E is for E-school

Dot-com start-ups go to the head of the class

Move over, B2B and C2C, and make room for the next online business du jour: the ABCs.

"Education over the Internet is going to be so big, it's going to make E-mail usage look like a rounding error," Cisco Systems Inc. CEO John Chambers famously announced in a New York Times op-ed piece last fall. The man whose company supplies the vast majority of the Internet's plumbing wasn't kidding: online learning is no longer a novelty. Consider, for example, that one in three U.S. colleges now offers some sort of accredited degree online, more than double the number that did so last year. And bits, bytes, and bandwidth are fast replacing the three Rs as schools' stock-in-trade. Internet entrepreneurs, Nobel laureates, Ivy League schools, textbook publishers, venture capitalists, corporate raiders, and junk-bond kings -- just about everyone, it seems, is betting that the Internet plus education equals a very big sum. Of money, that is.

Why the frenzy? The industry, with its 53 million students, 50 million parents, 3.1 million teachers, and 15,000 school districts -- not to mention the 55 million individuals that constitute the corporate training market -- is the kind of fragmented mess that makes Internet entrepreneurs salivate. What follows is a selection of start-ups that are attempting to aggregate, organize, and capitalize on that chaos.

Online publishing: K-12
The best information on any topic resides in people's heads. That's the discovery that has continually amazed Rich Rygg in the 10 years that he's worked at online-community companies like CompuServe and America Online. "The combined amount of knowledge that resides in individuals' heads dwarfs that within any single repository," notes Rygg, who is the cofounder and chairman of online-community start-up Kiko Inc. Located in Long Beach, Calif., Kiko taps the know-how inside students', teachers', and parents' heads to serve the vast, fragmented $360-billion K-12 market.

Kiko is modeled directly after Yahoo GeoCities, the online-publishing community that has attracted hundreds of thousands of users by giving them the tools to create their own Web sites -- and which spawned the term viral publishing, an online version of infectious word of mouth. Kiko features child- oriented site-building tools -- colorful graphics, animated characters, and fun video and audio clips, for example -- that enable students, teachers, and parents to create and share their own learning activities on the Internet. The finished products -- which might include things like a lesson on the migration patterns of blue whales that uses preselected links to SeaWorld and the Monterey Bay Aquarium -- all become part of Kiko's Global Learning Library, the site's gigantic storehouse, which is free for anyone to use.

Kiko employs its own internal team of programmers to help monitor and control the quality of the site. It also had its education staff (comprising industry vets from the Corporation for Public Broadcasting, McGraw-Hill, and Kaplan Learning Services, among others), as well as some 500 handpicked teachers from around the country, seed the site with model lessons before its official launch, in May.

Unlike many other sites geared to kids, Kiko will never have banner ads, stresses Rygg, who says he wants to keep the Global Learning Library a "free and educationally pure" service. That's not to say the company won't use the library to make money. On the contrary, CEO and cofounder Steve Perkins envisions at least 20 different revenue streams for Kiko, among them, subscription services. For example, for a fee, Kiko will set up a child with a weekly virtual tutor or steer parents to E-commerce products based on their child's specific learning needs -- say, supplemental books and materials on algebra. For the child who needs that extra materialistic push, the company offers incentive-based learning programs that reward students who meet established goals with prizes.

Prior to its launch, Kiko had already booked $250,000 from one revenue stream: the corporate sponsorship of various learning activities. A company may sponsor lessons on fourth-grade math, for instance, or on drug awareness.

Fast times at Wired High
In the fall of 1997, Babson College M.B.A. students Matt Flaherty and Mark Johnson were fishing around for an idea for a Babson-sponsored business-plan competition. As they searched for an education-related idea, they were amazed to discover that while many companies were working on aggregating primary and middle schools into an online community, no one had yet wired together the nation's 20,000 high schools. "We would have been the fourth or fifth entrant into the K-12 space, but the first mover into the high school market," recalls Flaherty. He and Johnson went on to win the competition with their business idea, and today they're cofounders of a Watertown, Mass., start-up called HighWired.com, which creates free Web "campuses" for students, teachers, coaches, and guidance counselors.

Venture capitalist Ted Dintersmith, of Charles River Ventures, in Waltham, Mass., says that HighWired.com's first-mover advantage was a key reason his firm agreed to back the two students after just one presentation. Selling high schools on the idea proved equally easy. Former New York City Board of Education chancellor Rudy Crew, worried that the Internet age was passing by too many kids in his urban districts, provided the B-schoolers with three beta-test schools and agreed to join the duo's previously nonexistent board of advisers.

