6 Things to look for when investing in EdTech startups

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Audrey Watters has a great piece this week in her Hack (Higher) Education column Top Ed-Tech Trends of 2012: The Business of Ed-Tech

What resonated most with me is her assertion that:

“…for all the finger-pointing about the flaws in the business models of higher education, it’s not clear that the business models of many education companies, particularly startups, will fare that much better.”

Watters worries about the possibility that “education technology startups [are] overhyped and overvalued?”

How should investors evaluate opportunities in the edtech startup world? What factors would I look for if I were to advise investors in this space?

6 Things To Look For When Investing in EdTech Startups:

1. Favor an Hourglass Approach: Successful edtech startups will be targeted to solve specific problems. An effective strategy will be supporting services or products that serve either the highest end or the lowest end of the education market. Stay away from the middle. For instance, low-cost education and credentialing startups will meet a huge unmet need amongst learners who are currently shut out of the higher ed market. The non-consumers. This group will not generate much revenue per customer, but platforms or services aimed at this group can operate at scale and therefore have huge potential. Serving the education needs of high-net-worth-individuals (HNWI’s – a person with a net worth of over $1 million) also represents a big and growing opportunity. Edtech startups needs to learn to differentiate by income and focus on meeting specific and specialized needs.

2. Big Data Is Not a Business Model: Beware of any startup that equates the amount of data it collects with a plan to make money. Big data is a buzz word, not a business strategy. Education platforms are terrific at creating huge numbers of data points – and the cheap processing power and storage capacity of cloud services such as Amazon S3 make for compelling stories about all the wonderful ways that this data can be analyzed. Be skeptical. If the data serves a specific need, solves a specific problem (that people will pay to be solved), then wonderful. If not, be prepared to walk.

3. Beware of EdTech Startups Built on “Mobile” or “Social” Buzzwords:
Social tools are a feature, not a business (and no, you will not make money from advertising). Edtech platforms need to be on mobile devices, but this is more an expense than a path to profits. Social and mobile are tools. They may add to the product or service on offer, or they may distract.

4. Fund Infrastructure: I think that the money to be made in edtech will in companies that figure out how to lower costs for colleges and universities. Figure out where the campus infrastructure money is being spent, and offer a platform that provides that same service for less money. Look at the data center. At storage. At security. At servers and server management. At backups. At communications. At the applications that are still housed on campus. This approach requires a really good understanding of the current campus technology spend, and the ability to form long lasting relationships based on trust with campus tech decision makers.

5. Back Teams Looking to Become Middle Income Slowly: The best edtech startups will consist of people looking to build a long range career working at the intersection between education and technology.Edtech capital must be patient capital, and edtech startups should be in this game for the long run. Sell cycles in higher ed are long. Sales are built on relationships. People working in edtech should be in the business because they love education, and want to spend their lives in the sector. Everyone needs to pay the mortgage and fund the 529 accounts, but the motivation in edtech should be about the education and not about the payout.

6. Fund Partnerships:
The name of the game in edtech will be for-profit / non-profit partnerships.Businesses that allow schools to do things that they would not be able to do without the expertise (and often investments) of a for-profit partner.These sorts of partnerships require startups to be staffed by people with good higher ed networks and a strong understanding of higher ed norms and values.

How would you add to this list?

ps. World Education virtual campus meets the most important criteria!

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