I don't often get to write these words, but there is a new must-read blog post on educational technology by a venture capitalist. Rethink Education's Matt Greenfield argues that there is no generalized bubble in ed tech investment; rather, the problem is that the venture community has a habit of systematically betting on the wrong horses.
It's worth noting that Matt is not your typical VC. For starters, he doesn't live in the Valley echo chamber. Perhaps more importantly, he has a background as an academic. He has a PhD in English from Yale, taught at Bowdoin and CUNY, and taught graduate classes in literature to teachers from the New York City public schools. As such, he has an unusual perspective for an ed tech venture capitalist.
Matt uses digital textbook platforms as his example of the problem he wants to highlight:
What type of ed tech have venture capitalists approached with the greatest enthusiasm and the largest piles of cash? The answer is new textbook solutions, including digital textbook platforms like Kno and renters of physical textbooks like Chegg, which just went public. Venture capitalists have put over $500 million into just the top ten companies in this sector....
I talked to the CEO of an academic bookstore company recently. How many digital textbook platforms would you guess that his stores handle? Five? No, more than that. Ten? Nope, guess again. Twenty? Still too low. The answer is forty-two different digital textbook platforms. Forty-two. Now try to imagine each of those textbook platform companies pitching a book store. Or an author. Or a publisher. Or a venture capitalist. “Choose my platform, choose me! Our platform is totally different!” How many of those platforms does the world really need? How many of those platforms can make money? What do you think the meaningful differences between those forty-two platforms might be?...Meanwhile, even the century-old publishing incumbents are moving away from book-like things to adaptive courseware: learning objects that simply will not fit into the wrappers being built by companies like Kno.
So there is a bubble in venture funding for education ventures that are obsolete at birth. Meanwhile, there are large opportunities in areas where few venture capitalists will invest.
This is a fascinating case study. Why would VCs, with their much vaunted drive for innovation, be so taken with the idea of rebuilding an aging instructional modality (i.e., the textbook) on a digital platform---particularly when, as Matt spells out in detail in his blog post, it's clearly a bad bet for a lot of reasons? It's worth unpacking this a bit to get at the underlying pathology.
A big part of the problem is the Valley's obsession with disruption. These days, "disruptive" and "innovation" seem to always come together in the same sentence. It's a bit like "big galoot." Theoretically, "big" is a modifier for "galoot." But you never hear people talking about small galoots, average sized galoots, or galoots of indeterminate size. In modern common usage, galoots are always big. "Big galoot" has pretty much become an open form compound word, like "post office" or "real estate." But "disruptive innovation" is not a compound word. Disruptive innovation is a particular kind of innovation, and a fairly narrow kind at that. Specifically, disruptive innovation is a phenomenon in which a new market entrant can overtake a leader in an established market by offering cheaper and simpler solutions. It's important to remember that some of Clayton Christensen's seminal examples of disruptive innovations were steam shovels and disk drives. This is not the same kind of innovation that produced the iPhone. It's essentially about identifying the slow fat rich kid and taking his lunch money. To be fair, it's not that inherently mean-spirited, because presumably one takes the rich kid's lunch money (or market share) by providing solutions that consumers prefer. But the point is that disruptive innovation is generally not about solving new problems with brilliant out-of-the-box ideas. It's primarily about solving old problems better because the old solutions have gotten overbuilt.
Who are the slow fat rich kids in the education markets? The textbook vendors. They make tons of money, they are clearly dysfunctional, and they are having trouble adjusting to change. It should be easy to take their lunch money, the theory goes. And since nobody really likes textbook vendors, you get to feel like a hero. Plus, it shouldn't be that hard because disruption. Disruptive innovation, valid though it may be as a theory for explaining how established market leaders get upended, also encourages a certain intellectual laziness if you start to think that a disruptive innovation is like a big galoot. In that worldview, all you have to do, in any case, ever, is deliver a simpler or cheaper solution, and you win. That's what Chegg was all about. The used book market was eating into the textbook publishers' market; what if we could make buying and selling used textbooks easier? Disruptive innovation!
Ron Paul and Mrs. Paul Capitalism
Another reason that Chegg was attractive to VCs is that the used textbook market is targeted directly at students and doesn't require any involvement with faculty unions, departmental committees, or (heaven forbid) governmental regulation. There tends to be a lot of libertarian chest thumping around this approach in the Valley. In Matt's post, he quotes noted investor Marc Andreessen as saying,
I wouldn’t want to back a business that’s selling to public schools or characterized by public financing, unions, or government-run institutions. Those institutions are incredibly hostile to change.
The narrative here is that change equals innovation and therefore no self-respecting change agent (like a VC or a startup) would want to be held back by any institution that makes change slower or more difficult. But the truth is more mundane and less idealistic. The truth is that it's just harder to run a company that sells to institutions with complex purchasing processes than it is to run a company that sells to individual consumers. Famed investor Peter Lynch once advised, "Invest in businesses any idiot could run, because someday one will." Under this theory, it is safer to invest in a company that sells fish sticks than it is to put your money in one that sells airplane navigation and safety devices that requires more skill to run well because the product has to be shepherded through an FAA approval process. This is a particularly useful maxim when you invest in startups. While I have met very few ed tech entrepreneurs who are idiots in the shouldn't-handle-sharp-objects sense, I have met many who are idiots in the I-just-hit-puberty sense. They tend to be extremely smart young people who nevertheless lack critical experience for certain kinds of business-building. Finding a 21-year-old who understands how to sell to a university system with a state-mandated procurement process and no single clear decision-maker is hard. Finding a 21-year-old who understands how to sell to 19-year-olds seems easier.
