Caleb Eliason, managing partner, VERSE CAPITAL PARTNERS.
Did you know that in 2015, the apex of private investment in U.S. K-12 Education Technology(EdTech), Uber alone raised 15.3x more private capital($8.4B per Craft)than all 118 U.S.K-12 EdTech investments combined ($548M per EdSurge)?
Once the Finest Education System on Earth
The Bureau of Labor Statistics (BLS) doesn’t say that it “might be” or that it “could be”, instead they say that it “is” a primary driver of economic growth, stability, and so on. I tend to think that they are pretty serious about their statements. So, if we all know how vital U.S. Public K-12 Education (K-12) is to our future and everyone is aware that it has fallen from #1 globally to #36 (image below)during the past four decades, then why aren’t we doing anything and everything necessary to change it?
Education vs. Wealth Inequality
Let’s have a look at how corrosive it has been to most of America and our competitiveness. This is meant to make you feel uncomfortable because, as rational people, you should see that this isn’t sustainable, and something needs to be done. Below, the average U.S. Reading/Verbal SAT Score vs. U.S. Wealth Inequality. It shouldn’t come as a surprise to see that as SAT Scores fell, Wealth Inequality climbed, and it is now exponentially higher than ever before in America’s history.
K-12 Education Was Left Behind
The Digital Revolution transformed the economy, and other industries were able to adopt technology through waves of innovation fueled by entrepreneurs and private investors consistently producing Return on Investment (ROI). But investments in K-12 haven’t consistently yielded the same ROI, and it was left behind. Now,K-12 is out-of-sync with the 21st-Century’s Digitalized Global Economy, and America’s Labor Force hasn’t been getting 21st-Century skills and knowledge. As a result, the U.S.’s Labor Force Participation Rate has also been in decline for decades, falling from 67 percent to 61.7 percent in the last 20-years, which means 38.3 percent(more than 1 in 3) working age, physically and mentally capable American people are unable to find work in the modern economy(see image below). That’s a wildly different picture than what the media & politicians were painting using the ultra-deceptive “unemployment rate” before the pandemic.
America is Falling Behind
In 2008, Obama said, “Nations that out-educate America today will out-compete America tomorrow.” China aims to be the dominant global power, and now America isn’t just competing against a nation many times larger with many times more natural resources but a nation that’s out-educating America and rapidly building momentum. For instance, per Tech Crunch’s article: “In venture capital, it’s still the age of the unicorn” (a private company worth $1B+), in 2013, China had just 3 unicorns (7 percent of total),and the U.S. had 39 (93 percent of total). But China had the #1 Education System and, by 2018, the U.S.’s dominant share of unicorns had been eclipsed by China, falling to 40.6 percent while China grew to a staggering 149 unicorns (41.5 percent) from just 3 (see image below). China’s prioritization and investment in Education is paying big dividends.
What We Know
There are many variables and scenarios that can’t be covered in a short article. I’m also not proposing that private investment into K-12EdTech is the one and only solution, but it is the most logical solution. Here’s the logic:
• 50-years ago was the 1st large-scale test of Arpanet, aka the internet. 50-years prior, many still used a horse and buggy for transportation. 100-years prior to that was the Industrial Revolution, when Public Education, as we still know it, was designed. Factory owners required docile, agreeable, punctual workers to do what they were told, and sitting in a classroom all day was good prep for that type of Labor Force
• Public Education exists to supply a nation’s economy with a Labor Force that has skills and knowledge that are aligned to the economy’s needs
• The Digital Revolution was fueled by private capital investment and entrepreneur-created technology innovation. Let’s call it America’s Ingenuity Engine
• Waves of technology innovation transformed almost every industry in almost every nation. The economy evolved, and so did we as the Information Age took shape
• But U.S. K-12 Education didn’t evolve or adapt, it’s fundamentally the same as it was 200-years ago when it was designed to support the Industrial Revolution
• It’s out-of-sync with the 21st-Century Global Economy and the people it exists to support, unable to prepare a modern Labor Force with skills and knowledge needed to compete on a global stage
• Missing link = private capital investment +entrepreneur created technology innovationaka America’s Ingenuity Engine
• Notice the similarities between an assembly line and K-12 now? Diploma vs. stamp on the forehead?
