: Public interest

Education stories are mainstream. The challenges surrounding student debt, international competitiveness, unemployment and equality are problems that affect everyone, not just those in the education space. If you’re building a company to address these problems in an innovative way, the world wants to know about it and you will get noticed. Outside of Silicon Valley (maybe even inside), I’m willing to bet that more people have heard of Salman Khan than Peter Thiel.

This is a huge advantage ed-tech companies have over every other kind of tech startup.

Like it or not, access to capital, talent, customers and partners is directly affected by the public perception of you and your company in the media. Those who know how to tell their stories appropriately have access to an unlimited amount of public interest coverage and a passionate audience who can’t get enough.

Advantage #3: Market timing

The education system is under attack from all angles. Education outcomes aren’t keeping pace with the requirements of today’s job market. Budgets are continually slashed. Higher education institutions are struggling to remain relevant and justify rising tuition fees in the face of open, free educational resources. The last industry that experienced these kinds of pressures was traditional media, when technology companies who were on the winning side of the disruption turned into billion-dollar businesses seemingly overnight.

If those within the established institutions are smart (and we would hope they are), they will embrace technology as the catalyst for much-needed change. If they ignore the disruption, they’ll face a similar fate to newspapers and radio. Either way, it’s a good sign for those starting companies in the space.

Advantage #4: Word of mouth spread through the industry

Unlike vertical SaaS providers, EdTech companies’ customers don’t compete with each other. Universities are certainly rivals in athletics and are always looking to improve their brand among prospective students, but for the most part, education institutions are collaborative and cooperative. This is even more true in K-12.

If an instructor or an institution discovers a product that improves learning outcomes, they want to spread the word to their colleagues and peer institutions. At the most, they’ll want to be identified as the forward-thinking school which “pioneered” this technology, but overall they’re happy to share their knowledge with others. This is a unique dynamic which exists in education that other enterprise tech companies can’t really benefit from.

Advantage #5: Competitive advantage of outside perspective

Right now, education technology is much less competitive than consumer or enterprise tech. The bar to build better products, execute better and displace incumbents is relatively low.

Historically, many EdTech companies have been started by passionate educators, but haven’t always had business or technical leaders on the founding teams. Their competitive advantages were institutional lock-in and long-term contracts. These structural barriers are disappearing in education, in the same way that the cloud and consumerization of enterprise technology shook the foundation of enterprise software incumbents.

These startups need perspectives from outside the education industry if they’re going to be truly disruptive. Many of the VCs who made great returns on “old world” education companies are too focused on pattern recognition, and they end up chasing after (or worse, forcing their newer companies to adopt) broken business models. Companies rely on their board for outside perspective.

Rather than looking in the rear view mirror to see what worked in education in the past, they should be checking their blind spots to see what tactics worked in other industries which may work for us. Having Gordon Ritter from Emergence on our board has allowed us to learn from what worked at Salesforce, Yammer, Box, and Veeva as they scaled their businesses, and that gives us a competitive advantage over education incumbents who are steeped in their ways.

The investors who get significant exposure to this space in the coming years will see some big wins, while those who continue to shy away will miss one of the biggest opportunities of the decade.

photo credit: sciencesque via photopin cc

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