Today HighWired.com is the world's largest online community of high schools, with more than 10,000 from 50 states and 65 countries. Most schools use the site to create Web pages that feature lists of homework assignments for various classes, sports and school news in online newspapers, and even midterm advice for nervous freshmen from seasoned upperclassmen. ("Get a good night's sleep. Duh.")

The company projects revenues of $15 million for 2001 and expects to break even early in 2002. To meet those goals, HighWired.com plans to operate online school stores that donate a percentage of the proceeds from each sale to the purchaser's school group of choice (the soccer team, the drama club, and so on). Sponsorship and advertising opportunities are another revenue stream. Additional income will come from providing schools with online procurement, with HighWired.com offering volume purchasing efficiencies by aggregating several thousand school athletic directors, for example, or librarians.

Corporate training, Hollywood-style
When his employer signed him up to take yet another business class -- this one on the leadership tactics of management guru Ken Blanchard -- John Dismukes wasn't exactly expecting to be wowed. But the vendor liaison for Texas Guaranteed Student Loans, in Austin, Texas, was pleasantly surprised when the "class" turned out to entail watching a humorous online video about two guys from a bait-and-tackle shop transforming themselves into peak performers. "Making it light -- adding humor -- definitely helps keep it interesting," notes Dismukes.

The video is just one lesson in 100 hours' worth of online training exercises from Ninth House Network, a San Francisco start-up wrestling for market share in the crowded, competitive $66-billion corporate-training industry. To encourage daily usage, the company prices its offerings like a cable channel: rather than charging per course, Ninth House Network bills customers annual subscription fees of $500 per employee, which gives them unlimited, all-they-can-eat access to the education company's offerings. Cofounder and CEO Jeff Snipes says his strategy is to create content so compelling that job training becomes a healthful habit, the corporate equivalent of daily exercise.

Snipes and cofounder Tom Fischmann, both 33-year-old multimedia-training vets, have stocked their business with an eclectic mix of Hollywood and high-tech refugees from the likes of Disney, Pixar Animation Studios, Electronic Arts, and PeopleSoft Inc., including an assistant director from Seinfeld. The goal? "To bring together knowledge, technology, and entertainment to create broadband learning experiences that stick," says Snipes.

Content from big-name business gurus with whom Ninth House Network has exclusive online relationships is part of the glue. Like its Blanchard video, the company's Tom Peters video wraps business lessons in an entertaining shell, in this case a skit about running a lemonade stand. Currently in the works is a sitcom-style miniseries in which viewers can influence the actions of characters with a click of the mouse.

The company has signed up more than 40 Fortune 500­size customers, including Hewlett-Packard and Intel, since it first started offering courses, in January 1999. Ninth House Network has raised almost $50 million from Merrill Lynch and Chase H&Q, among others. Breakeven is "not this year, but not far off," according to Snipes.

Internet Drives Growth in Education chart


Intelligence on E-learning

To make some sense out of the online educational feeding frenzy, we spoke to Rick Armbruster, director of product development for Eduventures.com, a Boston-based company that conducts research and tracks investment in the education industry.

Inc.: Why has investing in education suddenly become so hot?

Armbruster: The $2-trillion global market and opportunities to eliminate inefficiencies are attractive to investors. The Internet began as a medium for sharing information among academics; today it is furthering that initial vision as a tool for sharing information and knowledge across the entire educational community of students, parents, and educators worldwide.

Inc.: Long-distance learning isn't new. How does Web-based education differ?

Armbruster: Web-based education extends the potential of distance learning. With the Internet, course content can be packaged and distributed more efficiently to a wider audience. In an economy with low unemployment and a high reliance on knowledge, educational and training courses are in demand 24 hours a day. The Internet enables curricula providers to cater to that demand in real time. Web-based education can be tailored to meet the needs of individual learners. That personalization is especially valuable to corporations seeking inexpensive training for individual employees.

Inc.: Are certain start-up areas hotter than others?

Armbruster: During the first quarter of 2000, roughly 60 new companies attracted more than $900 million in private capital. Business models for those companies vary considerably, but the vast majority are Internet-based. In fact, during the first quarter of this year, 64% of the private capital flowing into the industry went to Internet-based education companies. The best business models have a large target market, an ability to scale efficiently, a differentiated brand or product offering, and multiple revenue streams.

Inc.: How much cachet will a "dot-com" degree have in the real world?

Armbruster: I don't think Web-based learning is going to replace the traditional campus and classroom environment. Instead, Web-based learning will enhance it and provide access to courses for a greater audience of students. Roughly 70% of high school graduates in the United States seek a bachelor's or an associate's degree, but not all attend an institution with cachet. Skills are what are most important to those learners and their potential employers, not brands.

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