During the technology bubble of the late 1990’s and early 2000’s, investors saw the potential that new technological innovations could have on the education system, both domestically and internationally. Over $500 million was invested into education technology companies in the year 2000, but the majority of that money was eventually lost as the bubble burst and most of these companies failed. Since then, investors have eschewed getting involved in education technology because the risk/reward profile of the industry was not favorable in their eyes. However, over the past two years, the education technology industry has experienced a resurgence in interest from the investment community. Ed-tech companies received over $177 million in investment capital during 2010 as investors are beginning to realize the important role that technology must play within the education system going forward.

What is often overlooked about the education market though is the stark difference between it versus a more traditional B2B or B2C market. Many of the companies emerging today have not taken the time to understand the nuances of the market and thus will face significant challenges ahead as they attempt to expand. In order for these companies to ultimately make a positive impact on the education system, the entrepreneurs, educators, and investors behind them most make more of an effort to educate both themselves and others on these nuances and what will make a successful ed-tech company.

Concept of Customer vs. End User

In September 2006, Economist James Koch labeled the textbook industry a “broken market” as a way to describe the relationship between the end user (the student) and the person making the decision on what that end user has to buy (faculty). The education industry as a whole could be deemed a broken market because, in many instances, faculty are making decisions for students about what they have to purchase and the students have no influence on that decision (other than to refuse to make the purchase).

While most entrepreneurs and companies are aware of the way the market is structured, very few of them fully understand the ramifications of that structure and how to succeed in a market such as this. In order to create a product or service that gains significant attraction, companies need to focus on creating value in the eyes of both the teachers and the students. This is a very difficult proposition at the K-12 level as most schools are so financially strapped that a product or service must generate significant returns for students to even be considered. In the higher education world, while students may be told by a faculty member they need a certain product or service, but the students are not forced to make the purchase. With tuition costs increasing rapidly, the product or service must have a direct impact on the students’ grades or else it will more than likely be ignored in favor of the cost savings.

Alignment of Values

Like any market, the reason there has been a resurgence in investment dollars within the education market is because of the potential for large returns. The US spends over $600 billion a year on education, which is significantly more than any other country in the world, and it is well-documented that this spending has not resulted in an improvement of student performance. Education is a market in which returns should be measured not only in financial terms, but also the impact new innovations have on students and teachers. By not focusing on both of these objectives, investors will experience the same dismal returns they experienced during the last ed-tech investment boom because the positive effects created by these new companies will be fleeting due to a lack of long-term sustainability.

Lack of Educator Involvement

While most companies have some educators on staff or contracted as consultants, there is still not involvement by these educators in shaping the innovations of tomorrow. In order to spur change within the industry, specialized knowledge is required to create products and services that will in fact improve student performance; the only way to gain that expertise is by truly engaging educators and using their knowledge to influence the development of products and services. Companies need information from educators who are working in the classroom every day and dealing with students on a personal level. For the ed-tech community to truly begin to have an impact of the education system, entrepreneurs need to be more focused on creating meaningful products and services and less focused on creating useless rhetoric to define their newly-created innovations.