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Summary:

Kno, launched with much fanfare, raised nearly $100 million in venture capital and debt, only to find out that the world of education didn’t care much for the company’s products or for that matter the company itself. It crash landed at Intel last weekend.

Computer crash

On Friday, November 8, 2013, Kno, a Santa Clara, Calif.-based e-learning startup was acquired by Intel, and the event got the usual news treatment. Friday is usually a day when you announce news for two reasons  — you want the media to obsessively cover your news through the weekend, or what is usually the case — bury the news. And my first reaction to the news was summed up by this tweet:

A few phone calls later, it seemed Kno really did want to bury the news. Why?

Because it sold for literally pennies on a dollar. Well placed sources who were in the know told us that the company sold for $15 million with some retention bonuses for the employees. Intel bought the company mostly for its hardware-related intellectual property and the employees. Intel also was one of the largest investors in the company — having pumped in $20 million via its Intel Capital arm.

Kno started life as Kakai Inc. and was co-founded by former Chegg CEO Osman Rashid and semiconductor industry veteran Babur Habib. In its four year lifespan, raised $73.4 million from venture capital firms of Andreessen Horowitz, First Round Capital, FloodGate Capital, Advanced Publications, Ron Conway’s SV Angel, GSV Capital and Intel Capital. It raised about $20.3 million in debt as well. Given how debt deals are structured, the venture investors lost pretty much their shirts on this deal.

The company launched a tablet with much pomp and circumstance only to see Apple’s iPad come and eat its lunch. The company shifted focus to adapting its platform and using it for providing books to students via its tablet apps. The more it refocused its plans, the more skeptical we became of the company and its chances.

The company had been flailing for a while and earlier this year, the company tried and failed to cut a deal with CourseSmart, an online book and educational content consortium started by text book publishers.

CourseSmart has been kept alive by publishers who have been pumping cash into the company. In order for the two companies to work together, Kno had to take on all of CourseSmart’s liabilities and at the same time honor its contractual obligations. That deal, which was being masterminded by uber venture capitalist and one time wunderkind Marc Andreessen didn’t really work out.

Industry sources tell us that Kno cut deals with publishers that limited its take to about 15 percent of gross revenues. At the same time, it wasn’t able to get the volumes necessary to grow its business — it was in competition for dollars from older ways of doing things: buying textbooks, both new and old and of course, the newer trend of renting books from the likes of Chegg.

Kno, in many ways is a case study in Silicon Valley hubris, where white-boarding and theoretical thinking doesn’t always match up with the reality of the real world. A book publishing industry insider pointed out that Kno was trying to solve a problem that wasn’t acute enough for the publishers and the end customers — students. It was a problem Kno wanted to solve for Kno.

  1. As a student, I love(d) Kno. I found their selection pretty robust and their app well-designed. It solved a major problem for me, which was having to carry around my textbooks. You wouldn’t think that’s such an issue, but when you have twenty books weighing a collective twenty pounds, things start to add up. It’s very, very convenient to have access to any book that I need on a device that’s half the size of one of them. Not to mention the convenience of having everything in digital format that’s searchable, easily highlightable, etc. Any recommendations for an alternative?

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    1. Yeah. Chegg.

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    2. You’ll soon be able to rent your digital books for a day at a time at Packbackbooks.com. Currently in a closed beta at Illinois State University with several major publishers.

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  2. Great post and valuation sleuthing. Another amazing aspect of the rise and fall of Kno was one of Intel Capital’s professionals telling me they basically got a call from their CEO that Marc Andreessen had told him to invest, so just come up with the thesis and paperwork.

    In the end, Kno’s flameout in combination with Altius Education’s asset sale to Datamark and Grockits flip to Kaplan this fall has led by to call the peak on the current 2011-2013 EdTech Bubble — read more on my blog: http://edreach.us/2013/11/11/the-first-crack-of-edtech-2-0-the-edtech-hype-bubble-of-2011-2013/

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    1. Christopher,

      When did this so called call happen?

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      1. Before their April 2011 investment — not last week’s sale. One of the IC folks told me about it last summer (2012).

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        1. Interesting. Thanks for sharing.

