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Silicon Valley Business Journal: Startups Chart New Courses

Posted by the Silicon Valley Business Journal Feb. 8, 2013.

By Lauren Helper

Every Tuesday evening at Stanford University, a few dozen MBA candidates, software engineers and aspiring teachers huddle to assess the future of education.

Classic navel-gazing academia, right?

Wrong.

The group is at the center of a movement that aims to blow up the higher education industry, making it less expensive and more widely available. In the process, some — or many — in the growing field are liable to become very, very wealthy.

“It’s the beginning of Silicon Valley re-imagining higher education,” said Mitchell Stevens, 46, a co-instructor of the course who has built his academic career studying universities. “A lot of people are going to make a lot of money.”

In the last two years, Stanford has spun out three major online education companies — Coursera, Udacity and as of last month, NovoEd. The startups have lured tens of millions of dollars in venture capital and are now experimenting with ways to make money.

Those and other business models being discussed in Stevens’ Tuesday night course, “Education’s Digital Future,” hold promise to cut the skyrocketing costs of higher education. They will also fundamentally alter the market for mid-range universities and for-profit schools like University of Phoenix, which pioneered Web education.

As a result, it looks virtually certain that education will join the list of industries — think travel, music and books — that Silicon Valley has turned upside down.

“There’s going to be a lot of denial,” Stevens said of the incumbent education providers.

For-profit pioneers

Online education isn’t new. Since 2000, the field has been dominated by for-profit online schools like the University of Phoenix, which were backed largely by private equity.

During the first quarter of 2012, the for-profit school’s parent company, Apollo Group Inc., brought in $1.06 billion in revenue, illustrating the size of the potential market for Silicon Valley education startups.

“The most interesting stuff in higher ed in the last decade — none of it originated here in Silicon Valley,” said Clint Korver, an education technology investor and co-founder of venture capital firm ULU Ventures. “A lot of people like to kind of look down their nose at University of Phoenix. They’re the largest university on the planet.”

Rob Wrubel, chief innovation officer for the Apollo Group, said the company has a 1,000-person tech operation nationwide, including more than 300 engineers, data server managers and product designers in the Bay Area.

University of Phoenix is betting that regionally accredited degrees, augmented by new efforts to increase online social interaction and mobile accessibility for students, will keep their program competitive for working adults.

Despite for-profit universities’ financial success, there is reason to believe the model will be one of many challenged by the growing field of online education providers being spawned by academic leaders like Stanford.

“The real innovation . . . is not the technology, but the fact that Stanford is validating that online education is actually an OK thing,” Korver said. “The really scary prospect for a lot of second and third-tier schools is what if everybody can get into Stanford?”

Another threat to existing schools posed by online education startups has to do with the cost of traditional education. Student loan debt has now surpassed $1 trillion, according to a July 2012 Department of Education report. The result is a bubble that some say could pop with dire consequences for the economy.

Couple student debt with budget cuts at public schools, throw in a growing need at corporations for highly educated workers, and you get an expanding market for affordable, high-quality online education services.

New video streaming technology, growing global Internet access and online platforms with the scale to handle hundreds of thousands of active users at once are bringing elite education to the masses.

New target market

Silicon Valley entrepreneurs, competitors like Harvard and MIT, and investors are taking a different tack than many online educators: Going directly to individual students worldwide.

Enter Coursera, an online platform developed by Stanford computer science professor Andrew Ng. In Coursera, Ng, now 36, developed a product with the scale to bring Stanford video lectures and assignments to the global masses for free.

It was the beginning of the Massive Open Online Course, or MOOC, phenomenon now widely used by elite universities. Investors soon took note.

“The way I found out about Coursera was at a social engagement at my house,” said Scott Sandell, general partner at Menlo Park-based venture capital firm New Enterprise Associates.

Sandell, 48, had previously invested in a company run by Coursera co-founder Daphne Koller’s husband, and was briefed on the business model over lunch with the couple in October 2011.

