Education technology investing continues to evolve as an earlier wave of products that had been developed to address key opportunities to disrupt the industry, such as data driven adaptive and individualized curriculum, blended delivery models, and competency based learning (especially for the “non-traditional” student) approach maturity. While there remains tremendous future opportunity to invest in real companies still addressing these areas, two types of companies had been undeservedly attracting a bulk of investment capital: 1) feature type companies at the seed stage and; 2) consumer facing, unproven freemium models. There are lessons to be learned here.

The first category includes investments in “FNAC” ideas. The term FNAC, “feature not an actual company” was popularized by venture investors Mark Suster of Upfront Ventures and Chris Fralic of First Round Capital. FNAC’s saw an explosion in seed round financings even through 2014. Deal volume and dollars did cool off a bit at the end of 2014; perhaps normalizing the market. Looking forward, we are skeptical that the market needs another math or literacy app, and the ROI for an investor here is suspect.

The second category is the direct to consumer, no business model, swing for the fences strategy that billion dollar funds need to employ to chase the ever elusive, potential billion dollar return. A significant amount of money has been lost chasing this dream, including : Kno ($100 million raised- sold to Intel for $15 million); Grockit (raised $45 million- sold its core assets to Kaplan and did a restart); Flatworld Knowledge (raised $37 million and did a restart); and Altius (raised $27 million and was sold in a fire sale last year).

Furthermore, the verdict is still out for other companies with truly disruptive approaches in search of business models. These companies include: Coursera (raised $85 million and is trying to sell certifications for its free courses); Udacity (raised $20 million and is trying to sell sponsored courses); Knewton (raised $54 million for a freemium model with a potential premium upsell to universities); and Edmodo (raised $40 million and gives its product away to teachers and then tries to sell them apps). Although the economics of some of these investments is questionable, we don’t believe they are an indication of a busted ed-tech investment bubble or a bad course. Back in early 2014, a Fortune Magazine article (“Is there an ed-tech investment bubble,” February 19, 2014 http://fortune.com/2014/02/19/is-there-an-ed-tech-investment-bubble/) detailed some of the above investments. The article concluded that, these well-funded companies are “trying to completely transform some aspect of education by making it free or accessible online. The only problem with that strategy is that it’s just as risky as offering a boring, derivative algebra app. Except here, there’s a lot more money at stake.” In the same article, Brian Napack, a Senior Advisor to Providence Equity Partners, concluded “There’s a Darwinian thing that happens in ed-tech. It’s survival of the fittest. But this isn’t going to be like the last ed-tech bubble. We’re actually going to get some real companies out of this one.” Napeck has traditionally been skeptical of the level of venture investment into ed-tech, so his optimism is telling.

Here at New Markets we will try to stay disciplined and look for the best of both worlds. We will stay focused on backing the truly disruptive companies with proven business models that address the compelling need for educational transformation.

New Markets Venture Partners is an early and growth stage venture capital firm that invests in and helps build disruptive education, information technology and business services companies. We are one of the leading education technology-focused venture firms in the U.S.

Mark Grovic co-founded New Markets Venture Partners in 2003 and is a General Partner. Mark serves or has served on the Board of Directors for several education technology companies including Fishtree, Graduation Alliance, Think Through Learning, Moodlerooms, and Workspace. Mark also co-founded LifeJourney, an online educational company that allows students to test drive real life careers in specific corporations.