K12 venture investing – bubble or reality? Interview with Alan Louie, co-founder of Imagine K12

After a small bubble in education investing in the late 1990s, there was a sharp drop-off in venture capital investment in the sector. In 2005, despite education representing a trillion dollars of GDP, there was only $60 million of education-related venture investment. Fast-forward to today and education investing is back – with almost $600 million in venture capital invested in 2012. Much of that funding, in companies such as EdModo and Class Dojo, has gone into K12 education, an area where it has been notoriously difficult to generate venture scale returns.

The fundamental question is whether or not disruptive changes in technology, like the introduction of the low cost tablet, will permanently shift how students learn and enable new companies to displace traditional publishers and edtech vendors.

Alan Louie and his co-founders at Imagine K12 left senior roles at Yahoo! and Google with a strong conviction that these shifts will happen and that bringing consumer Internet expertise to education will help accelerate change. I think you’ll enjoy hearing his perspective on the market.

Interview with Alan Louie, co-founder of Imagine K12

 

QUESTION:  You were three consumer Internet executives with a passion for education in starting ImagineK12. I would love to just get your hit on what’s been the biggest surprise around the education market both positive and negative? What are the things that you didn’t expect going in?

ANSWER:   I had done a lot of homework beforehand and my wife is a teacher, so I was reasonably prepared. But there were tons of surprises in the sense that I didn’t really understand how the teacher world works. I was probably most surprised in understanding that it’s not so much that teachers and administrations don’t want to adopt technology, but for thirty years they’ve had technologists tell them hey, just try out this thing. It’s going to be great. If you just put a PC in every classroom grades are going to go up, or the kids are going to be more engaged. So they have endured a good thirty years of unsatisfied promises. Not that anybody was lying to them, it’s just that everybody’s hopes were not the outcome that anybody was planning for.

QUESTION:  Given these issues, how was the response from entrepreneurs in launching ImagineK12?

We were pleasantly surprised people applied… actually it was a big surprise. We had big hopes, but we were surprised that we ended up with so many quality teams and that there was a big enough interest in K12 because when we talked to our VC friends, most of them said, I think all of them said, “are you crazy? You should really think twice about that whole K12 thing because haven’t you done your homework? If you want to focus on education you should do higher ed.”

QUESTION:  Why do you think there’s been this proliferation of VCs investing in K12 businesses? There have been some nice size exits- Wireless Generation and Schoolnet – but lots of failures. And then but seemingly out of the blue you’ve gone from zero funding at all to a proliferation of top VCs investing capital here.

ANSWER:  I don’t know – I wish I had a good answer for that. I speculate that I think they are getting wind of what is possible in seeing the viral growth of Edmodo and Engrade and folks like that. Before the Internet, the story was get in line with everybody else who is selling stuff to the superintendant, the curriculum, technology director, and oh by the way, there’s about ten people ahead of you and this is not going to be startup friendly. It’s not going to work. The thing that we were exploring was to see if there is consumer web-like behavior that we could tap. The theory was well, the Internet changes everything. Edmodo (not part of Imagine K12) shows that you can go straight to teachers and they can adopt.

QUESTION: Early days, have you seen that kind of growth within the ImagineK12 teams?

ANSWER:   We do have a couple consumer web-type standouts from the summer 2011, and this was a surprise for us since we hoped but didn’t know if any would pop that fast, and these are Class Dojo and Educreations, both of which raised good size rounds from investors.

QUESTION:   I met with Jennifer Carolan from New Schools Venture Fund for drinks the other night, and she had great things to say about what Educreations is doing and the ability it gives teachers to quickly create lessons and have a self-publishing tool where they can have their lectures seen by students globally. Can you tell me how Educreations and ClassDojo have gotten off to such fast running starts?

ANSWER:   I really believe these are much easier times to start a company vs. 5-10 years ago. I mean it’s dirt cheap to start a company, it’s dirt cheap to run a company, and you look at Class Dojo or Educreations – when they first start it’s two guys and a dog running on AWS or Rackspace, and they can dial up and dial down their infrastructure in minutes so they don’t have any of that fixed cost. It’s much cheaper to do, and they can turn on a dime, and they can respond to customer input. So Class Dojo, which is giving teachers the ability to track student behavior and give students real time feedback in the classroom, their numbers are 4 million users signed up between teachers and kids in the last year.

QUESTION:  Has it all been viral word of mouth?

ANSWER:   Yes. Zero marketing dollars.

QUESTION:  Is it similar to Archipelago Learning, which is the case study for creating a product that goes viral with teachers, and then you create the infrastructure to sell into schools and districts? Or is there a parent revenue model

ANSWER:   One option is a parent revenue model for now but they can push on lots of others. Here is one approach that you could use with parents: “So you send home a review that states that Jennifer is doing great in math but is not challenged, so a parent might want to consider these applications, or games, that are pretty well suited for somebody like him. Then they have all this big data that they can mine and figure out like which student uses what, or which kids it really works for, and then they can be in the business of making good recommendations for parents.”

QUESTION: Are there examples of teachers kind of recommending things parents pay for? I mean Net Nanny is the perfect example of where the value proposition makes perfect sense and when it comes to brass tacks the parents just don’t pay. What do you think, are there some comparables where parents are paying based upon a recommendation from a teacher?

ANSWER:  No, not yet. I mean here’s why I’m attracted to K12 is… I can take a contrarian view based on 30 years of mishaps in K12 for technology. It’s not like that for the hardware vendors, so the hardware vendors have never had any problems, it’s always been the software guys. The poor software guys who only get 10% of the edtech budget.

