Compared with other industries, companies working in education have more trouble raising capital for research, product development and other key tasks. One reason for this is that these companies must sell their products and services to a highly fragmented customer base – thousands of school districts, each with its own decision-making structures, budget pressures and long sales cycles.
To scale, solution providers need a large salesforce to reach each school / district
- There are a lot of decision-makers, each with individual authority: 50 state education agencies, 16,000 districts, intermediate units in most states and 65,000 schools.
- Incumbents with relationships and economies of scale across a wide range of products are difficult to complete with - three publishers control 85% of the textbook market.
- To better amortize the cost of going to market, startups tend to build comprehensive suites of products that attempt to solve multiple challenges.
- Districts often make decisions to purchase solutions independently, without consulting other districts.
- Newer solution providers have difficulties scaling as each sale is made independently; in addition, the number of decision makers within each district prolongs sales cycles.
As part of each sale, buy-in is required from a broad array of stakeholders
- Sales process involves winning support of policy makers, school boards, CIOs, principals – most of whom are authorized to say “no” but have no budgetary authority to say “yes.”
- Getting buy-in from all these stakeholders results in a lengthy sales cycle – often between 8 to 18 months.
- Superintendent tenures often less than 5 years, but most innovations take 1-2 years to create and 3-4 years to refine. Innovative projects are rarely considered a first year priority and tend to launch as the superintendent’s term ends.
Long timetables and meager exit options decrease appeal to VC firms
- Education sector accounts for only 0.9% of venture capital transactions and 0.3% of total public market capitalization, despite being 18% of the US GDP.
- Long sales cycles mean investors often wait 5+ years before seeing a meaningful exit.
- M&A deals are more common, but not particularly lucrative: of the 596 K-12 education company M&A deals between 2001 and 2011, only 18% were worth >$50 million.
Solution providers are experimenting with several types of business models to access the market
Large field sales teams: Traditionally, the large publishers price their products on a per seat basis and build large sales teams to access buying centers at the district level.
Inside sales model: Dreambox prices its product under $10,000, which is within most school principals' discretionary budgets; tele-sales teams sell the cloud-based product over the phone.
Freemium model: Bloomboard provides its product to teachers for free and monetizes it based on any professional development content teachers purchase.
New Schools Venture Fund is a non-profit venture fund that has invested nearly $180 million in more than 100 non-profit and for-profit organizations since 1998
Imagine K12 is an education startup incubator that puts founders through an intensive 3-month workshop to take their companies through the early stages