Is Education Technology Turning into a Goldrush?

Uh, oh. Even though the economy is still ping-ponging its way toward recovery, we’re already hearing the ominous “B” word: Could we already be seeing signs of an investment bubble in what’s historically been a tough market, namely education?

“Digital learning may be getting too popular among some entrepreneurs and investors,” warned long-time writer Frank Catalano in GeekWire. “K-12 and other education segments are now being chased by a mob of investment capitalists,” he added. Fred Wilson, a venture capitalist with Union Square Ventures, agrees that a crowd is gathering. “I certainly believe that lots of entrepreneurs and investors think there's a lot of money to be made in the intersection of education and technology,” Wilson said, speaking at the Edstartup101 MOOC recently; watch it here.)

But does that spell b-u-b-b-l-e?

You’ve got to love the question--and love the fact that people are vaulting eagerly into the debate, adjectives blazing. Why? Because the fact that we’re already having this kind of debate may indeed save education from getting trampled by those infected with goldrush fever--and leave enough room for real innovation.

I've spent decades covering the emergence of just about every technology-driven industry--from personal computers to steel mini-mills, nanotech to biotechnology, and now education through EdSurge. I’ve seen “mission-driven” innovators and those seeking the next goldrush.

Telling them apart is crucial, though tricky. (And watch out: they can morph.) From a distance, those drawn to mission-driven sectors and goldrushes look similar. The players are young and work with feverish intensity. They declare success, early and loudly. And they live for the promise of what they will do, overlooking the problems snapping at their ankles.

But broadly speaking, one creates innovations; the other stirs, or worse, drains the pot. So who’s got the upper hand now?

Numbers are a big signal--and edtech’s look troubling. At the height of the dot-com boom in 1999, 106 education technology (K-16 as well as corporate and test prep) companies were funded, according to investment firm, GSV Advisors. Last year, we surpassed that peak, funding 127 edtech companies--including 48 in the K-12 sector.

This year’s tally will surely be higher. EdSurge has already reported close to 100 edtech financings this year. (Since we include both small angel rounds and larger secondary rounds, we might be capturing more deals that GSV, but I’d wager that their numbers will show more activity, too.)

There’s no question that the spurt of edtech companies in 1999 was a bubble, shiny and fragile (and puffed up by the overall dot-com bubble machine). A year earlier, a mere 11 edtech companies were funded, reports GSV Partners. And within a decade, a whopping 75% of those 1999 edtech companies had had a Humpty-Dumpty-like fall.

Look closer, however, and you will see that even a decade later, the market those companies was chasing was--all things considered--pretty darn small: Simba Information reports that in 2009, U.S. K-12 schools spent about $8.1 billion on instructional materials. About half of that money went to three big companies--Houghton Mifflin/Harcourt, Pearson, and McGraw-Hill, leaving the market for "digital courseware" (again in 2009) to amount to a bit more than $500 million. That made for slim pickings for the more than 100 K-12 edtech venture companies started between 2001 and 2009 (not to mention any older hangers on).

And that's where the differences between now and 1999 start.

For starters, the market for edtech companies is genuinely growing. States are exploring moving to 1:1 computer: student ratios. (Idaho just followed Maine’s lead). Other states are changing their rules to let districts buy digital materials with traditional textbook funds. The State Educational Technology Directors Association recently recommended that states and districts commit to shifting from print to digital instruction materials with the goal of “completing the transition” within five years. Then there's the Common Core--the new education standards that most states will be implementing. These will require new materials, curriculum and yes, tools, to support teachers.

Equally important, many of the people running edtech companies are--at least for now--classic, mission-driven people. For instance, not every Teach For America volunteer continues to teach in the classroom after their two years. But their desire to improve education and children’s lives is still strong. Many are starting education technology companies (including the likes of Grockit, Clever, Kickboard and many others. Even one of EdSurge’s cofounders was a TFA’er.)

People in mission-inspired industries pursue a goal that is bigger than they are--and, if you pull them aside at the end of a long day, will probably confess that they don't know if what they are building will succeed. They are "innovators," in the way that business school professor Clayton Christensen described: taking ideas from other fields or industries and applying it, with a twist in a new environment. They trust their instincts and look for evidence, and at the end of the day, believe deeply in the promise of their mission.

Mission-driven innovators pour their efforts into building, testing and rebuilding their products. They’re cheap when it comes to marketing; they believe their best sales force consists of happy customers.

Goldrush companies, by contrast, are copy-cats, or if you want to put it more nicely, "fast followers." Someone else has demonstrated that there's a market or demand for an idea--possibly too broadly conceived as in 1999 when anything "digital" seemed promising. But the golddiggers are primarily seeking customers. Their marketing dollars often outweigh--and sometimes by a large share--their development costs. Sales not innovation is king.

Do mission-driven innovators "know" what they're doing will work? Nope. It’s a work in progress--and they know it. The minute they do demonstrate compelling effectiveness, though, the gates threaten to swing open to the goldrush style imitators.

And therein lies the challenge--and perhaps the saving grace--of education.

Unlike just about every other industry on the planet, we're not entirely sure what constitutes "success" in education. Do we want kids to score better on tests? Memorize facts? Pass algebra? Go to college? Get jobs? Have happy and fulfilling lives? Follow their passions and learn independently? The answer is "yes, and…"

What do we know works in schools? We know "great teachers" make a difference. We know that children's basic needs need to be met in order for them to be "ready to learn." We're increasingly convinced that students' "mindset" matters: they have to believe that they can learn, and have the grit and determination to persevere through inevitable setbacks.

We also know that there are not enough dollars in school budgets to deliver those things for all students. And every other industry on the planet--when confronted with the need to do more with less--has turned to technology for leverage.

Edtech innovators are waist deep trying to figure out how to build tools that will provide leverage to teachers. What makes it tough is that the target (“success”) keeps shifting--and except in very rare instances, the technology on its own isn’t enough. We need teachers. How well they wield technology makes all the difference.

The more closely entrepreneurs work with teachers, the more likely they are to build products--and processes--that genuinely support learning. There will surely be a lot of startups--a “hypercompetitive” lot, as Fred Wilson suggests. But as long as we remember that it takes both the tool and the teacher to create success, the mission-driven innovators will outnumber the market-driven copycats. And innovation will outshine the bubbles.