
Why Education Companies Do Not Succeed - avichal
http://www.avichal.com/2011/10/07/why-education-startups-do-not-succeed/
======
jonbischke
I think article is essentially right on. It's very difficult to succeed in the
education space and, at a minimum, it typically takes a long time to succeed.
If you have the patience you can definitely make money in the space (witness
Wireless Generation as an example) but there are very few quick wins.

Education also really is several separate industries rather than a monolithic
one. K-12 has a very different dynamic than higher education and those
industries have a much different dynamic than corporate training. Consumer
education, which I would consider to be stuff like Kaplan Test Prep,
Lynda.com, LiveMocha, etc. is essentially another industry albeit with some
overlap with the others. And consumer ed is probably the toughest one to make
money in, at least in the U.S.

One of the biggest challenges with education companies in the United States is
that I feel we've almost been conditioned not to pay for education. Public
K-12 education (which is the vast majority of consumption) is paid for by the
state. Higher education is heavily subsidized by the government and when it is
paid for by the consumer it typically comes in the form of student loans. And
then we you become an adult your employer steps in and pays for the majority
of your education/training.

So while people will spend lots of money for clothing, entertainment, food,
etc. it's tough to get people to pay out of pocket for education. The industry
that is most similar in this respect is health care and end the dynamics in
these two industries are much the same. I'd highly recommend that anyone
wanting to understand these industries more deeply read Disrupting Class and
The Innovator's Prescription, both by Clayton Christensen.

~~~
jbyers
> Education also really is several separate industries rather than a
> monolithic one.

This is a great point, and something pundits and the author of this article
don't explain in sufficient detail. Comparing a company that offers online
courses to end consumers and a company selling software a a service to
districts and universities is nonsensical. Is it safe to say that the
education market on whole is a challenging environment? Sure. But beyond that,
without specifying a narrow segment, generalizations are useless.

~~~
avichal
Hi JByers -- blog author here. I don't think the comparison is non-sensical
because the common thread tying all of these different segments together is
the end buyer's perception of value. If you as the builder or service provider
or technologist think that the value you're offering is higher quality you
will have a slow road. If you think it is saving cost/time to get to the same
level of quality you will scale quickly. This holds across segments as the
examples in the post illustrate -- Chegg, University of Phoenix, TutorVista,
etc.

~~~
Goladus
I would say the distinction is most important for considering what the
competition will be. There are already plenty of people who consider higher
education an investment, but also factor cost and risk for more significantly
than the sort of entrepreneur you describe. Many middle-class people value
quality but moderate their exposure to risk by choosing State and Community
Colleges. They perhaps sacrifice some quality in return for "good enough" and
a $20,000 loan instead of a $60,000 loan.

I suspect if you could beat state/community colleges on quality and at least
match them on cost I think you could be successful. I just have no idea how a
company actually beat them on quality.

------
tokenadult
There have been tough barriers to entry set up by pricing for a long time in
"education." If some providers have exclusive subsidies from taxpayers, it is
difficult for other providers to compete. "In modern times [as contrasted with
ancient times] the diligence of public teachers is more or less corrupted by
the circumstances which render them more or less independent of their success
and reputation in their particular professions. Their salaries, too, put the
private teacher, who would pretend to come into competition with them, in the
same state with a merchant who attempts to trade without a bounty in
competition with those who trade with a considerable one. . . . The privileges
of graduation, besides, are in many countries . . . obtained only by attending
the lectures of the public teachers. . . . The endowment of schools and
colleges have, in this manner, not only corrupted the diligence of public
teachers, but have rendered it almost impossible to have any good private
ones." -- Adam Smith, The Wealth of Nations, Book V, Part 3, Article II (1776)

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mnemonicsloth
FTFY:

"Why Companies That Deliver Incremental Improvement To Educational Services
Already Provided Free To Most Rich-World Citizens Do Not Generate Sufficient
Returns At Scale To Justify VC Investment."

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Irfaan
Every time I think about the education space, I think back to a couple of
Steve Krenzel's posts about his startup's experience.

• <http://news.ycombinator.com/item?id=1343380>

• <http://news.ycombinator.com/item?id=1343564>

Quick summary: Union politics can rear its head in unexpected ways. :(

There's probably good money to be made in this space. Goodness knows there's
plenty of low-hanging fruit. But you may run-up against some terribly well-
entrenched opposition.

------
jxcole
This article basically centers it's argument around the fact that people in
small town america don't need an education to survive. With increased
automation and robots, that is quickly changing. I bet in 30 years we'll see a
complete shift in American culture where education is absolutely necessary
just to survive.

