The broken edtech ecosystem investors once avoided is changing

“Don’t go into education technology, no one makes any money,” was the advice I once got from an early founder of an edtech startup that failed.

It used to be an all too common sentiment that once deterred many prospective investors from backing some of the most promising edtech ventures conceived.

Previously considered risky investments, it’s true that many edtech startups — commonly founded by “teacherpreneurs” hell-bent on mending the broken social and cultural framework of education through tech innovation — either tank or fail to achieve true scale.

Why is this the case, when basic reasoning leads us to believe there is no other professional better placed to address the issues facing education than an actual teacher?

The broken ecosystem of selling to schools educational software rather than the actual technology is what often consigns many edtech ventures to the dustbin.

Of the few teacher-entrepreneurs who do succeed in the startup world to become true scale-up businesses, these mold-breakers are developing solutions to tackle some of the most difficult challenges in education — challenges that are leading many of the industry’s talent to leave the profession completely and a disproportionate number of children to underachieve.

In a digitized world where tech innovation has revolutionized nearly every corner of our life, the negligible impact it has made in our classrooms is woeful.

Primary and secondary schools in the U.S. alone spend $11 billion on educational technology annually, which, while growing at 20 percent year-on-year, is still only a tiny fraction (1.4 percent) of the $800 billion spent on schools. Considering the lack of accountability and clear inefficiencies apparent in the way government, local authorities and schools spend on educational resources, edtech businesses are slowly but surely being seen as a sustainable means of tackling the bureaucracy, resourcing shortfalls and engagement issues that come with teaching. For these very reasons, edtech ventures are not only worthy of additional attention — they are deserving of investment.

The market potential for the edtech industry is vast and forecasted to grow 17 percent year-on-year to become worth $252 billion by 2020. Last year, CB Insights reported that funding of edtech startups peaked at $3.3 billion. Let’s put this into perspective: Digital advertising is a $200 million industry, from which two of the world’s biggest brands (Google and Facebook) have grown; the edtech market, though still in its infancy, already exceeds this and is growing at a faster rate. It’s not impossible to think that an edtech behemoth of the same power and scale of two of the world’s most successful tech brands will soon emerge from this space.

Technology can and must be mobilized to make the process more efficient and engaging.

Today, the unforgiving school ecosystem, which has presented itself as an almost insurmountable barrier to entry for many edtech startups, is showing signs of change. This is a critical development in an industry where many innovative apps have been unable to displace archaic, inferior technologies in schools because of restricted funding and a general unwillingness of schools to disrupt the status quo.

The implication of this change is exciting. A clearer path will be made for new players to create valuable businesses with meaningful social impact. There will be ample opportunities to innovate; it is there for the taking.

To fully appreciate what this could mean for the edtech industry, for teachers and, ultimately, for children, you need only look at the broken ecosystem currently in place that has long prevented modern classrooms from innovating teaching and learning processes using 21st century technology.

Imagine you’ve invented a great new application for teaching math to school children and you want to sell your app to schools. It’s almost certain that such schools are already paying for a math application (typically costing £500 annually for a MyMaths or Mathletics app in the U.K.) — and these schools will have set their annual budget for math software to match the price of the £500 annual subscription fee. The only way you can get such schools to pay for your software is by displacing the incumbent.

That’s achievable, in theory, if you have a better product and a brilliant sales pitch. Yet the typical cost of achieving a single sale of this nature in the U.K. is around £1,000 — and you may well have to wait until the start of the new school year for the school to have the funds to make that purchase. In short, an edtech startup will need to invest £1,000 and wait 6-12 months to get a £500 initial return.

Few new ventures have the kind of funds available to invest in this process, and even those that do have the funds struggle to build up and sustain the sales effort needed to scale. Show My Homework, founded by teacherpreneur Naimish Gohill, is one of the few examples of companies that have received the kind of investment needed to break through, but break through they have: their software is now used by one-third of the schools in the U.K.

Of course, the great news is that once you have made that sale, the same issues that made it hard for you to get the sale in the first place now make it hard for others to displace your application, and the school will likely continue to use your application for 5-10 years.

The long-term return on that £1,000 investment is anything from £2,500 to £5,000 — that’s a 2.5X to 5.0X return. Pearson predicts it will take about three years to break even on a sale, but they also expect the school to keep using the software, on average, for seven years. Indeed, once you get your edtech business to a position of scale, you have a highly profitable business with quite exceptional margins.

