Larry Berger checks on a scrum board where a multitude of sticky notes assist the teams at Amplify in tracking the progress of their projects. PHOTO / KEN GABRIELSEN / AP IMAGES AP / GABRIELSEN KEN / PHOTO 8 EDUCATION NEXT / SPRING 2014 educationnext.org feature For Education Entrepreneurs, Innovation Yields High Returns Entrepreneurs are having a heyday. Mark Zuckerberg of Facebook graced the cover of Time magazine as Person of the Year, Ashton Kutcher played Steve Jobs of Apple in a recent biopic, and Amazon’s Jeff Bezos even bought the venerable Washington Post. Our culture is enamored with the idea that a visionary individual can create a brand-new business that not only makes it big, but also makes a big difference in the way we live and work. Meanwhile, few sectors are more desperate for new ideas than the $600 billion system of K–12 public education. Many intrepid entrepreneurs have waded into the waters, hoping to improve outcomes for students. And many have failed or fal- tered in attempting to address an institution that “alienates creative problem solvers while erecting bureaucratic barriers against those who would devise new solutions,” as Frederick Hess and Chester Finn wrote in these pages a few years back (“What Innovators Can, and Cannot, Do,” forum, Spring 2007). Education entrepreneurs create either a for-profit or nonprofit enterprise, based on their fundraising needs, the revenue model that will suit their product or service, and Learning from Larry Berger, Jonathan Harber, and Ron Packard the employees they hope to entice. Those who take the for-profit route face mistrust on the part of policymakers and many parents, and for-profit ventures have conse- quently been prevented from participating in federal grant programs like Investing in Innovation (i3) and barred from operating charter schools in some states. Despite a surge in education entrepreneurship over the last several decades, for- profit education ventures have received far lower levels of investment than those in by JULIE LANDRY PETERSEN educationnext.org SPRING 2014 / EDUCATION NEXT 9 telecommunications, medicine, and energy. When they need By most accounts, however, the economics of education new products, school and district administrators often choose investing are changing. Schools are now wired and have to develop solutions in-house or buy from one of the big pub- accountability incentives to invest in technology to boost lishing companies rather than take a chance on a new, possibly student achievement, while teachers are ready to experiment untested, innovation. Not surprisingly, it has been difficult with new tools. For start-ups, hardware costs have come down for entrepreneurs to persuade individual angel investors and and software is cheaper than ever to develop. Longtime edu- venture capital firms to back their ideas with funding. Will- cation banker Michael Moe of GSV Capital says a higher ing investors give a company money in exchange for equity (a quality of entrepreneurs is entering the space. Consequently, share of ownership in the company), figuring that if the ven- education technology companies raised $1.1 billion in fund- ture does well they’ll recover their investment at a premium ing from venture capitalists in 2012, more than double the once the company is either sold or sells its shares on the public amount raised the prior year and nearly 10 times as much market (known as an “exit”). But there is often little patience as a decade earlier. Today’s education entrepreneurs and the among investors for the slow growth required to create a high- investors who back them believe they can avoid the mistakes quality education product and to develop trust among school, of their predecessors and find their place among the 20 or so district, and parent customers (and earn revenues). percent of companies that succeed. In the late 1990s, investments in e-learning companies and In this article, I look at three entrepreneurs who have for-profit school management firms surged along with those recently succeeded, with an eye toward understanding what in Internet companies. The public stock market saw 11 initial made them successful and what that might tell us about the public offerings (IPOs) of education companies in 2000 alone. future of innovation in education. These companies have Most education companies founded and funded during that all exited in the last five years, bringing in hundreds of mil- time went bust (although a few of those left standing eventu- lions of dollars and earning sizable returns for their investors ally became success stories, as I’ll show below), leaving entre- and their founding teams (see Table 1). What can we learn preneurs and investors alike gun-shy about venturing into the from them about what it takes to have a significant impact sector for most of the last decade. on K–12 education? Three Success Stories (Table 1) Entrepreneur and Total venture capital Revenues and reach Revenues and Exit story