~~~
potatolicious
The _reality_ will change in America long before the _culture_ will. The Asian
obsession with education is ingrained from literally over a thousand years of
systemized, central testing. I have my doubts that The American middle class
(or, those who were once the middle class) will go from borderline anti-
intellectual to embracing the need for education, in a mere 30 years.

~~~
briandear
That happened with exercise. Suddenly, in the 1960s and 1970s fitness became a
massive priority for millions of Americans. The paradigm shift happened almost
immediately. 50 years ago you would only work out if you were an athlete or a
soldier. A value was placed on wellness much like a value will eventually be
placed on education. Also watching parents sit in unemployment lines because
the factory closed is serving as a wakeup call to many people. Don't
overestimate the Asians either -- their concept of education is quantitative
(i.e how high we're your scores or how many vocabulary words did you learn)
while Americans tend to be more qualitative. There's a reason innovation in
places like China depends on copying everyone else. What major startups in
China have been built based on an original idea? Very very few. There are more
successful startups based on new ideas in the Bay Area than in the entirety of
China. The successful Chinese companies are almost always rehashed versions of
American products. Education isn't the driving force behind success in China
-- at least not Chinese education.

~~~
godarderik
> A value was placed on wellness much like a value will eventually be placed
> on education.

Then how are obesity rates at all times highs?

~~~
ww
The diet changed, and more then compensated for the exercise change.

------
ams6110
My view is a bit different: education companies don't succeed because they
don't have a market. People who are motivated enough to actually engage in
online education can do it for free (MIT courseware, as one example). People
who aren't, won't sign up. Or if they do they won't stick with it. So the only
way to make money in online education is to appeal to people who won't ever
really benefit, and take their money.

~~~
trevelyan
I run an education company in the consumer space.

Slight disagreement on the quality/cost problem. The big challenge isn't
having a market. One of the reasons there is so much competition is that
people will look at the leading players and think, "if they can sell that for
$500 then I can make a lot of money with a better and cheaper product." This
encourages a flood of really low quality education products that saturate the
market and create a barrier to entry for new startups.

The thing most founders don't realize is that most of the revenues from high-
priced products are used to fund advertising and customer acquisition
strategies, so competing on price is very difficult because - ironically - it
hurts your ability to scale in the short-term. This makes bootstrapping tough
because if you charge the prices necessary to get users you have to compete at
the same level of quality as the established players, while if you charge less
you will have trouble getting users. Meanwhile, the extreme competition makes
SEO near impossible (our organic search figures are dismal - our growth is ALL
word of mouth).

This is why there is so much snakeoil in the industry: distribution trumps
quality. The companies that survive tend to be the ones that take a shotgun
approach to maximizing visibility rather than actually focusing on how to
provide a better education. I personally believe focusing on quality at low
cost IS a winning approach because once you achieve dominance you undermine
the pay-to-advertise business model, but you have to figure out how to cover
your costs and grow into that position organically. And this is simply not
possible for startups that have expense structures that require them to get
funding.

I've been told by public listed companies not to enter our market because they
were going to own it in X years by giving away both the cow and the milk. I've
seen competitor after competitor flame out because they thought getting users
would be easy, produced crap and discovered that no-one came. But if you can
produce something that people use and care enough about to help spread word,
you _can_ do it.