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        2. Christopher, interesting to see that its that easy to get investment of more than $20M with just a phone call.

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    2. Kevin F. Adler Sunday, November 24, 2013

      Christopher, I appreciate the conversation around an edtech bubble. However, as a founder of an angel-backed edtech company and having advised quite a few edtech startups, I don’t believe a bubble has suddenly burst.

      Rather, if we look at the examples you cited with Kno, Altius, and Grockit, and the hundreds of edtech companies never to see the light of day (in a classroom or in front of a guy like Om) I believe bureaucracy, government regulations, too narrow focuses and limited visions, and a significant lack of resources available in the space to early-stage companies is curtailing the innovation.

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  3. Nicholas Paredes Monday, November 11, 2013

    My last educational product was the largest print reading program. The publishing business was in dire straights and I left my business in 2005. I have always wanted to return to primary education, and was accepted to Startl in 2010. But, the textbook industry is not changing until a tablet is as cheap as printing a book, and perhaps little more than that — a book per tablet.

    One day…

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    1. Nicholas

      What is your prediction on when that is going to happen.

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    2. I agree… sort of. When the (price of the table + the value of the electronic books) > (the total investment in textbooks required) then the tablet becomes a valued educational tool at a smart price. I think the case could be made that we are there already but won’t really be highly visible until educational institutions *require* electronic textbooks.

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  4. Hmmm. Om – in the link about the original Kno story you said that we need start-ups with fat ambition. Now you’re all ‘I told you so’ (which you didn’t) because it didn’t work out. At least they made sure the product is still available for my kids (Thank God!!!) versus pulling the plug on us.

    My kids back-pack was cut by 2/3 weight because of these guys. As a parent, we have not found anything that comes even close to Kno. How in the world is that NOT a problem for every parent/kid and only part of Silicon Valley hubris? Btw, do you have any kids – or busy writing about a topic you don’t understand!! ;-)

    My hats off to the Kno team and their investors for having the guts to give it a shot.

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    1. Just port kno software to the ipad, like Amazon did with kindle. Build an ipad case that holds two units side by side, and there you have it, and for a lot less than the original kno.

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      1. Lot less than the original Kno? Do you know how much the original Kno cost?

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    2. Sally

      As to this piece of your comment, “How in the world is that NOT a problem for every parent/kid and only part of Silicon Valley hubris?” — I would say, there aren’t clearly enough of you out there to keep this company in business. The problem might be there — but it is pretty clear, the business execution was terrible. As far as I am concerned, I am not sure I have to have a kid to know, that a bad business/terrible execution is just that – bad business. Fat startups doesn’t mean dumb startups. Launching hardware when Apple is launching iPad. Doing business deals where they had no business leverage with publishers. I think it was pretty clear, that sometimes even the best of intentions need a reality check.

      PS: Happy for your kids and the reduced weight in their backpack.

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      1. Om, I enjoy your blog on a regular basis – some facts on your comment above – Wikipedia says they started the company one year before the iPad was released – first half of May/2009 and iPad started shipping in April/may 2010 – so clearly thinking far ahead – but no one could have taken down Apple – so let’s be fair. No one could have predicted the iPad!! And then these guys shut down hardware in early 2011 when iPad became dominant to go software only. So, true, a boatload of money went there but that is the risk of dreaming big.

        Don’t hate me for being a fan of the company! They were/are doing good stuff. The problem totally exists and maybe there were still 18 months ahead of their time.

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        1. John Z

          To be clear, the news of iPad was fairly common knowledge long before the product came out, almost a year earlier. I remember asking them even when they were still Kakai as to what was their game plan when Apple/Google announced their tablets eventually. The answers were not clear, even then.

          I don’t think the idea is the issue — it is the tactical/execution problems for the company that led to the issues they eventually faced. More importantly, I believe (and book industry sources agree) that they didn’t do a good job of estimating how big a portion of the text-book market they could get in the US.

          Anyway, glad you are a vocal supporter of this company.

