How much Kno sold for & why it failed

42 Comments

On Friday, November 8, 2013, Kno, a Santa Clara, Calif.-based e-learning startup was acquired by Intel(s intc), 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(s aapl) 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.

42 Comments

Supra Manohar

Nice article, the problem in my opinion is tech hubris. I’m an edtech CEO and a clean analysis of the market will identify that there are great opportunities to create businesses driven by tech, but by providing solutions that lend value to the process of teaching. “Education” is different from “learning” – education is unique in that there are multiple stake holders who may sometimes have conflicting agendas. In this environment if innovation is purely moving access from print to digital, then 80 mil investment is a silly idea. Kno could have done a lot with the money but most people who had basic knowledge wondered what was so transformational to justify 80 mil. I guess we got the answer – it wasn’t justified. Am sad as $80 mil cld have spawned numerous companies that actually may have had an impact – que sera sera.

perumula

Om– Kno’s sellout reminds me of Push, Pop, Press whose big moment came with producing Al Gore’s Our Choice, uh, whatever you want to call it, “eBook,” eTextbook, “Work,” etc. But it was/is a fine, fine piece of authorship, but alas all this talent seems to have been flushed down the buyout drain when they were swallowed up by Facebook. If they are contributing something to it, I sure can’t see it. Maybe they’re just doing ads which I normally never notice. What a waste!! Kno falls in the same category. Such is the digital life, $$s over accomplishment.

Mary

Kno might have been full of creative types but their lack of understanding about the world they were trying to dominate caused their downfall. Question is, did Intel buy Kno because they had sunk so much money in it they might as well own it, because they want the knowledge gained from the failed tablet or because they want to get people to only be able to use Kno on an Intel tablet?

Spook SEO

You are right. The price that people has to pay for such lessons is not just fair especially when you can work with better things on your own or even for free. It is better to go to school if that will be the case. Kno could have been more successful if they had focused on one-on-one tutorials.

Frank

ESCO has this problem solved. They have the platform and relationships with all the Publishers needed for Digital and they handle regular textbooks as well. They make transitioning as easy as Pie! I would definitely recommend them over Kno since they have been in the business for over 20 years.

jpreynolds7

Kno started as a hardware company and all of the hoopla was on their double paged tablet so that it resembled an open book. They should have started as a content developer and optimize for iPad and Android tablets and phones. Inkling still has a chance to be successful as a packager and developer of content under license from publishers and authors.

As it turns out, KNO was not “in the KNO” and crashed and burned. Nice try guys, but hardware solutions are tough to pull off these days. They software or content creation and packaging — the true science and art of publishing.

Joe Reynolds

Christopher Nyren

If its Marc making the call, particularly right around the time of the sale of Skype to Microsoft, you bet.

DV Mitchell

Clearly what the marketplace is telling us that the problem with textbooks is their cost, not how much they weigh or the method of delivery. Students are not embracing electronic textbooks for whatever reason, even though this would seem to fly in the face of seeing them as “digital natives.” It is easy for students today to rent print textbooks or to buy used ones at reasonable prices. I would not be surprised to see other players pull out of this space soon, as a number of sites like Kno are competing for a small piece of the textbook pie.

LeMoi

I am glad Intel did this move. This way they can extend the whole thing globally. And in the future, a big portion of revenue will come from deals like the one with Broward. Where the piracy will not mean anything.. Kno is more than just a reader, is a “smart-reader”, you can do quite a lot of stuff with it. And there are a lot of things behind which make the whole thing attractive (quite a lot of analytics that you might not know…)

JCC

So what happens to the book people bought? Was it a proprietary format? Will they allow users to convert it once this thing finally goes bust inside Intel?

Perry North

Looks like Om is making an important point which is getting lost in this conversation – that Kno was a case of an over-capitalized startup which was mismanaged to death (or nearly so).

What surprises me is how VCs like Intel Cap and Andreessen Horowitz let this happen under their nose. Whether its Kno or Beyond Oblivion, shouldn’t investors be paying attention to spending versus milestones? Looks like Kno had a strong board, but still managed to spend $100M without generating much revenue…. Wonder what the level of oversight was. Could it be too much trust on the founders, one of whom had a past success?

JMD

It is less than surprising. The education market is one of the most difficult market. It has complicated decision making processes, long lead times, multiple players (from IT to school administrators). On top of this it’s not geographically homogeneous with wide differences from one country to the other.
In addition technology is only a small aspect of running a school effectively. I’ll never forget Craig Barret (Intel’s former CEO) stating on stage that the most important piece of technology in a class room was “the teacher”. He was so right !
(Comment from European IT exec.)

john ramul

FYI – The CEO and CTO were taking home 450k and 350k in annual salary throughout the whole time. Average employee was being paid upwards of 190k. I guess we now know where the 100M went…

Perry North

wow, that’s some deep inside knowledge. How do you know this, John? I have a hard time believing that any VC would allow founders to take $800K / year in salary at a startup

Rishin

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.

John Yates

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/

Fatima Khan

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.

Subraya Mallya

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.

Barry Sill

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.

skozinsky

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

Jeff Gould

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.

Mark

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).

Sally Ghal

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.

stencil

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.

Badri

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

Om Malik

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.

John Z

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.

Om Malik

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.

Nicholas Paredes

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…

Gee Deezy

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.

Christopher Nyren

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/

John Yates

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

Kevin F. Adler

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.

Richard

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?

Mike Shannon

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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