The education sector's current fascination with innovation, distruption and entrepreneurship is being fueled by the emergence of start-up commercial ventures that create new products and services as solutions for big hairy audacious problems plaguing today's schools and students.
An April, 2014 post by CB Insights noted that investments in education technology hit a record high in Q1 2014 as investors poured more than $559 million across 103 deals in the first three months of this year. Of note, Ed Tech funding in Q1 2014 represented nearly 45% of total funding to the sector in all of 2013. The record quarter comes after Ed Tech investments hit $1.25B across 378 deals in in 2013, the second-straight year of over $1B invested across the Ed Tech sector. With everything from MOOCs to tutoring marketplaces to standardized APIs for K-12 schools getting funding, investors are clearly bullish on the education industry.
So what could possibly be wrong with getting rounds of other people's money to help you grow your big educational idea into a product that becomes the NEXT BIG THING?
Well, nothing...except you need to pay back all the money that everyone had given you. With interest and at a prenegotiated rate of return. That means that once you take someone else's money as an investment in your hot shot edu-preneurial company, EVERYTHING you do is going to be focused on paying your investors back.
Aral Balkan recently blogged about his experience with a new social media platform called Ello. His post caught my eye because it included a pointed summary of how venture capital works. Having just spend the past several months at various educational technology meetings and trade shows where the buzz over acqusitions and investments is ever-present, I found myself sharing the following paragraphs with my friends from education who may not have had the experience of working with investors:
"Here’s how venture capital works: you go to an investor, before you’ve even built the thing you’re building and you tell them how you’re going to exit. It’s called an exit plan or exit strategy. You tell them, for example: “Hey, we’re going to get 100 million people using our new platform in two years time, how much will you give me for 100 million people?” And they go “Umm, we’ll give you this much for 100 million people because we’re pretty sure we can get that amount back several times over when we sell those 100 million people in an exit either to another company or in an IPO.”
"When you take venture capital, it is not a matter of if you’re going to sell your users, you already have. It’s called an exit plan. And no investor will give you venture capital without one. In the myopic and upside-down world of venture capital, exits precede the building of the actual thing itself. It would be a comedy if the repercussions of this toxic system were not so tragic.
"Let me put it bluntly: if a company has taken venture capital, you have already been sold. It’s not a matter of if, it’s simply a matter of when. (Unless the company goes under before it can exit, that is.)
"A venture-capital funded startup is a temporary company that has to convince enough people into using their platform so that they can make good on the exit they promised their investors at the very beginning. It is the opposite of a long-term, sustainable business." (Italics are mine).
You can read Aral Balkan's complete "Ello, Godbye" blogpost by clicking here.
I draw your attention to this article because every time I hear someone confide that their platform provider is a rising VC funded firm that is going for its next round of money, I wonder if these education customers understand the degree to which EVERYTHING their vendor provider must now do is focused on meeting their investors' expectations.