Educational Tech Gets a Second Look

A national debate over how to remake the American education system just got one more interested party: the money guys of tech. Silicon Valley put $177 million in education technology companies last year, more than triple the amount they invested in the category in 2007, according to the National Venture Capital Assn. On Apr. 15, Technology Crossover Ventures steered $125 million into online learning company K12 (LRN), which provides software for online learning and testing. Five days later, K12's stock hit a 52-week high of $38 per share. "Education is having its Internet moment," says Rob Stavis of Bessemer Venture Partners, a prominent venture fund.

It's actually more like a second Internet moment for educational technology. In 2000, at the height of the Internet bubble, investors pumped a record $534 million into educational tech companies. Many of the startups didn't last. Companies such as UNext, which raised more than $100 million to help universities such as Columbia and Carnegie Mellon reach online pupils, folded because they couldn't sign up enough students. School board bureaucracies and tight IT budgets turned off other investors. "You saw a lot of venture capital guys swear off educational technology forever," says Michael Moe, a longtime adviser to educational technology companies.

What's different this time around is that high-speed Internet is widely available in colleges, high schools, and elementary schools across the U.S., and students now have access to mobile devices such as Apple's (AAPL) iPad that can run apps specialized for education. Venture capital funds are also awash in cash. "Every VC is trying to dispense as much money as quickly as possible," says Farb Nivi, the founder of education startup Grockit. "What might have looked unattractive a year ago looks more attractive."

Kno, a Santa Clara (Calif.) startup, raised $46 million in capital last September—a total that has grown to $95 million today—from investors including Andreessen Horowitz, the VC firm started by Netscape founder Marc Andreessen. The company scrapped its original plan of creating a tablet computer customized for students after schools began buying iPads in large numbers. In early April, Kno said it was shifting its focus to designing software for various devices.

Geoff Ralston, former chief executive officer of online music service Lala (bought by Apple in 2009), believes a slew of education-focused tech startups, which could improve schools while making investors rich, will launch over the next few years. In March, Ralston said his new startup incubator, Imagine K12, will provide funding and mentoring to companies specializing in online education. The program, which is taking applications for its first round of startups through May 1, will invest $15,000 to $20,000 apiece in up to 10 companies each year. Ralston and his co-founders, Alan Louie and Tim Brady, will help entrepreneurs develop their products and navigate the education system. "There are a lot of ways that we think we can help carve out revenues in the system for for-profit companies," says Ralston. A group of charter schools has agreed to try out early versions of apps built by startups in the program. In exchange for the seed money and other help, Imagine K12 will take an equity stake of 2 percent to 10 percent in each company.

Not every edu-tech startup is getting venture capital funding these days. "People say, 'Why the hell would you do an education thing, no one is going to fund that,' " says Aaron Harris, co-founder of local tutor matchmaking service Tutorspree, which raised its first $1 million from investors in April after meeting with several skeptical venture capitalists who passed.

Still, the dealmaking in educational technology is intensifying. On Apr. 19, Blackboard (BBBB), a maker of online educational courseware, said it had hired Barclays Capital (BCS) as its financial adviser after receiving unsolicited buyout offers. The company's shares surged almost 29 percent, to just under $48 per share, on the news. Back in November, Rupert Murdoch's News Corp. (NWS) paid $360 million for Wireless Generation, a provider of online student assessment tools that has grown into a 400-person business since it was founded in 2000. And textbook publisher Pearson snapped up, a site for live online tutoring focused on the Indian market, for $127 million in January. "You're starting to see more potential buyers, which create those exit opportunities" for venture capital investors, says consultant Moe. "It's a good sign that there's nice momentum in the space."

The bottom line: Venture funds are spending big on educational tech startups as broadband networks and digital devices reach more students.

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