It’s Time For Edtech Entrepreneurs To Throw Out Stale Business Models

We hear it again and again: The U.S. K-12 education system is in crisis.

In its 2015 report, the National Assessment of Educational Progress, otherwise known as “The Nation’s Report Card,” revealed that just one-third of eighth graders and one-quarter of twelfth graders performed at or above “proficient” in math. In reading comprehension, the performance was only marginally better.

Even more concerning is the fact that spending per student has doubled over the past 40 years, but achievement has not. To further add to the complexity, many schools are now beset with budget cuts, teacher shortages and overflowing classrooms. The challenges are as complicated as they are entrenched, and fierce political disagreements, as well as the fragmented nature of the U.S. school system, have stunted progress.

In response to these struggles, it is no surprise that so many entrepreneurs decided to start educational technology (“edtech”) startups serving the K-12 market. With 55 million kids in the U.S. attending elementary through high schools, it’s clear why startups have gained significant momentum over the past few years and taken advantage of the market size.

Edtech startups are increasingly viewed as a way to slash through bureaucracy and funding shortfalls with low-resource, high-impact solutions. This momentum is fueled by the proliferation of mobile devices. Before the mobile revolution, it was next to impossible for companies to access school users (teachers and students) directly, without having to navigate the slow district bureaucracies.

These days, as more classrooms adopt “1to1” (one device per student) and BYOD (“Bring Your Own Device”) programs, edtech startups can gain meaningful user traction by pursuing mobile distribution strategies that are significantly more efficient than the traditional ones.

Where edtech entrepreneurs have failed

Growing new users at scale in a cost-effective manner is a solid start, but growth only solves part of the problem. The next critical challenge for edtech entrepreneurs consists of implementing monetization strategies that will allow them to build sustainable businesses. Historically, this is where edtech entrepreneurs have failed.

Edtech companies with strong MVPs frequently flounder in the crowded dead sea of startups trying to sell to the K-12 market. As passionate as these entrepreneurs are about their users and the problem they are trying to solve, they don’t spend enough time experimenting with and innovating around new monetization strategies.

Edtech entrepreneurs focus too much on product design and user acquisition, but not enough on building sustainable business models.

This is why most have failed and why investors remain skeptical. Building a truly disruptive business requires driving transformative change on a large scale, attracting a meaningful number of users and building a business with long-term sustainability.

Let’s take a deeper look at the different types of monetization strategies edtech startups use and what’s next for the industry…

Grow now, monetize later

Fueled by massive VC rounds, edtech startups decided to build out a huge user base before they tried to monetize it. In edtech K-12, this very selective league includes a small number of companies, including Edmodo, Remind and ClassDojo, who have set the pace for consumer-like VC investments for the last three to four years. These companies are very much the canary in the coal mine when it comes to VC attitudes toward edtech, and their success or failure will ripple throughout the landscape.

While their user growth has been nothing short of amazing, their “land grabbing” period may need to come to an end soon. As all three approach later rounds of VC financing (series C and D), they will need to start funding growth off of revenue, and not their investors’ money. It will be fascinating to see how these startups evolve in the next year or two, and whether or not they live up to the high expectations that they’ve created when it comes to monetizing their large user base.

In fact, with regards to monetization, it’s just begun, with Remind very recently announcing that they are creating a product for schools, likely a paid version of its service. This is interesting, because it first seemed like they were pursuing a mobile platform path (à la WeChat). Instead, they are likely monetizing via paid school conversions, which is a hard path to take because, even with high teacher engagement, school conversions are slow and it’s typically hard to get people to pay for something that was once free. So, now (much like what happened with Edmodo), they will have a hard time growing conversion numbers as quickly as they grew their usage numbers.

The same old top-down boots on the ground

Startups with this model are implementing the same monetization strategies as the incumbent players that have dominated the K-12 industry for decades: They pitch district administrators with a top-down sales approach that involves large ranks of salespeople with their “boots on the ground.”

While this model has been successful for some startups (notably BrightBytes, MasteryConnect and Canvas by Instructure), it has two problems: It is slow and expensive.

It’s critical to think carefully about your business model from day one.

Sales cycles in K-12 are infamously bureaucratic, which makes it frustrating for startups that need to move fast and show continuous progress and significant growth on a monthly or quarterly basis. Even if a product does manage to catch the eye of the right person in the district administration, approval processes in these organizations are cumbersome.

Startups with this approach can succeed, but sales and marketing expenses will drive up the price of the product. The monetization model, and thus the technology, remains a far cry from disruptive.

The innovators

Today’s most innovative edtech companies are exploring alternative distribution and monetization strategies, such as grassroots or bottom-up. They also are showing the potential of the “consumerization of IT” movement by proving that the voice of the end user (in this case, teachers) is becoming more and more influential when determining where budgets get allocated.

Take for instance, BrainPOP, Teachers Pay Teachers, Quizlet, Wikispaces, GoNoodle or Schoology, who all got creative when it came to exploring distribution and monetization strategies. These companies have been able to scale their revenues without having to build massive sales teams and/or deploy “boots on the ground.”

All of these companies are proving that the bottom-up approach can be a viable monetization model in K-12 education. They are applying best practices from consumer Internet companies and distributing directly to teachers/instructors as end users, then finding smart and elegant ways  to monetize those relationships — either directly with the teacher or indirectly by charging schools and/or even parents or local donors for their products/services.

They share an extremely low cost of acquiring new customers, and an alternative way of converting them into paid users. Moreover, they all pass along these savings to their customers in the form of free versions of their services and very affordable paid versions.

Generally speaking, edtech entrepreneurs focus too much on product design and user acquisition, but not enough on building sustainable business models. This startup characteristic is hardly unique to edtech, but it is particularly pronounced, and comes with a unique, steep set of challenges.

In other areas (e.g., social media or digital content), figuring out monetization down the road could be a fine strategy, but this may not hold true in K-12 education where engagement-driven revenue streams like advertising are not necessarily welcome by teachers and administrators.

For existing and aspiring edtech entrepreneurs, it’s critical to think carefully about your business model from day one. This will be particularly important in the new funding context in 2016, with the likelihood of an early stage funding crunch.