Can Ed- Tech Companies Survive Marketing Only to Teachers?

Within education technology startup and investment circles, there’s a lot of chatter about the “consumer-ization” of the market. Basically, the end-users of ed tech—teachers—are becoming more proactive about choosing what they use in the classroom, and companies are developing and marketing products with those very end-users in mind. No longer are district-level procurement officers the primary gatekeepers for teaching tools and materials.

This week, I wrote about the “consumer-ization” trend, the companies that are using that model, and how the dynamic within a school district changes when teachers are the primary drivers of what’s used in the classroom. I focused on Schoology, a learning management system company that is gaining traction with this exact strategy, picking up 30,000 schools and $10 million in venture capital along the way. I also talked to teachers whose own technology use influenced their schools and districts. As a result of these trends, a ton of money—upwards of $400 million this year by some estimates— is coming into the ed-tech market looking for the “Facebook of education.”

This follows what’s happening in technology at-large; people are more comfortable using software like Google or hardware like iPhones than whatever technology their company provides for them. Hundreds of millions in investments and acquisitions have been based on the number of users of a technology. But recent data and comments from Silicon Valley investors suggest dollars are moving past the “consumer-ization” stage.

With publicly traded technology darlings Facebook and Zynga (the company that creates addictive games on Facebook) struggling, the amount of money invested in “consumer information services” dropped 42 percent the first nine months of this year, compared with 2011, reports the Wall Street Journal. Of the 165 companies that received initial rounds of funding in 2010, less than half have raised additional rounds of funding, the Journal reports. But overall investment is on the rise. (The same data suggests the companies can at least hang around longer now, going three to four years without needing another round of funding.)

For the technology industry at-large investments are going toward companies that focus on enterprise sales, which count businesses and institutions as customers and tend to be more stable and less flashy, wrote Fred Wilson, a principal at renowned venture capital firm Union Square Ventures, in a recent blog post. Users are no longer the key metric in technology, it’s efficiency and revenue.

Suddenly the enterprise is cool again,” writes Dan Lyons, the wonderfully curmudgeonly editor of Read Write Web, a news site that covers technology. He profiles the company Box, which raised $285 million and is used by 14 million people, behind a 27-year-old founder and a dedication to selling cloud infrastructure to businesses. “After a decade of going crazy over Farmville and Angry Birds and me-too photo-filtering apps and other such fluff, Silicon Valley is finally getting back to its roots — making real software to run real businesses.”

If education technology is consistently a few years behind consumer technology, it’s now possible there’s a risk in following “consumer-ization,” which may be at best a cycle and at worst a fad.

Schoology, for example, realizes that while offering a product for free to teachers can build usership, the sustainability of its business depends on selling enterprise contracts to schools and districts (this is referred to as the “freemium” business model).

“We’re an enterprise company that has consumer functionality,” Jeremy Friedman, Schoology’s CEO, told me.

Developing products based on teachers’ experiences and preferences would help improve academic performance, which can’t help but influence district-level officials with bigger checkbooks, Friedman believes. In an ideal world, it’s a win-win for teachers and for companies. Similarly, some education industry onlookers I spoke with hope that “consumer-ization” is not the endgame for the market, but a means to enterprise sales and putting better technology into schools.

“Successful freemium ultimately become enterprise software players,” Adam J. Newman, a founding and managing partner of Education Growth Advisors, told me.

There does seem to be a balance in where K-12 ed-tech investment is going. Education Week analyzed data on 2012 K-12 ed-tech investment compiled by the NewSchools Venture Fund (which produced the infographic below). Of the $365 million invested in K-12 education so far this year, investors gave $110 million to teacher-focused enterprises and $156 million to those with a primary focus on institutional sales (some enterprises focused equally on teachers and institutions, and were included in both categories). Some investors have voiced concerns that ed tech is headed toward a bubble.

The enterprise craze is possible, Wilson says, because consumer technology habits are mostly established already, (any Facebook addict can probably attest to this) and “it is harder than ever to build a large audience from a standing start.” Investors rushing to fund ed-tech startups may think education doesn’t have this exact problem yet. But how patient will they be and how many fads will end up in schools along the way?

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