The big value frankly is in the software from my perspective. People want to do something meaningful using the hardware, not just own a hunk of metal and glass. Of course Apple may beg to differ, but that’s fine. I mean why did Reid Hoffman invest in Edmodo? Maybe it was his LinkedIn experience. Maybe he thought Edmodo is like a private social network for a classroom, and now you have so many teachers that are using it, and then since it’s good… it’s really tough to dislodge Edmodo.

QUESTION:  So the other business model, besides teachers, you have mentioned is selling administrative tools and premium products into districts. How are the discretionary budgets of the schools looking in kind of today’s times of budgetary decreases?

ANSWER:   We hear they still seem to have around a $3000 signing authority at the school level. These are state and local government-run schools for the most part and then there are a lot of federal programs. So these things are bucketed and budgeted, so whatever you have to spend on certain things, then it’s reserved for that and typically it’s a use it or lose it situation.

One area with lots of budget is special education where for the most part the money is spent on compliance and not tools that actually help the kids. Have you heard about Goalbook and Daniel Yoo?

QUESTION:   I haven’t met those guys, no.

ANSWER: Oh, okay. So, Daniel was an oracle software developer who decided he wanted to be a teacher so he goes and gets his teaching credential, falls in love with special ed, does that for a while and then realizes oh my God, the tools I’m using are horrible and I can do better than this. He comes to Imagine K12 and we look at it and… special ed kids are about 15% of the population. The definition is very broad. It’s not like just autistic kids, it’s anybody who needs a little extra help.

QUESTION: Yep. Dyslexia, etc. There’s a lot of bucket.

ANSWER: The other broad brush is that this space is so historically laden with baggage that there’s not that much competition. That’s the other thing I love about it. It’s not like I’m going to be able to launch this stuff in the consumer web space and see no competition. In consumer web, what happens is once you launch it, everybody else sees you and then multiple teams spring up to go take you down.

QUESTION: Yep. That’s right.

ANSWER: And it’s pretty damn easy to fast follow. In K12 that’s not happening. It’s not. It’s great. Nobody chased after Class Dojo and now they have a 4M user lead that’ll be hard to catch.

QUESTION: I understand special ed as a focus area. Are there other focus areas you have when you look at teams? Are there certain markets that you like and don’t like, or is it more on an individual case by case basis when you’re selecting teams?

ANSWER: So far the way we’ve selected teams has been the seed stage startup approach of how accelerators tend to do it. Even though we’re a vertical, we tend to focus on teams that we think can code, iterate, or, if they can figure out how to do it without a coding founder more power to them.

QUESTION: And the upside is high powered guys like you and your co-founders weren’t doing this in education previously, and there wasn’t top talent that was going against this market so it’s a sea change. When you’re working with your teams, how do you try to bridge the reality that not every school is a really well funded charter in Palo Alto, and the reality is that you have 50 kids in a 2nd grade classroom in New Orleans and you’re running uphill just to survive?

ANSWER:  This is one of the least of my worries because you go to where your customers are and you don’t have to cherry pick the customers. I mean you can, but there is no need to. I just forwarded you this old e-mail that two weeks after Class Dojo launched. It was from this teacher and said “I found out about Class Dojo on Sunday night and I tried it out in my classroom on Monday and it worked so well that I mentioned it to some of my teacher friends. They tried it out on Tuesday and it worked great for them, and by the end of the week the principal was walking around encouraging teachers to try it out.” Then she goes on, all of our kids are from the projects in Arizona. She said all of our kids are low income, 100% on FRL, free or reduced lunch, and we love Class Dojo as teachers, they love Class Dojo because it really makes the class much more interesting and they’re the most engaged kids we’ve ever seen. We’ve never seen our kids so engaged, so we just wanted to let you know.

I read that e-mail and I’m like oh my God, this is perfect. The reason why I’m in this is not just to make money. In fact money actually is the secondary reason. I’m in it for those kids. I look at our education system and I say… and the same for Tim and Jeff, we see systemically there are dropout rates that are way too high. The kids coming out are not at the academic level that they need for their own lives.

QUESTION:  We’re moving towards a society where we’re going to need have a third more college graduates than we have and you don’t have enough kids who are academically prepared to be there. We have some huge systemic problems, and if you don’t start when the kids are 3 it’s an uphill battle.

ANSWER: That’s right – it would be game over. We could go do higher ed, and I think if I just wanted to make money I would do higher ed because it’s a much easier play. Look, don’t get me wrong, higher ed is not easy either so I’m only saying that on a relative basis, relative in that anything K12 is harder. It is probably 10 times harder than consumer web, and maybe only like 3 times harder than higher ed, but it’s hard.

I also want to just tell you one story from a couple months ago. We got an e-mail at Imagine K12 that was just through our info line, and for some reason they thought we owned Class Dojo. It was somebody in a district and she said “Hi, we need to train all our 1500 teachers and had some questions.” I was thinking holy cow, absolutely they can help you out, so we forwarded that to the founders of Class Dojo. Hi, you have 1500 teachers. That’s times 30 or 40 kids, the whole district is going to do it.

QUESTION: That’s fabulous. That has to be rewarding for you guys to see Class Dojo, Educreations, some early evidence that the program is working in that it has the ability to work across thousands of schools.

ANSWER:  Absolutely! There are other Imagine K12 startups growing like crazy like Hapara (making Google Docs way easier for schools to implement), TapToLearn (mobile learning games), Remind101 (teachers use for mass-texting their students and their parents safely), and BloomBoard (massively improving teacher professional development).  The first 20 companies are listed on imaginek12.com; check them out!