August 25, 2010

Web Start-Ups Opening New Chapter in Evolving Education Sector

By Ty McMahan

When Reed Hastings isn't serving as the chief executive of online movie-rental business Netflix Inc., he volunteers at a charter elementary school, where he recently found his next entrepreneurial project.

Hastings, who also taught high-school math for three years immediately after college, witnessed children enthusiastically interacting with online math games developed by Dreambox Learning Inc. So intrigued was Hastings he bought the company in April and sunk $10 million of his money into it.

"They were addicted to it and learning a lot," Hastings said. "That's what got me interested in helping that company expand."

He's one of an increasing number of entrepreneurs and investors betting the next decade will bring about a major overhaul of the education system, driven aggressively by technology leveraging the power of the digital age.

Droves of start-ups are racing to market with new products that bring education out of the classroom and onto the Internet. They're laying the groundwork by modernizing distribution methods for education, digitizing textbooks, and creating online post-secondary programs.

"What I find interesting about education is, from a macro perspective, it's the second largest industry in the U.S.," said Alex Finkelstein, a general partner at Spark Capital. "A lot of players are moving slowly and technology is starting to meaningfully change the way education is delivered."

The potential in this area spurred education company Kaplan Inc. to start up a venture capital arm in June that will invest in start-ups building new learning technologies and online business models in the K-12, higher education, test preparation and professional-compliance areas. Kaplan, which offers its own online courses through its Kaplan University program, is already incubating Colloquy Inc., a company that is designing online education programs for universities that promote interaction between students and faculty.

Evidence proving the powerful effect the Internet can have on education is mounting. A study released last year by the U.S. Department of Education found that students who took all or part of their instruction online performed better, on average, than those taking the same course through face-to-face instruction. Those who performed best, however, were those students who took courses that mixed both online and face-to-face elements.

Realizing this, colleges have begun moving some of their courses to the Internet. Arizona State University, for instance, now serves online courses to about 3,000 students and expects the number of students and courses to increase dramatically in years to come.

"Courses we developed five years ago look pretty pedestrian," said Philip Regier, executive vice provost and dean for Arizona State's online offering. "Over the next five years we will develop courses that have much more engaging interfaces and much higher engagement. All of those things will drive what we've already seen, students spending more time with content and experiencing better outcomes."

This is creating opportunities for technology start-ups eager to help schools improve students' performance and their interaction with teachers.

Changing the Face of Teaching

Hastings' Bellevue, Wash.-based company, for instance, is selling its product directly to elementary schools. Its first product, Learning K-2 Math, debuted in January 2009 specifically for home use, but since then it's released a series of online math instructional games for both home and school environments, targeting students in kindergarten through third grade. It charges schools or districts anywhere from $20 to $40 per student, depending on the amount of students using DreamBox.

DreamBox's product offers more than 500 math lessons and assesses each student's understanding of math, providing the most suitable hints and encouragement at the right pace for a child. Teachers get a detailed view of the progress each child is making. The company says that in a recent study, 27 second graders playing DreamBox for four hours increased achievement test scores by 19%.

Two other venture-backed start-ups, Grockit Inc. and Knewton Inc., offer online testing-prep courses with the plan to eventually sell a full platform with a variety of subjects directly to school systems. Their sites demonstrate how the Web can revolutionize the dynamics of teaching.

San Francisco-based Grockit, which in May raised $7 million from Atlas Ventures and Benchmark Capital, uses online-gaming mechanics to keep students motivated and inspire competition with peers. It also features live-chat technology that lets members practice with and learn from the nearly 100,000 other students on the system.

Knewton's system offers live, interactive video lectures with instructors, and it can track virtually every action a student takes, using algorithms to prioritize concepts for study each day based on areas where a student is weakest. It then delivers those concepts in whatever learning method is best for that individual student - looking at factors such as media format, time of day, and the number and difficulty of accompanying practice questions.

"If you learn math better in the morning, we'll know that. If you learn science better with video clips instead of text, we'll know that," said Jose Ferreira, chief executive of New York-based Knewton, whose investors include Accel Partners, Bessemer Venture Partners, FirstMark Capital, First Round Capital and angel investor Reid Hoffman.

Cutting School

While their technologies are promising, these start-ups will eventually face the challenge of convincing school districts to buy in. The K-12 education sector can be difficult to tap into, since companies have to deal with governments and long sales cycles. "It's hard to build scale," said Brian Hirsch, managing director at Greenhill SAVP. "Decisions aren't always made to work with the best products. As a venture investor, it's hard to handicap a team's ability to cut through those things."

Diana Rhoten, co-founder and managing director of Startl, a New York-based not-for-profit organization that aims to break new ground in the education market by helping launch the next generation of digital learning tools, said the key to proving the worth of new technologies in classrooms could be charter schools that don't face the same curriculum requirements and budget restrictions found in public schools.

"You've got to find willing chancellors, principals and superintendents," Rhoten said. "The more flexible charter schools that are willing to take a chance will help prove these tools work. Those types of conversations have to take place."

For his investment in education, Greenhill's Hirsch chose to invest in a start-up, Flat World Knowledge Inc., that avoids having to convince schools to buy in. Flat World, which last year raised $8 million in Series A funding from Greenhill SAVP, Valhalla Partners and High Peaks Venture Partners, offers free Web-hosted textbooks that college students can access by entering a URL given to them by their instructors. The company pays the books' authors and earns revenue by providing students with options to purchase print-on-demand soft-cover textbooks, audio textbooks and self-print individual chapters at a fraction of the cost of traditional textbooks.

This fall semester, more than 800 colleges will use Flat World textbooks, up from 400 in fall 2009 and up from 30 colleges in spring 2009.

Other start-ups are creating their own online degree programs in the mold of one of the most established Web-based institutions, Phoenix University. Washington-based Latimer Education Inc., backed by a recent $1.25 million investment from Maveron, is creating an online university specifically for African Americans, for example.

Altius Education Inc., meanwhile, is partnering with nonprofit universities to launch online programs that cater to those students who may have left high school without the requirements or means to go straight to college. When it was founded in 2007, it started an associates degree program with Ohio-based Tiffin University for students who intend to transfer into four-year universities. In July, it launched its second institution with Tiffin devoted exclusively to elder care.

"The concept that everyone should have the time and resources to go away for four years and spend that in an academic environment and get an education to serve them the rest of their lives doesn't work anymore," said Paul Freedman, chief executive of Altius.

Over time, some schools may be forced to either adopt Web-based technology or compete with online offerings, said Spark Capital's Finkelstein, an investor in San Francisco-based Altius. The infrastructure required for face-to-face teaching is massive, consisting of buildings, personnel and acres of campuses to not only facilitate the learning but to keep the institution running. Online education could eliminate many of those costs.

"Smaller colleges will go out of business," he said. "The fundamental reason is because with the Internet you can deliver education in a more capital-efficient way and acquire students at a much lower cost."