A Toxic Combination
The combination of the obsession with disruption and the phobia of institutions is a particularly bad one for the education markets. When I say that, I don't mean that it is harmful to education (although that is probably also true). What I mean is that it leads to consistently unprofitable investment decisions. For Exhibit A, let's return to the case of Boundless, which I wrote several posts about a while ago. Now, despite what some in the industry think, I do not particularly enjoy overtly bashing companies, even when I think they deserve it. But since my diplomacy in those posts appears to have been lost on at least some who read them, I shall abandon all subtlety here:
I think that Boundless' entire business is specifically designed to attract investment by appealing to investors' prejudices. (Who's the slow fat rich kid now?)
Update: Upon further consideration, I softened the language of the above paragraph a bit. My point is not that I think Boundless deliberately deceived anyone but rather that I think they designed their company around ideas they thought investors would like, instead of around a sound product concept.
This is a company whose pitch was that they are Cheggier than Chegg. "It's like Chegg, but with no warehouses! We're disrupting the disrupters!" They came up with a strategy that makes a show of punching the slow fat rich kid---the textbook publisher, not the VC---in the face. Yay disruption! They also made as conspicuous an end run around teachers and institutions as possible. They didn't just sell a used version of the textbook that the teacher required (which the teacher probably wouldn't care about). Nor did they attempt to persuade teachers that they offer less expensive but high quality alternatives the way, say, Lumen Learning does. Instead, they marketed what amounts to the CliffsNotes of the textbook directly to the students. Take that, you change-hostile, union-joining classroom bureaucrats! I don't think it would be possible to come up with a business plan that is less subtle about playing to VC prejudices. It's like the Sand Hill Road equivalent of an email from a Nigerian prince.
But what is their business, really? Boundless basically sells Rolex knockoffs in Times Square. OK, I'm not being fair. Most textbooks are hardly Rolexes. Really, Boundless is selling Timex knockoffs in Times Square. There is no innovation in this disruption. In a market that is overrun by e-book platforms and in which downward price pressures are causing low-cost options to proliferate, why in the world would any rational investor think that Boundless is a good bet? And yet, the company has received $9.7 million in venture funding.
A Better Idea
A while back, I made the following observation in the context of Udacity's fall from grace:
Silicon Valley can’t disrupt education because, for the most part, education is not a product category. “Education” is the term we apply to a loosely defined and poorly differentiated set of public and private goods (where “goods” is meant in the broadest sense, and not just something you can put into your Amazon shopping cart). Consider the fact that John Adams included the right to an education in the constitution for the Commonwealth of Massachusetts. The shallow lesson to be learned from this is that education is something so integral to the idea of democracy that it never will and never should be treated exclusively as a product to be sold on the private markets. The deeper lesson is that the idea of education—its value, even its very definition—is inextricably tangled up in deeper cultural notions and values that will be impossible to tease out with A/B testing and other engineering tools. This is why education systems in different countries are so different from each other. “Oh yes,” you may reply, “Of course I’m aware that education in India and China are very different from how it is here.” But I’m not talking about India and China. I’m talking about Germany. I’m talking about Italy. I’m talking about the UK. All these countries have educational systems that are very substantially different from the U.S., and different from each other as well. These are often not differences that a product team can get around through “localization.” They are fundamental differences that require substantially different solutions. There is no “education.” There are only educations.
I just don't see disruptive innovation as a good guide for investment in education. And for similar reasons, I think the notion of avoiding institutional entanglements is pretty much hopeless, since the very idea of education is inextricably bound up in those institutions. Disruptive innovation and direct-to-consumer are both investment strategies that are designed to avoid complexities that lead to investment risk. But in education, complexity is unavoidable, which means strategies that attempt to avoid it usually result in risk-increasing ignorance rather than risk-avoiding safety. And as Warren Buffett said, "When you combine ignorance and leverage, you get some pretty interesting results."
Buffett also said, "I am a better investor because I am a businessman, and a better businessman because I am no investor." Call me old-fashioned, but I believe that if you want to find a good ed tech investment, you have to understand what the company does. In the real world, not in some Ayn Randian fantasy where technology unleashes the power of the individual. How will this product or service impact real students? Who would want to buy it and how would it help them? Very, very often, that will mean dealing with companies that sell to institutions or deal with institutional politics, because that's how education works today in America and around the globe. If you want to find a good business to invest in, then think like a consumer. Better yet, think like a parent. Ask yourself, "Would my kid benefit from this? Would I like to see her have this? Would I, as a parent, take steps to make sure she can have this?" These are often businesses that can't be run by any idiot, which makes them risky. But they are less risky than giving your money to a Nigerian prince.