EDUCAUSE and Robot Tutors In The Sky: When investors are your main customers

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Robot tutors in the sky

Before I head out to Indianapolis for the EDUCAUSE conference, I keep thinking back to a comment someone made in response to Michael’s description of Knewton marketing as “selling snake oil”. I can’t find the exact quote, but the gist was:

This is what happens when you start to see VCs as your main customers.

This viewpoint could be applied well beyond Knewton, as they successfully parlay their marketing hype into raising more than $100 million to date (I suspect with another round in the works based on the aggressive marketing). Martin Weller has a post out today looking back at the MOOC investment mania and lessons learned such as “Don’t go cheap – they won’t respect you” and “Big rhetoric wins – allied with the fear factor”. The post is somewhat tongue-in-cheek and cynical in nature . . . but spot on.

Update: Ray Henderson shared a recent WSJ story about Chegg and how they are suffering from trying to increase market valuation by a “ratchet”.

Tech startups eager to land sky-high valuations from investors might want to heed the cautionary tale of Chegg Inc., the textbook rental service whose stock has languished since its IPO in 2013.

In a candid interview, an early investor in Chegg revealed how the company gunned for the highest possible valuation in several funding rounds ahead of its public offering. Chegg in exchange granted venture capitalists a favorable term called a “ratchet” that guaranteed the share price in the IPO would be higher than what they paid.

The move backfired. When Chegg went public, it was motivated to set an IPO price that met the terms of the covenant, or Chegg would have to pay the difference in shares to the early investors. The stock plummeted on the first day of trading and hasn’t recovered.

The entire ed tech market finds itself in the interesting position where it is easier to raise large sums of money from VCs or private equity or strategic buyers than it is to establish real business models with paying customers.

On one hand:

  • Ed Tech private investment (seed, angel, VC, private equity) has hit an all-time high of $3.76 billion for the first 9 months of 2015, according to Ambient Insight; and
  • M&A activity in ed tech is even higher, with $6.8 billion in Q3 of 2015 alone, according to Berkery Noyes.

On the other hand:

  • In the LMS market Blackboard is laying off staff and their owners are trying find an exit and D2L has hit a plateau despite massive investment. Instructure, while set for a half-billion+ IPO later this year has yet to set concrete plans to become profitable, and they are by far the hottest company in this market.
  • In the MOOC market, Coursera is just now getting to a repeatable revenue model, yet that is likely $20 million per year or less.
  • Other than ALEKS and MyLabs (owned by McGraw-Hill and Pearson), it is unlikely that any of the adaptive software providers have yet become profitable.
  • Etc, etc.

I am not one to argue against investment in ed tech, and I do think ed tech has growing potential when properly applied to help improve educational experiences and outcomes. However, there is a real danger when it is much easier for an extended period of time for companies to raise private investment or get bought out at high multiples than it is to establish real revenue models with end user customers – mostly institutions. The risk is that the VCs and private equity funders become the main customers and company marketing and product plans center on pleasing investors more than educators and students.

Knewton has fallen into this trap (although at $100 million + you could argue it is not a trap from their perspective) as have many others others.

What is needed in the market is for more focus to be applied to companies finding and simply delighting customers. This is a balance, as there is a trap on the other side of just supporting the status quo. But the balance right now is heavily tilted towards pleasing investors.

This is one of the main issues I plan to watch for at the EDUCAUSE conference – how much the company messages and products are targeted at educators and students vs. how much they are targeted at investors.

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About Phil Hill

Phil is a consultant and industry analyst covering the educational technology market primarily for higher education. He has written for e-Literate since Aug 2011. For a more complete biography, view his profile page.
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4 Responses to EDUCAUSE and Robot Tutors In The Sky: When investors are your main customers

  1. Great point. Feel free to stop by the DubLabs booth or attend our mobile session at 1:30 Wednesday with UTSA; http://www.educause.edu/annual-conference/2015/preparing-mobile-first-student.

    We’re 6 years in, self-funded and investing everything we have into helping schools meet the mobile needs of today’s students.

    Thanks,

    Chris Hopkinson
    http://www.dublabs.com

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