Inside the Edtech Hourglass

Strategies for Scaling Innovations in K-12 Entrepreneurship

This post is a condensed version of my MBA/M.Ed capstone paper at the University of Virginia Darden School of Business and School of Education. It has been edited for clarity and practicality for education entrepreneurs.

Each year, K-12 school districts in the U.S. spend between $25 billion and $41 billion on education technology. While edtech spending has increased in recent years, efforts to innovate schooling are far from new. Sidney Pressey was one such innovator who developed a mechanical teaching machine as far back as 1926.

Now, an astounding 1,847 edtech startups raised more than $36 billion in venture capital in 2020 alone. Edtech has become big business since the earliest days of teaching machines, and it holds great promise for impacting the lives of millions of students.

So how can education entrepreneurs enter the K-12 market in a way that increases their innovation’s chances of success?

In this post, I will highlight 3 key challenges that prevent education entrepreneurs from scaling their innovations. I’ll share why these barriers stem from the fundamental shape of the K-12 market, and how savvy entrepreneurs can learn from past attempts at innovation to better navigate this complex marketplace.

In short, education entrepreneurs must learn to scale their products strategically, or risk missing their contributions to better education as time runs out on their innovation.

Why Innovation in K-12 Education Matters

Entrepreneurs start education companies and raise funding because there’s massive potential for value creation in K-12 schools. Since the inception of the common school, American school systems have struggled to deliver an excellent education to every child.

Today, only 35% of fourth-graders and 34% of eighth-graders read at or above grade level. Students are likely to have slipped between 5–10% points in math due to learning interruptions caused by the COVID-19 pandemic.

For students that successfully graduate from high school — and some 15% fail to do so each year — only 55% will ever graduate from college, and even fewer students of color and those from low-income backgrounds will earn a college degree. For students who do graduate from college, the average young adult starts their career with $30,000 of student debt.

I’d argue that the risk associated with failing to advance at each level of education is higher today than ever before. McKinsey predicts that adults without a college degree are now 30% more likely to face job displacement from automation in the next ten years.

The point is American education requires innovation at a massive scale and requires it right now.

A Disclaimer

Before discussing the K-12 edtech market in more depth, I want to offer a disclaimer that underpins the premise of this post. My perspective represents that of a “tool builder.” Here, I quote from Larry Berger and David Stevenson in their 2007 paper, “K-12 Entrepreneurship: Slow Entry, Distant Exit,” and in which they offer a similar cautionary note.

I do not consider myself a “technophile,” nor do I subscribe to the idea of tech solutionism or quick fixes for complex problems in education and society more broadly. I also assume that you, as a reader, care deeply about improving public education as I do, instead of making a quick buck — there are easier industries for doing that.

The key distinction is that “school builders” innovate from within systems by starting and running schools, or by educating thirty or so students in a classroom at a time. Tool builders, on the other hand, are entrepreneurs who aim to build products and services that serve thousands of schools and millions of students.

To me, there’s no right or wrong approach between the two for getting involved in education innovation, but rather different approaches that require knowledgeable and good-intentioned builders.

I simply prefer to build tools.

Product-Market Fit in K-12

Most startups fail not from lack of technology or talent, but because they fail to reach “product-market fit.” Legendary Silicon Valley investor and technologist Steve Blank discovered this insight, and coined the term, when diagnosing startup failures. Blank found that startups fail when they don’t align their product with the demands of a market. By failing to do so, young companies burn through cash and time, leading to eventual failure.

A teacher with a revolutionary idea for a new learning app may fail to gain traction or scale, clearly not from a lack of proximity to the problem or insight into possible solutions, but because the K-12 market presents unique challenges for innovators. This is why it’s critical that innovators understand the dynamics at play in the K-12 market so they may increase their chances of achieving product-market fit.

To me, the core challenges in the K-12 edtech market center on 3 key themes: (I) complexity of distribution channels, (II) differences between consumers and beneficiaries, and (III) a lack of return on investment (ROI) thinking and metrics. The key is to design products and services that strategically enter the market in a way that overcomes these barriers.

The Edtech Hourglass

When looking closely at the K-12 education market, one might notice the unique shape the market forms. With 50+ million students and millions more parents, teachers, and school leaders, the market features an expansive base that reaches into every community in the U.S. Towards the top, districts and state education agencies spend billions of dollars each year implementing large-scale technology initiatives.

Yet the pathway for connecting institutional investment in edtech to stakeholders in individual school communities is quite narrow. We can trace how funding gets allocated across key use cases in schools:

• Only 3.5 cents on every dollar in schools is spent on materials, tools, and services
• Almost 90% of school budgets are allocated towards teacher salaries, benefits, and staffing
• Principals often have as little as ~1–8% of their annual budget allocated to discretionary spending

So when products are adopted at the district-level, it does not necessarily translate into activation and engagement from students, teachers, and parents. And vice-versa, products that are beloved by students and teachers often fail to gain institutional investment from higher-ups.

This presents a dilemma for education entrepreneurs seeking scale in the K-12 market: you can enter from the top — selling to districts and state agencies through long adoption cycles, requests for proposals (RFPs), and board approvals — or you can enter from the bottom — offering free or low-cost products to students, teachers, and parents.

The market is shaped like an hourglass.

I call this dynamic the “Edtech Hourglass,” which dictates how entrepreneurs must align their products with the K-12 market strategically if they hope to deliver value to institutions and stakeholders at scale. Often times, edtech companies run into trouble (highlighted in yellow) when their product’s value remains disconnected between institutions and end-users, ultimately costing time and money while delaying product-market fit.

