08 February 2013 #Education
Education is big business. The last two decades have seen rapid growth in the for-profit education industry. Apollo Group, a Nasdaq listed for-profit education industry heavyweight which is also part of the S&P 500 group of companies, and the owner of such brands as the University of Phoenix in the US and BPP University College in the UK, saw consistent exponential growth from its inception on Nasdaq. Kaplan, another for-profit education provider wholly owned by the Washington Post had revenues of US$2.5b in 2011, whilst DeVry Inc., listed on the NYSE, had a market capitalisation of US$1.62b at the time of writing. The sheer scale of these three examples serves to show just how big the industry is.
However, the aforementioned organisations have recently announced significant restructurings involving closure and consolidation of campuses, citing lower registration demand amongst a host of other factors. This should come as no surprise considering the combination of the current economic climate resulting in public cutbacks in education spending, rapidly increasing university tuition rates and unsustainable levels of education debt, a crackdown on so-called for-profit education institutions in the UK, and the large number individuals connected online which continues to grow, not to mention the scathing report on for-profit education institutions by the US Senate. The result is a number of start-ups attempting to use innovative technology to capitalise on this flux, and in the process revolutionising the industry.
According to SeedTable, a platform based on underlying data from Crunchbase which facilitates analysis of start-ups across a range of sectors, the online education space has been growing exponentially. The number of businesses founded in the sector was relatively constant from 2002 to 2006, averaging nine annually. Since 2006, growth has been exponential, with 153 businesses having been founded in the sector in 2011. According to Boundless, an online learning start-up, 236 businesses were founded in the education sector between 2002 and 2012, receiving US$2.8b in total funding with an average round of US$5.6m. The number of VC investments in education is also growing exponentially, with 23 made in 2002, 89 in 2011 and 114 having been projected for 2012.
The investment community is clearly showing interest in the online education sector because it boasts two fundamental characteristics: a massive potential market underpinned by factors suggesting the need for innovation and a potential to disrupt the status quo of an existing industry. However, the nascent nature of the disruption still leaves some unanswered questions, creating difficulty in picking winners. To understand the nature of these problems and how they arise, it is useful to explore the landscape of the types of businesses and the products and services on offer.
There are three main stakeholders in the education sector: the institutions, the teachers, and of course the students. Some businesses such as Chegg and Boundless are developing services around content delivery, with Chegg providing textbook rentals and Boundless curating open and free content into an online learning environment. Others focus on more structured learning by providing students with online courses. Coursera, for example, works with universities to bring their courses online whilst Edx, a not-for-profit collaboration between MIT and Harvard University, is bringing their courses online to the masses for ‘interactive study through the web’. Codecademy and Bloc are examples of businesses specialising in a specific topic; both are aimed at those wanting to learn how to code. Udemy goes one step further by opening up the provision or consumption of online courses to anyone.
Some pundits argue that the majority of start-ups in the education sector are doomed to fail. Firstly, whilst many of these businesses are certainly gaining early traction, few have developed business models which will generate real value in the form of sustainable recurring revenues. The land grab approach, where businesses come to market to gain as many users as possible and then figure out a business model, is of course unsustainable so success will depend on a business model and monetisation strategy. Codecademy, for example, generated huge interest upon launch, but has yet to develop a concrete business model and its own investors have admitted that user retention is relatively low. Secondly, the sector is subject to political pressures, potentially lengthy budget cycles and may be reticent to adopt new technologies and offerings. Some businesses are approaching the sector having taken both factors into account. Coursera, for example, though yet to generate noteworthy revenue despite attracting US$22m in venture funding, has been wildly successful in generating interest from universities; the business has plotted a path towards revenue generation which involves all three major stakeholders in the education space.
Public spending on education in 2011-2012 was approximately £90b in the UK alone. According to the Institute for Fiscal Studies, this figure is expected to fall by 3.5% annually until 2014-2015. These factors all suggest a large global market desperately in need of intervention through private sector innovation.