• The 21st-Century Global Economy values individualization, personalization, and specialty expertise. But assembly lines and universal education aren’t conducive to a personalized learning experience because it doesn’t scale
• Technology can deliver a personalized education at scale, adapting to a student’s needs and adjusting to weaknesses, personalized to fit strengths and interests, helping them reach their highest potential vs. taking general classes for a general diploma, then wandering around a campus accruing interest while taking “generals” and graduating with a degree that doesn’t translate into a career, leaving them no way to service their debt
• It seems pretty clear to me that we need to mobilize America’s Ingenuity Engine ASAP
Return on Investment
So, let’s assume that private investment in EdTech is the best way to bring K-12 into the 21st-Century. Unfortunately for America, private capital doesn’t flow to social need or economic vitality; it flows to ROI and that’s it, but something has to be done. The government has had more than enough time to fix it, expecting it to change now is the definition of insanity.
Private investors can have their cake and eat it too. ROI, economic sustainability, and a hedge against recession while insulating every other investment through K-12 EdTech investments. Now let me get to the part of the story where I’m in it and, hopefully, I can share a few ideas that’ll generate bigger, faster, and more frequent ROI while making a greater impact on K-12 Education.
But first, you should know that right now is the best time for investing in K-12 EdTech.
1. Computing Devices: Moore’s Law; prices of computing devices fell precipitously as their power grew exponentially. Now devices are used pervasively
2. The Cloud: Before the Cloud, locally installed data centers, servers, networking, IT staff, etc. were needed to support devices in 130,930 schools. This type of technology deployment would have increased K-12’s budget by hundreds of billions. It simply wasn’t even an option
3. Broadband: Without broadband, the Cloud and devices are useless, but today broadband access is pervasive too
4. COVID 19: The wake-up call. The pandemic is forcing America to seek alternatives, creating urgency, awareness, and helping teachers/educators accept EdTech’s value and potential. Before, many were afraid of the change technology is capable of. Now, most embrace it & they are one of the most vital components, they are the keystone in the EdTech archway that’ll bridge our education system into the 21st-century. They have more control over the speed, efficacy & sustainability of EdTech’s adoption than almost any other participant
Here’s my part of the story and for the record, this first idea can be used in almost any industry. Revenue is universally the key to maximizing ROI and minimizing risk. In 2012, I was the 1st manager & playbook author for Boom Startup, the 12th most successful Technology Accelerator in America, as per TechCrunch, MIT, and Darden. An Accelerator stimulates startup growth to a portfolio of companies or a “cohort” by supplying them with capital, training, mentoring, and other resources over 12-16 weeks. During the last week, accelerators host “Demo days”, where each startup get’s 8-10 minutes on-stage to pitch 100’s of accredited private investors. While managing Boom Startup, it occurred to me that I’d never heard of an accelerator or early-stage investor that specifically focuses on accelerating Revenue with a deliberate & repeatable process, leveraging concentrated capital, expertise & other resources to rapidly generate sales. But from an investor’s perspective, there’s no other single element that creates more value across the whole business than revenue. For example, Revenue does the following:
1. Magnifies each company’s valuation by a multiple (EV/R)
2. Increases the speed to market, market penetration, cash flow, therefore speed to ROI, extending their runway, and reducing each investment’s risk
3. Lowers the cost of capital which minimizes dilution and more
4. Increases the frequency of successful investments vs. failures, reducing portfolio risk
Contrary to one of asset management’s foundational pillars, Post-Modern Portfolio Theory, which assumes that less Risk warrants less Return and vice versa, when Accelerating Revenue and magnifying Returns, Risk is being carved away. As Ex-Google CEO Eric Schmidt says, “Revenue solves all known problems” and Problems = Risk.