If education entrepreneurs fail to reach product-market fit within these constraints, they must change course quickly before time runs out.

3 Key Challenges to K-12 Product-Market Fit

In 2013, Max Ventilla, a former Google product leader with a Yale MBA, launched AltSchool in San Francisco. The company set off to reimagine elementary education through “microschools” and a suite of personalized learning software.

AltSchool attracted top-tier investors like Andreessen Horowitz and philanthropic investors like Mark Zuckerberg and Laurene Powell-Jobs, successfully raising more than $176 million in total.

Six years later, with losses mounting and its financial runway dwindling, the company shuttered several of its few remaining microschools and spun out its software into a smaller company that would be acquired before ever distributing its products at scale.

This story beckons the question as to how a company with all this funding and an Ivy League-educated, Google-trained team could fail to make sizable impact in education. The reality is these K-12 market dynamics present a dizzying array of challenges that are unique to education innovators.

I. Complexity of Distribution

There are approximately 97,500 public schools in the U.S., each organized and managed by one of roughly 16,800 districts, and another 32,400 private schools. The sheer breadth of institutions in the K-12 market is stunning; it’s impossible for a small startup to knock on every school door, which makes prioritizing distribution channels both important and difficult.

Distribution is the process of getting a product in the hands of users reliably and cost-effectively. To distribute products and services into K-12 schools, you’ll notice the “power law” is in effect where more than half of all students (~55%) are educated by the 1,000 largest districts. If you extend this view to the 2,000 largest districts, you can account for ~70% of all K-12 students. This leaves a long tail of 14,800 other districts that educate the remaining ~15 million students.

While spending in these K-12 districts might appear massive at first glance, it’s actually comprised of the budgets of thousands of local agencies, some with disproportionate reach in serving students. A highly-fragmented marketplace makes it quite difficult for education entrepreneurs to scale to millions of students with an “overnight success.”

Look no further than the market share of the leading student information systems (SIS) — the core databases that have housed information in school systems for decades— where no one product captures more than 25% adoption by large districts today.

So even with the best product in hand, education entrepreneurs face difficult questions about their distribution strategies when entering a wide, fragmented K-12 market.

II. Differences in Beneficiaries and Consumers

There’s often a disconnect between who is spending and who is benefiting from innovative edtech products. It’s common to hear teachers voice concern about the amount of time spent inputting data instead of working with students and, at the same time, hear district leaders voice frustration about the lack of insight they have into students’ progress in classrooms and schools.

Both groups are committed to the same end goals, but face different realities when interacting with edtech tools. This challenge exists because the K-12 market does not have one customer, but rather multiple consumers and beneficiaries.

Education entrepreneurs often struggle to serve those who might benefit most from their innovations — perhaps a young teacher who’s new on the job or an immigrant student who’s learning English as a second language — and those with the authority and means to purchase a product.

Brian Rainville, a Harvard doctoral graduate and former Panorama Education colleague of mine, highlights this distinction:

“When an organization disambiguates their end clients into consumers and beneficiaries, the universe of value creation is greatly expanded.”

Perhaps education entrepreneurs can learn from healthcare entrepreneurs; creating value for patients is just one consideration when innovating within a larger system that includes healthcare providers and insurers — among many other parties — each with different, and often conflicting, interests.

Education entrepreneurs should not only ask themselves who’s paying for their product, but also who’s using and who’s benefiting from it.

III. Lack of Return on Investment (ROI)

In an ideal K-12 marketplace, one might expect that the best and most efficacious learning tools would win out. If district leaders invest in technologies and review their impact on student outcomes regularly, then adoption would naturally flow towards the edtech tools that offer the greatest return on investment (ROI), as measured by learning gains or similarly important metrics.

Unfortunately, that’s not how it works today. Just by glancing at the total amount spent on edtech tools today — some $25-41 billion annually — there’s an astounding +/- $16 billion range. It’s possible that 64% of edtech spending might go entirely unaccounted for when factoring in the low end of this range.

This gap reveals a fundamental truth about the market: there are few, if any, accurate measures of spending or ROI related to student outcomes. While education entrepreneurs might promote the learning gains or productivity boosts that their innovations enable, they will likely encounter leaders on the other side of the table who simply don’t place the same premium on ROI.

GlimpseK12, a company working to solve this ROI and efficacy challenge, finds that two-thirds of education software licenses go unused in schools today. Add in a “use-or-lose” budgeting formula that many districts employ and there’s almost an incentive to continue spending regardless of ROI.

So now what?

With these challenges in mind, it might appear next to impossible to improve K-12 education systems in meaningful ways through technology. The barriers that education entrepreneurs face are enough to drive most aspiring innovators out of the business altogether.

Yet after more than a century of technology innovation in education, American schools find themselves once again at a crossroads. The challenges facing public education are far-reaching.

From persistent achievement gaps and upward mobility that’s tethered to a child’s zip code, to the runaway costs of higher education, threats of job displacement from automation, and a pandemic that exacerbated inequities in schools , solving these challenges requires input from public, non-profit, and private sector leaders, entrepreneurs among them.

Building tools still holds a great deal of potential as one avenue for improving public education. It’s only within the past couple years that reliable, high-speed internet reached just about every school. By learning lessons about this complex market, education entrepreneurs can design better strategies to reach product-market fit quickly and scale their innovations successfully.

For education innovators, each day that students walk into schools or sign in to virtual classrooms, the hourglass counts down.

Thanks to my cohort of MBA/M.Ed peers, and to Matthew Wheelock, program advisor at UVA, and Brian Rainville for their guidance and feedback.

Ideas and feedback? Let me know via LinkedIn.