Can Venture Capital Fix Our Dysfunctional Educational System?

Venture capitalists are betting that technology will play a major role in fixing a broken U.S. educational system. Accel Partners, Spectrum Equity and Meritech Capital Partners put their chips down last week with a $103 million investment in Lynda.com, which sells monthly subscriptions for training videos in business, technology and creative skills.

The investment was so important for Accel that the global firm was willing to woo the online education company for four years. For Lynda.com, which topped $100 million in revenue last year, the outside investment was the first in its 18 years of operation.

VC Excitement

What has VCs so excited is an educational system ready for technology's transformative powers. The soaring cost of higher education has made college only a dream for many high school grads, while those who borrow their way through risk landing in the poorhouse if they can't land a job. Student loan debt nationally exceeds auto loans and credit-card debt, according to Grading Student Loans, a scholarly blog published by the Federal Reserve Bank of New York.

VCs are gambling that online education startups will eventually remake the system through cheaper, more efficient alternatives to traditional options.

Last April, Kleiner Perkins and New Enterprise Associates helped Coursera make its debut with a $16 million investment. Coursera now has more than 2.3 million people using its free classes in science, business, economics, the arts and law. The coursework is provided by almost three dozen universities, including Princeton, Stanford and Duke. For now, Coursera is focused on building as large a user base as possible and plans to figure out how to make money later.

“Elite education is too expensive, and it’s available for too few,” Kleiner Perkins partner John Doerr told The Wall Street Journal. “I’m not saying accredited institutions will go away, but having great content available for free in the U.S. can transform community college education… and in the developing world as well.”

Other online schooling startups that received millions of dollars from VCs over the last few years have include Pluralsight, 2tor, Craftsy and Lore. In 2011, investment firms spent $171.8 million on education technology companies, which includes online learning, compared to $88.5 million in 2009, according the latest figures from GSV Advisors, which tracks such investments. In the first half of 2012, the amount of investment had already reached $105.3 million.

Direction Uncertain

How dramatically VC-funded startups will change higher education remains unknown. A lot of hurdles remain - with the biggest being accreditation.

To be truly disruptive, online education companies will have to deliver courses that are accepted by employers and recognized by State Universities and Colleges. California, often a trendsetter for the rest of the nation, believes online education can help the state lower college tuition that has risen by double digit percentages for the last several years.

Last Tuesday, San Jose State University signed a deal with Udacity to provide online versions of three math classes this spring for $150 each. While online courses have been part of college curricula for years, the California State University system is now trying to see if the online courses can help ease overcrowded remedial classes for local students. In other words, online education is being used to solve a real problem in California colleges: too many applicants for too few classes.

"Today our aim is to focus like a laser on entry-level classes that can be so difficult for our students," Mohammad Qayoumi, president of San Jose State, said during a public signing of the deal that was attended by California Governor Jerry Brown. "Every year nationally, 1.7 million students need remedial education. That's roughly the population of San Jose and San Francisco combined. We must innovate."

That innovation is exactly what the investments in online education technology companies are trying to create.

 

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