------
MarkPNeyer
a friend of mine has an education startup that's doing quite well, considering
she spends maybe a few hours a month it.

they offer dance lessons, after school at elementary schools, or during the
day at preschools. depending on the school, they charge the parents of the
children, or they charge the school directly. the money they earn is more than
enough to higher dance instructors to teach for them and to pay their
overhead.

i'm talking to her about hiring programmers to come in once a week and teach
the kids algorithmic thinking - i can imagine a ton of parents who'd be
willing to pay $10 a week to help their kids learn to program. if you teach a
one hour class five days a week, and each class has 30 kids, that's $1,500 a
week.

most of the thinking in this space - especially on getting more people into
programming - is way too focused on people in high school and early college.
at that point, their impression of programming is mostly set. if you want to
really change the world, you've got to start with they're still excited about
learning and too young to worry about being cool.

~~~
deyan
Note that the article is talking about VC-scale (think 10s/100s of million in
revenue).

------
droithomme
He makes the claim: "Well educated people think about education as an
investment." He later says: "The average, middle class person thinks about
education as an expenditure, not an investment."

Put together he is claiming that middle class people are not, on average, well
educated. There is also an implication that lower class people are not well
educated either.

We are left, by inference, with the claim that it is only the upper class who
is well educated. Perhaps we should define what it means to be well educated
before proceeding or accepting any further claims in the article.

~~~
njharman
You dropped "well". Well Educated and Educated are not equivalent.

Educated is Univ KS BSCS I got for $600/semester

Well Educated is MIT Masters of CS which costs what $10's of thousands

~~~
tomkinstinch
I would argue that being well educated is not about the name of the
institution, but the breadth and depth of knowledge. A master's degree in CS
from a top school does not make you well educated without the insight of how
to apply it. That insight comes from more broad study in humanities and the
arts.

~~~
Locke1689
No, in my experience it's mostly about the competence of your peers and the
expectations of your professors. Decent schools teach you about operating
systems. Great schools make you write an operating system and don't care when
you bitch that it's "too hard" and takes 20 hours a week for that one class.

~~~
tomkinstinch
Mastery through rigor is one interpretation.

For me being well-educated is about expanding one's scope of knowledge beyond
a myopic mastery of a particular niche to an understanding of the power and
potential of their craft, in the context of current society as well as
history.

How can I use what I know to improve things, and what have others tried
before? What knowledge can I borrow from other fields to be more effective?

------
ainsley
Just a couple of notes on K-12 public education spending, for additional
context: (1) The vast majority of the public funds go to teacher salaries and
benefits. In most districts, as little as 5% of funds are available for new
technology, pilot programs, or anything innovative. That said, small
percentages can go a long way. New York City, for example, has an annual
budget of ~$24 billion. (2) Per student funding is a complex mix of federal,
state, and local dollars. Federal dollars are designed to even the playing
field, while local dollars exacerbate socioeconomic differences. The lack of
transparency around these formulas is a significant barrier to disruption--
many families don't have an accurate picture of how their school's resources
compare to the resources of schools in the town nextdoor, which would be a
first step toward starting to think about what your money should really be
getting you. Part of the reason the school choice movement has been so
powerful is that it sheds light on per student funding. With the increasing
number of blended/ hybrid learning options, I'm curious to see whether there's
a push to give families even greater control over the per student dollars
allocated to their children. If you can take your child's ~$10-13K and go to a
charter school, why can't you decide to dedicate half the funds to online
courses and half to live instruction?

------
jeffreymcmanus
Anytime anyone advises you that something can never work, you should run
screaming. "Never" is an extremely long time.

First of all, what's being referred to here as "education" is really dozens of
different categories of products -- it's very challenging to generalize about
all of them.

Secondly, the author asserts that building a meaningful education business
will take 20 years. It's interesting that he makes that assertion since he
didn't spend 20 years on his own education business. But consider that _every_
meaningful innovation always seems like it's 20 years away. (Indoor plumbing
probably seemed at least 20 years away the day before it was invented.) But
then, as soon as something is invented, it immediately seems obvious and
commonplace. That's how innovation works; that's why it fascinates us.

The big problem with education is that most investors work on pattern
recognition, which is to say they want to see some variant of something
they've seen before. So they fund shitty businesses that really act more like
media companies or software companies because they think that's how they'll
achieve scale. And it's unsurprising that students are indifferent, because
students want to be _actually educated_ and your highly scalable education
business essentially rickrolled them.

