Within a few days, Pucci had met with the management team. Pucci made the case for the Internet. He recalls, "I said the only way to hit a home run with this business is to embrace the Internet fully."
This would be the company's most radical reinvention yet, from a 15-employee business that sold its own products, developing them a few at a time, to what today is a 110-employee dot-com that tries to capitalize on a huge market by selling hundreds of other people's products. From Pucci's perspective of watching for opportunities, it made sense: the market appeared immense, and with the Internet, the mechanism to reach it was finally available. (Americans bought some $28 billion worth of children's toys, games, books, and videos in 1999, according to Gomez Advisors. About $360 million of it went to online retailers, up from just $43 million a year earlier. Gomez predicts the toy market will climb to $33.6 billion in 2003, with online retailers taking a little more than $3 billion of that.)
But the company would play in another market with even greater potential: education. American parents spend $19 billion a year on educational games, books, and software, according to Thomas Weisel Partners LLC, a merchant-banking firm in San Francisco that assisted SmarterKids.com in a private placement in 1999.
Private industry sees many opportunities in the education groundswell. During the 1990s, for-profit education companies raised about $6 billion in private capital, a little more than half of that in 1999 alone, according to Eduventures.com LLC, an education-industry research and information-services company in Boston. Eduventures.com forecasts that in 2000 education companies will raise another $4 billion in private capital. Much of the money will go to ventures that deliver educational products and services online.
If success in electronic commerce requires a huge market, as many believe it does, then education is the real thing: the K12 market alone consists of 3.1 million teachers and 50 million parents, a growing number of whom are connected to the Internet. With many thousands of products of uncertain quality available for purchase, the opportunity could be enormous for a company like SmarterKids.com, which would rate products as well as match them to the needs of individual students.
It sounded like a good sell. But at first, raising money was difficult. Because at the end of 1998 the company was still selling CDs while positioning itself for the Internet, says Blohm, "it wasn't clear to investors what business the company was in. So we had to ditch the CD business. We realized we had to be a pure play in the Internet." The company didn't have much choice. "We were desperate at that time," says Pucci. "If we couldn't raise the money, I'm not sure how we could have continued with our Internet strategy."
The strategic decision to stop producing CD-ROMs worked. SmarterKids.com raised $2.1 million from a pool of individual investors, enough to develop the Web site.
In 1998 the company went on a flat-out sprint to open its doors before potential competitors could. To get the job done quickly, Blohm outsourced some key tasks. He forged a deal with the J.L. Hammett Co., a leading distributor of educational products to schools, to stock SmarterKids' inventory and fulfill customer orders. He hired an outside design team to create the Web site. Over a period of seven months the site took shape. At the same time, the company continued to raise money. Riding the wave of investor interest in E-commerce, it raised more than $33 million in private placements and venture capital over nine months.
As SmarterKids.com began selling other companies' products on its site, it sold off the remaining inventory of its CD-ROM testing products. By Christmas, 1998, SmarterKids.com had begun deriving all its revenues from selling third-party products online.
Pucci and his friends, in their third incarnation, had bet the company on electronic commerce.
If Pucci's idea has legs, the company may find out how strong they are by looking at a pilot program it's running in Michigan.
Parents there get personalized help for their children by going to a Web site called WeHelpKids.com. Operated by National Computer Systems Inc. (NCS), which scores the assessment tests for more than 30 million K12 students nationwide, the site provides a page where parents can type in the scores their children achieve on Michigan's standardized tests. In a few seconds parents are taken to the site of NCS's partner, SmarterKids.com, which suggests educational products appropriate to the student's assessment. If a student has a specific weakness in mathematics, for example, the parent can select from an array of products that are supposed to boost Tommy's ability in arithmetic.
Intriguing to many experts is the unique way that SmarterKids.com constructs a bridge connecting standardized test scores -- a source of confusion and worry for most parents -- to opportunities for learning. "The power of the Internet is that learning can be tied to individuals," says R. Keith Gay, a partner at Thomas Weisel Partners. "Assessment is the key to driving product purchases."
Until now, standardized tests have had limited benefits for students and parents. They're used chiefly for the purposes of ranking schools and school districts. "The assessment tests now aren't tied to anything prescriptive," says Gay. "It's like going to your doctor for cardiovascular tests and finding out how you rank in the county."