The Key Ingredients
After managing BoomStartup, I stumbled across the idea that K-12 Education in America, a $680B industry, was one of the last to adopt technology & it was obviously going to happen at some point. So, rather than just trying to raise a fund to invest in EdTech, I decided to go down into K-12 EdTech where I could develop an investment thesis from within, while intimately learning the nuances, creating relationships and much more. The ultimate goal was to find combinations of common themes or ingredients in successful K-12 EdTech companies that were missed by the failures. While many exist, some spanning beyond even Education, there are three unique ingredients in Public preK-12 EdTech companies that, in almost every case, must be present to succeed.
1. Direct Sales: Tech startups prefer freemium & other revenue models that fundamentally don’t make sense in K-12 Education vs. managing sales people and doing Direct Sales. If you think about it, freemium’s don’t easily convert into government contracts without a sales person pushing paperwork through the education system. Yet K-12 EdTech companies using freemium revenue strategies still raise investor capital, which depresses ROI &fuels the stigma.
2. Alignment to Existing Education Budgets: Products have to align to existing Education Budgets, or there’s no immediate source of revenue and going through the legislative process for budget is a no-win scenario. Navigating these budgets requires experience but once it is done, the roadmap becomes crystal clear. For instance, the size of the opportunity is defined to the penny, the company knows when to sell, where to sell, how to sell, who to sell to, who they are competing against, and so on.
3. Implementation with Fidelity: The post-sale Implementation Plan is often under prioritized, and that’s a big mistake. The Implementation Plan drives a product’s usage and if a product isn’t getting used, it’s not helping anyone, and it won’t win renewals either. Direct Sales is expensive, renewals or recurring revenue is more profitable and is vital to recovering the cost of Direct Sales. Most companies consider welcome emails an Implementation Plan, but if users aren’t told the email is coming, it may as well be spam and that is why Renewals are a pervasive problem. Based on my observations, less than 1:3 companies will win the 2nd year contract. The implementation is an investment capable of generating the greatest ROI and positive impact on our education system. But for startups stuck in tactical survival, the benefits can be too far off on the horizon to see clearly. It’s intuitive, once it has been pointed out. Implementation Plan = Usage = Engagement = Student Achievement = the Key to Renewals =Recurring Revenue =Profit = ROI. Voila!
Recession-Resistance: EdTech vs. U.S. K-12 EdTech
I cut my teeth at Goldman Sachs and left to do a turnaround during the Great Recession. After the turnaround, I was keen on finding and integrating some sort of recession resistance into the investments I worked on. I didn’t find what I was looking for until I found EdTech. Investing across EdTech would include Higher Education, K-12, Continuing Education, and so on. But if an investor focuses on companies generating revenue from the U.S. K-12 Education Budgets, the largest segment of the U.S. Education industry, wit, it creates Recession Resistance because the U.S. K-12 Education budget has grown by 2.3 percent steadily for a century (see image below). Other segments of Education introduce systematic risk. For instance, Higher Ed introduces consumer credit, discretionary income, and so on.
The Home of EdTech
If you’re looking for the right region to invest in K-12 EdTech, look no further. While I was in the trenches of U.S. K-12 EdTech as the Director of Business Development for School Improvement Network, serendipitously, my very own backyard, Utah, got the reputation for being “EdTech’s Home” (see image below).BoomStartup, the technology accelerator that I wrote the playbook for, they even ended up launching an EdTech focused accelerator. Some of EdTech’s biggest companies sprouted around me, giving me the chance to work with and learn from some of the finest people in the industry. I’m humbled and grateful to have gotten to know each.
America is at a crossroads, and our future is truly at risk. Decisions made right now will dictate whether or not America continues to be the greatest nation on earth or collapses like the 16 global powers that preceded her rise to dominance. Our destiny lies in the hands of the few private investors with capital to deploy, and I truly hope that they choose to invest in the greatest and most valuable asset there ever can or will be, America’s human capital. May God bless you and may God bless America…