Sandell said he previously shied away from education technology investments, but NEA and Kleiner Perkins Caufield & Byers invested $22 million in a series A funding round for Coursera in 2012.

“I always thought it was a really difficult place to invest, because up until now most of the things I had seen were dependent on selling to schools,” he said. “Now, you can charge a small fraction for something of value to (students) and at the same time literally serve millions more.”

Coursera now offers 215 courses and has 2.5 million users worldwide, Ng said.

Questions remain about how all of that activity can be turned into cash flow, given the company’s stated goal of lowering financial barriers to higher education.

The company in January started charging $30–$100 to verify student identity and it has revenue-sharing agreements with partner universities. One early revenue channel is a partnership with Amazon, where the company gets a small payment for recommending textbooks or other products. Course-licensing or subscription fees are also potential sources of revenue, though Coursera has yet to implement either.

Udacity’s coup

Another online education startup, Udacity, just inked a major deal with San Jose State University. Udacity co-founder Sebastian Thrun, 45, previously a Stanford computer science professor and VP at Google, first experimented with MOOCs when he taught a free, online Stanford artificial intelligence course that attracted 160,000 students in 2011.

The next year, Udacity struck out on its own and attracted more than $21 million in venture capital. This January, the company scored a deal to provide remedial classes for students preparing to enroll at San Jose State University at a price of $150 per three-unit course. Currently, San Jose State charges $280 per unit or more.

Udacity, which has hired more than two dozen employees, is pursuing two business models: entry-level college preparations and corporate work force development.

“You make money in both,” Thrun says, explaining that in addition to the SJSU deal, Google Inc., Microsoft Corp. and Nvidia Corp. are sponsoring courses in the coming months to educate would-be tech talent. The sponsorships cover some course development costs for the company.

Big data is another potential source of revenue for Udacity and other online educators. Two possible plays: Headhunters paying online education companies a premium for referrals to the most promising alums, and personalized analytics matching students with courses and professors based on personal preferences.

Thrun says his company’s competitive advantage vis-à-vis traditional education is fundamental: Udacity cuts through academic bureaucracy to deliver faster, more efficient education.

“There’s a fundamental mismatch between the speed at which technology emerges and the speed at which universities can really go and staff classes,” Thrun said. “We’ve gotten a very strong calling from industry to step in and exhibit leadership.”

Added features

Stanford management science and engineering professor Amin Saberi is also answering that call with his new company, NovoEd Inc.

It took Saberi four weekends during 2012 to build the foundations of a platform for online courses, then called Venture Lab, that introduces students to abstract topics like entrepreneurship. NovoEd uses algorithms to break students into teams, encouraging peer reviewing and collaboration.

“In real life, students go into groups and work on a business model and present,” Saberi, 33, explained at a recent meet-and-greet with students in the “Education’s Digital Future” course. Education investor Korver was also at the talk, as were representatives from Stanford, Coursera and local nonprofits.

“I thought, ‘Let’s see if we can do something similar online,’” Saberi said.

Now on a leave of absence from the university, he and co-founder Farnaz Ronaghi, a Stanford researcher, spun the company out from Stanford in January. They are staffing up, negotiating partnerships with other universities and recently closed on their first round of funding, though how much NovoEd raised is not yet public.

“I had to make a decision whether to give this up, to continue it as a Stanford project or to continue as a separate entity,” Saberi said.

He opted for the third approach to better position NovoEd to secure partnerships with universities other than Stanford, strike deals more quickly and attract outside talent.

The company is distinguished from competitors by what Korver calls a “social and interactive pedagogy,” bringing elements of social media into online education.

Saberi is quiet for now on how his technology will generate revenue but says he’s being approached by Silicon Valley entrepreneurs and other universities for partnerships and new course offerings.

Despite the room for growth, Thrun, Saberi and Ng all stress what they say is really the central element of their companies: a social mission of expanding access to education, which dovetails with increased market demand.

“Education should be a basic human right,” Thrun said. “We should re-democratize it to everybody. I’m super excited. It seems to be actually happening.”