~~~
americandesi333
I couldn't agree with you more. What you just said reminded me of how IBM
first reacted to personal computers. The crux of innovation is disrupting the
existing model. Thats what Apple did with its iPod and iTunes product.

The author has mentioned very few education companies outside of the
standardized tests/textbooks/tutoring model. Companies like Wireless
Generation, Khan Academy, P2PU are the ones that are really disrupting how
education is delivered. Another education company called Zinch which was
purchased by Chegg turned the admissions process on its head. These are the
type of innovations that education industry will have. It will be sad if we
all sit around with our arms crossed thinking that it can't be done for the
next 20 years because the technology is ripe and so is adoption...

~~~
jeffreymcmanus
It's not at all clear to me that Khan Academy is really "disrupting
education". They may be awesome and all, but when an industry is disrupted
something more fundamental is at work -- other businesses are displaced and
shut down, people lose their jobs, and billion-dollar market segments get
turned into million-dollar market segments (or eliminated completely).

To compare, look at what's happening in the music or book industries right
now. It's hard to find a retailer that sells CDs today because that business
has been disrupted.

It's far from clear to me that KA is actually having that "disruptive" effect,
or that they will be able to do that in the future.

------
michaelpinto
The reason most geeks fail at this is because they think the answer can be
found in technology, but what they always seem to forget is that at the end of
the education is about people. By the way if anyone is interested in role
model I'd suggest reading the book "Street Gang: the Complete History of
Sesame Street" by Michael Davis: <http://www.streetgangbook.com>

People tend to forget today that color TV was bleeding edge tech in the 60s
and what CTW did back then was amazing. I also think that anybody who wants to
be a CEO should study what Joan Ganz Cooney did at CTW, and more importantly
what she didn't do: She found the best creative talent out there and made it a
point to not get in the way. She also made it a point to not base her
organization in Hollywood, and because of many of her choices kids today are
still watching and learning from Sesame Street.

<http://en.wikipedia.org/wiki/Joan_Ganz_Cooney>

~~~
ippisl
We're sesame street creators the first to use content testing(borrowed from
direct mail ads) in a systematic way for children TV ? wasn't this the source
of they're success ?

------
deyan
Thank you for this essay - I spent a lot of time researching (higher)
education and had similar conclusions - although certainly not as
substantiated by experience and well put.

------
JupiterJazz
It seems that they are serving the wrong customers. Most edu startups try to
sell to parents, teachers, or administrators. Sell directly to the student.
Thats one reason I think Khan Academy is having such success.

What I would like a startup to offer me is this: Buy my product/service,
invest your time and energy as well as you can learning the subject, and in
return we will make you as employable as humanly possible.

Maybe work backwards from that. Just my 2 cents.

~~~
avichal
Unfortunately students have the same mentality and have no buying power on
their own. Khan Academy has built a great brand but is free. The demographic
analysis in the article supports the thesis -- in my unbiased opinion ;-)