Schools and teachers get very upset if they are asked to start paying for something that used to be free.

Unfortunately, most new edtech ventures never get that far and run out of money first. Some manage to keep going, but struggle to attain real and sustainable scale. The result is a highly fragmented education software market with some big established incumbents.

To circumvent these funding issues, some edtech ventures have built their offering on a freemium business model, offering basic features of their apps for nothing. ClassDojo and Kahoot! are examples of edtech brands that have succeeded in getting very high penetration in schools by providing their application for free.

The problem is that these companies haven’t quite yet worked out how to generate revenue.  Schools and teachers get very upset if they are asked to start paying for something that used to be free. Furthermore, the problem for these ventures can be even worse than for those edtech businesses who stay small, given that their large user bases gobble up cash in both servers and in customer and community support costs.

These are the very issues that have led investors to steer clear of investing in the K12 edtech space despite the sizeable market opportunity. Whilst they may understand that, with proper investment, these edtech ventures can give outstanding returns in the long term, they see other sectors as being far easier to crack. The result? Companies that have the potential to break through, never do.

Of course, the ultimate losers in this are our children. The current quality of software used by schools is extremely poor compared to what it could be. MyMaths, for example, is essentially a 10-year old product that has had no investment over the last five years. Software has the potential to have a massive impact on how children learn, particularly the new generation of personalized and adaptive software applications that customize the learning experience to each child as they progress.

Giving a student his or her own personal tutor usually has a massive impact on a student’s rate of learning. A personal tutor can understand and address a student’s specific learning gaps and deliver teaching and practice exercises that perfectly match the student’s needs. It’s impossible to give every child in the world their own personal tutor, but it is possible to give every child their own personal virtual tutor using software.

Schools are ripe for this new generation of intelligent software that uses data, analytics and intelligent algorithms to make teaching more informed and effective and to help students learn better. The potential for such technology to democratize quality education and transcend the socio-economic barriers to progress is incredibly promising.

What we are effectively seeing is the radical democratization of the edtech market.

That aside, nascent, high-sophisticated education software is now forcing the current ecosystem to evolve, and investors should be excited about how the new world of K12 edtech is shaping up.

Relatively few companies will be able to raise the funds and have the skills necessary to deliver the underlying technology for this new generation of software, and those that are first to market will achieve global scale. This is already happening with companies like Knewton and Duolingo — which received $150 million and $83 million of investment, respectively, and have acquired a worldwide user base.

Elsewhere, there are edtech ventures out there whose “reason to be” is to make it easier for small and new players to succeed — from lowering the cost of developing, launching and marketing an edtech app without the need to raise astronomical funds, to transforming the 200,000 or so applications in existence on the Apple App Store into something that is accountable, effective and instantly classroom ready. There are ventures that enable schools to pay a low-cost one-off subscription fee that gives them access to thousands of apps for free; no longer will they be locked into one incumbent application. What we are effectively seeing is the radical democratization of the edtech market.

In the classroom, we are seeing transformative innovations being deployed by way of edtech apps that give teachers access to valuable real-time data and insight into the classroom. In the past, teachers would test their students at the end of a term or topic and only at that point would they discover what students really knew — by which time it was too late to do anything about any learning gaps students might have. Now teachers are able to get this insight instantly in every class and change their teaching immediately to address any issues and ensure pupils achieve mastery of curriculum-mapped learning objectives. Technology of this kind is new, and it exists today.

Complementing rather than replacing traditional pedagogy, teaching and learning needs to be relevant to the next generation of students and teachers, and edtech — fueled by the proliferation of mobile devices — creates the very tools needed to achieve this. Technology can and must be mobilized to make the process more efficient and engaging in order to curtail the critical decline of quality teachers in the industry, as well as unlock a fascination within pupils for academic subjects that inspires them to pursue something at a higher level or even later as a career.

New opportunities brought about by a digital world pose new challenges and responsibilities for both educators and policymakers. But the significant shift in the ecosystem will see more schools invest in current transformative technology that will create accountability in a way that has never been seen. Adoption is still in its infancy, but the climate is ripe for a new wave of megabrands set to overturn not only the misconceptions around investment in edtech, but to also move the needle on student learning. We’re entering a new era in edtech; now has never been a more opportune time to take advantage of this space.