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  5. What this story misses is that in the last year that has been a fundamental shift in the market. It used to be that many of the top textbooks were only available in these dedicated formats (Kno, CourseSmart, etc.), if at all. But now they are all on Kindle. The old Kindle format didn’t render graphics well (crude pasted in images). The new “just like the printed book” format does a vastly better job. It’s not perfect, but the experience is very close to leafing through the pages of the actual dead tree object. Apparently the publishers agree, because all of a sudden dozens or probably hundreds of the top selling textbooks have been released on Kindle, for sale and for rent (Molecular Biology of the Gene, and many others). Of course the prices are high (though slightly lower than dead tree) and of course the Kindle format kills the resale market, which is what the publishers wanted all along. But the Kindle app runs on cheap Android tablets as well as on iPads. So there is no need for the dedicated platform plays. It’s a whole new game.

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    1. Jeff

      Thanks for your very insightful comment.

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    2. The dedicated reader idea was bad from day one. I think it’s pretty clear that was a huge mistake and a giant distraction. I’m sorry Om doesn’t see it this way, but this is a case where the idea was wrong, and trying to adapt the idea after the fact was always going to be too much catch up. Effectively, they needed to reintermediate what Apple and Amazon were disintermediating. And the original Kno tablet was a super expensive way to do that, even if it was elegant (in my opinion, it was hardly elegant).

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  6. Om –

    The problem isn’t that Kno was a useless company. The problem is that there weren’t enough of Sally’s children who loved the product to merit such heavy investment. We’ve seen other great edtech companies fail due to massive early investments (read Flatworld Knowledge) http://www.insidehighered.com/news/2012/11/05/flat-worlds-shift-gears-and-what-it-means-open-textbook-publishing

    More importantly, taking a bad business model and making it digital and light is not a sustainable model. Kno could have tested this out fairly easily without jumping this deep in the rabbit hole. Publishers have finally realized this, and are now re-branding themselves as education service companies. Technology needs to help solve teacher/student problems… studysoup.com/blog

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  7. I think the why it failed part is pretty simple. Students aren’t buying digital textbooks.

    The latest BISG report showed that only 7.1% of college students bought digital textbooks, and that is only a slight improvement over previous surveys:http://www.the-digital-reader.com/2013/07/17/increased-piracy-among-college-students-means-a-smaller-market-for-digital-textbooks

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  8. Om, you hit it on the head with your last paragraph. That is the exact reason edtech companies are floundering. While down the road technology might do a world of good to education, the current problems in education (atleast in US) is not technology (or lack thereof) – it is systemic.

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    1. Interesting comment Subraya.
      The way I look at it is like this: (most) Tests are proctored on paper.
      Paper resources will still win until this is over &/or it’s easier to handwrite electronic notes.

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  9. Looks like the Broward County Public school deployment seems to be very positive: http://www.hmhco.com/media-center/press-releases/2013/october/Broward%20County

    I think for KNO to come up with this novel idea was ambitious and to disrupt the market. I also think they were way ahead of their time.

    looks like the comment from Andreessen Horowitz. “We consider Kno a very successful experiment.” in WSJ was indicative of how they feel.

    http://blogs.wsj.com/digits/2013/11/08/intel-steps-up-e-learning-efforts-with-kno-deal/

    On top of that, it looks like publishers seems to hate Amazon and Apple for arm twisting publishers and they were happy to have an alternative with KNO.

    The Intel blog seems to mention that they were really happy with the acquisition of KNO – ” The acquisition of Kno boosts Intel’s global digital content library to more than 225,000 higher education and K-12 titles through existing partnerships with 75 educational publishers. Even more, the Kno platform provides
    administrators and teachers with the tools they need to easily assign, manage and monitor their digital learning content and assessments.”
    Ref:http://blogs.intel.com/csr/2013/11/intel-education-welcomes-kno-to-the-family/

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    1. Wow John. You certainly have an optimistic way of viewing what looks like an $80 million loss. Despite what is said for spin control in the press, I can’t imagine that any investor would be happy with this outcome, nor would the words “successful” and “Kno” be used in the same sentence behind closed doors.

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  10. was there an existing problem that’s sufficient enough to feed the company for years, or, are we trying to imaging the problem exists – the last few sentences int this post sums this up perfectly.

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