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Summary:

As part of an open online course on entrepreneurship in education, Union Square Ventures managing partner Fred Wilson talks about the role of venture capital, potential business models in ed tech and a few areas that are most ripe for innovation.

Innovation in a thought bubble written on a chalkboard

Over the past couple of years, Union Square Ventures, already a leading investor in consumer tech startups, has been building up its portfolio in education. It made an early investment in education social network Edmodo in 2010 and, since then, it’s invested in Skillshare, Codecademy and Duolingo.

On Wednesday, Fred Wilson, a managing partner at the firm, gave a little insight into how he and USV view opportunities in education technology as part of an open online course on entrepreneurship in education, called Ed Startup 101. Speaking to a group of ed tech academics, researchers and entrepreneurs, Wilson talked about the role of venture capitalists, potential business models for freemium startups in education and a few areas that are most ripe for innovation.

Until recently, venture capitalists haven’t looked favorably at education, which is notorious for its bureaucracy and long sales cycles. But as startups have attempted – and shown early success with – new models that skip over institutional buyers to target teachers and students, investors have steadily warmed to the sector, including K-12 education.

According to GSV Advisors, a Chicago-based investment firm that specializes in education, transactions in K-12 education climbed to $389 million in 2011, which is up from just $13 million in 2005 and more than three times the investment in the sector in 2010. Funding has been so strong that some have already started asking the inevitable question about whether an ed tech bubble is brewing.

Wilson didn’t offer a position on the bubble question, but said, “Investors think there’s a lot of money to be made at the intersection of education and technology. … This will turn out to be a hyper-competitive market.”

The full video of the talk – which was moderated by David Wiley, associate professor at Brigham Young University’s David O. McKay School of Education, and Richard Culatta, Deputy Director of the Office of Educational Technology at the Department of Education – is available here. But below are a few takeaways from the conversation.

Consumer tech offers plenty of models for freemium ed tech startups

It can be head-scratching for people outside the tech world (and even, sometimes, for those inside it) to watch venture capitalists pour money into startups without a clear business model. As one of the students in the course noted in a question for Wilson, “It seems as though the revenue model for these startups — for the time being at least — is just to raise venture capital.”

But Wilson provided several examples in which consumer startups with a free service eventually found a path to profitability after years of venture backing, including Dropbox and Twitter. In those examples, he said, venture capital played a key role in helping them reach the scale that would make a freemium model work.

While Union Square Ventures isn’t an investor in Coursera, he speculated that the company could grow into a WordPress-style open software model that provides a basic service for free but charges for extra support. As the ed tech market expands, he expects models of all kinds – from those supported by advertising to those with enterprise licensing models – to emerge.

Sell to the learner first, not the institution

“We should compete with the existing education system as opposed to sell to it,” Wilson said. That doesn’t mean he thinks the startups in his portfolio are going to put Ivy League institutions out of business, but that entrepreneurs can make faster progress by bringing their tools straight to the learners and the teachers providing instruction. That’s the way Edmodo has gained its strong traction and the approach Codecademy has taken with its after school program targeting students in schools without computer science instruction.  As students and teachers adopt new platforms, Wilson said, the institutions will come around.

Vendor exclusivity is like teacher tenure – it’s a bad thing

As more companies turn their attention to online learning and digital education, Wilson said universities shouldn’t standardize with just one vendor but support the range of tools that faculty members choose. Exclusivity, he said, makes vendors “fat and happy” and less incentivized to innovate. “Like tenure, I think it’s a bad thing in the education world because it makes people feel comfortable,” he said. “I don’t think there’s any benefit anyone would get by standardizing on one platform.”

Credentialing, peer-to-peer networking and verticals are areas of opportunity

Now that plenty of platforms offer courses and instruction, the next step is figuring out whether students are actually mastering the skills and knowledge that they’re setting out to learn.  That credentialing and accreditation question (which we’ve touched on in posts about startups like LearningJar, Degreed and Smarterer) is one of the areas in which USV is most interested in, Wilson said.  He also said he thinks there are opportunities in peer-to-peer platforms, which leverage online communities to reduce the cost of creating curriculum and learning content, and vertically-focused startups, such as those similar to Codecademy and Duolingo.

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  1. John Danner from Rocketship Education has some great insights on this topic in a recent blog entry: Tips for Edtech Entrepreneurs – Part 2 – Looking at Success Past and Present

    http://beyondschools2.blogspot.com/2012/10/tips-for-edtech-entrepreneurs-part-2.html

  2. “I don’t think there’s any benefit anyone would get by standardizing on one platform.”

    A million IT nerds just felt a disturbance in their continuum.

  3. Some of these firms touted as successes may have large numbers of users (or user accounts), but no obvious path to profitability or even sustainability. Given the long history of innovators trying to work around formal K-12 education institutions and failing by not attending to policy and practice issues (at the federal, state and local levels), I find it hard to share Fred Wilson’s optimism. I wish him and his colleagues all the best (as there are some good ideas here), but some historical context on the impact of innovation in K-12 might raise some questions that remain unaddressed.

  4. weird. he threw his portfolio company code academy under the bus saying its user-students had very few positive outcomes. and then he said edmodo was reluctant to take money from school districts, but that they would if they HAD to. funny coming from a VC.

    1. man i wish i could use disqus to comment here at gigaom.

      in any case, i did not throw codecademy under the bus.

      what i said was the funnel is very broad at the top and narrow at the bottom and that everyone, including codecademy, needs to work on that. i think connecting to offline experiences, like codecademy is doing with its after school program, is a good way to do that

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