~~~
paulgin
This is an easy excuse but it's dead simple wrong. Students represent a huge
amount in spending power, with a huge percentage of that being discretionary
spending on non-essential items. Students spend money. Lots of money. Parents
spend even more. A lack of a market isn't the reason ed-tech startups fail.
It's lack of value.

~~~
avichal
That's the point of the post. There's lots of money out there. But it gets
spent in ways that are different from what the typical entrepreneur and VC
expect it to be spent on. The dynamics of how purchasing decisions are made
are around cost, not quality.

Let's talk data. How many students spend money on educational services? 15% of
students take SAT or ACT prep outside of school. By the time a student is 16
and has some discretionary spend and has some influence of a parent's spend.
If students took their spending power/influence and prioritized educational
spend you would have a lot more than 15% of students getting test prep outside
of the school.

Consumer spending is huge. Consumer spending on education is large. Consumer
spending on education where the primary driver is quality is much smaller.

------
nordsieck
Counter example: The Great Courses nee The Teaching Company.

There seems to be a reasonable amount of interest in what used to be called a
liberal arts education.

~~~
avichal
I do wish them the best but I don't think it's a counter example. They've been
around for 20 years, so if they are huge (I have no idea how big they really
are) then it because they stuck it out for the long term.

"The Great Courses was founded as The Teaching Company in 1990 by Thomas M.
Rollins, former Chief Counsel of the United States Senate Committee on Labor
and Human Resources."

~~~
hncommenter13
According to Forbes, the Teaching Company's sales exceeded $100M/yr as of
2010.

[http://www.forbes.com/forbes/2011/0117/entrepreneurs-
brandon...](http://www.forbes.com/forbes/2011/0117/entrepreneurs-brandon-
hidalgo-dvds-marketing-master-class.html)

[Edit:typo]

~~~
tokenadult
Thank you for mentioning the specific number for The Teaching Company, which
allows me to relate it to my local public school district. I was just at a
public meeting last week where I learned that my local school district, one of
a few dozen school districts in the suburban Twin Cities (and by no means the
largest), has an annual budget of $137 million. Other HN participants may want
to check what the budget is of their own local school district. (As an update,
a Web search I just did turned up my school district's budget documents
online.)

[http://www.minnetonka.k12.mn.us/administration/Budget/Docume...](http://www.minnetonka.k12.mn.us/administration/Budget/Documents/Budget.pdf)

On the basis of The Teaching Company bringing in less revenue than one school
district in a single state, more than twenty years after it was founded, I
would have to say that the submitted article's main point is correct, that
there isn't a lot of big money for private enterprise in education in the
United States.

Note on background knowledge: I have bought a few sets of videos from The
Teaching Company, as has my local homeschooling support group. Our local
public library system also buys them. But the local school district spends
more money in a year than the full revenue of the company even at that.

~~~
hncommenter13
I'm sorry, but I don't find that to be an instructive comparison. The money
the school district spends isn't revenue from the open marketplace, it's tax
dollars, which the law compels residents of the school district to give them.
Your school district could be the absolute worst or the absolute best in the
world, but the money they spend would be derived from the law, not from free
choice of a similar caliber (it's much easier to stop doing business with the
Teaching Company than to sell my house and leave the district).

On esimply can't compare legally-mandated, tax-derived expenditures to cash
freely given to a private enterprise (which is their revenue). Not only that,
the proper measure in both cases is outcomes per dollar spent, not total
expenditures. For the business, this is return on equity. For a school
district, it's educational outcomes vs. dollar inputs.

This is not to say that every company in the education sector is a great
business; there are lots of so-so and outright horrible businesses in many
sectors of the economy. But comparing a private enterprise to a tax-supported
government entity doesn't make that point clearer.

------
chrisabruce
Great article! I have a rabid passion about this space and have been thinking
and researching it for last 2 years. The five minutes I spent reading this has
taught me more about the space than the last 2 years. I also think this
resonates with me because it just shows how hard it will be to be disruptive
and how jacked up it really is in the US.

Thanks for posting!

------
DjMojoRisin
The most important thing that I got from this article was the realization that
for most people to live an average life where they are not "screwed" they
don't need a very high quality education; an average education which provides
good value for money will do just fine.

~~~
briandear
The key isn't making education 'great' (whatever that means,) but making it
easier. Edu-products need to be simple. Try getting a class of 9th graders to
login to Basecamp and you'll see what the problem is..