company (year founded) raised at exit reach today <$121 million2 $60 million1 Sold to News Now reaches Larry Berger, Wireless Reached 3 million $17 million Corporation in 2010 3 million students Generation (2000) students and for $390 million and 200,000 200,000 educators educators ~$75 million3 Unknown4 Jonathan Harber, Sold to Pearson in $30 million Reached 5 million Now reaches SchoolNet (1998) 2011 for $230 million students 11 million students $162 million $848 million Ron Packard, K12 Raised $108 million in $40 million Reached 27,000 Now reaches (2000) 2007 IPO students 118,000 students 1 News Corporation did not disclose Wireless Generation’s revenues at the time of acquisition, but sources familiar with the business estimate revenues at $60 million. See http://finance.fortune.cnn.com/2010/11/23/news-corp-deal-for-wireless-generation-is-great-but-doesnt-make-sense/ 2 News Corporation will not disclose Amplify’s revenues, but documents filed with the Securities and Exchange Commission indicate that Amplify is the main component of the company’s “Other” segment, which generated $121 million in revenues in Fiscal 2013. See http://investors.newscorp.com/ secfiling.cfm?filingID=1193125-13-373501&CIK=1564708 3 Pearson did not disclose SchoolNet’s revenues at the time of acquisition, but sources familiar with the business estimate revenues at $70-$85 million. See http://blog-next.learnboost.com/thoughts-on-pearson-acquisition-of-schoolnet/ 4 Pearson will not break out the exact revenues of SchoolNet. Pearson’s North American Education business brings in about $4 billion annually but includes not only the technologies Harber oversees but also its textbook publishing and assessment contracts. 10 EDUCATION NEXT / SPRING 2014 educationnext.org feature EDUCATION ENTREPRENEURS PETERSEN The Data Guys: that teachers use to capture students’ early-learning progress. Larry Berger and Jonathan Harber When demand for the products emerged faster than did sat- As the disciples of innovation scholar Clayton Christensen isfactory deals with publishers, Wireless Generation shifted know, market-leading companies are rarely the ones that its strategy and built a sales team. invent the future. Although large technology companies like They quickly found that in order to succeed in public IBM often work with school systems, the real pioneers in education, they would need to be attentive to public policies the use of technology and data in education have been start- that would drive demand and funding for their products. ups. The founders of Wireless Generation and SchoolNet, Wireless Generation employees pored over the No Child respectively, took into account the ways in which teachers Left Behind Act (NCLB) the night it was signed, looking for and schools wanted to work with data (and, crucially, the potential opportunities, and found that the act’s Reading First ways in which school systems were able to pay for them) component “created an unusual amount of liquidity central- rather than bolting existing technologies onto the desks of ized at the state level (about $200 million per year) that did teachers and administrators. not already have a bureaucracy trained to spend it,” as Berger Most people trying to incorporate technology into has written. Wireless Generation went on to secure at least schooling in the 1990s were focused on instruction, recalls 18 state contracts, including those of New Mexico and Ohio. Larry Berger, who started Wireless Generation with Greg By 2010, the company had grown to 350 employees and an Gunn, a graduate-school friend. But in other fields, he estimated $60 million in annual revenue, including a sizable observes, “much of the success technology had had was in contract with the New York City Department of Education automating the workflow behind the scenes.” Berger and to build its Achievement Reporting and Innovation System Gunn worked together at a web development company and (ARIS) as an IBM subcontractor. “What impressed us with also created an online presence for actor Paul Newman’s Larry was his largeness of vision,” says Tony Berkley, who Hole in the Wall Gang camp for children with serious spearheaded a $5 million convertible loan from the W. K. illnesses. After observing that new Internet-connected Kellogg Foundation’s Mission-Driven Investments portfo- mobile devices might be better suited than desktop com- lio in mid-2010. “He had built a company that was trying to puters to the needs of teachers, they began in 1998 to tackle teacher effectiveness and accountability and innova- pursue their longtime dream of starting an education tion in the curriculum market—pretty much all the big chal- company together. On nights and weekends, they worked lenges in education.” on the business plan, eventually raising $17 million from That year, several publishers as well as media conglomer- individual investors and Seavest Capital, as well as from the ate News Corporation approached Wireless Generation with W.