The Downfall of the Dot-Coms (And Other Industry Trends)

• By Vicki Smith Bigham
• 07/01/01

The times were exciting, even exhilarating. The Internet moved into every aspect of our lives, both personally and professionally. We witnessed the rise -- and then the fall -- of many of the dot-coms. They were riding high on the Web wave, and we saw their names everywhere -- in mailings and advertising, at conference booths and bashes and more. They proclaimed exciting new one-stop solutions to deliver goods and services. Somewhere along the way, reality emerged and a number of these companies began to fail. It's all in the new documentary film, Startup.com, which recently arrived in theaters.

You may have experienced this scenario a little closer to home in your own schools. The rise and fall of the dot-coms has indeed hit the education community, as it has every other market segment. For many of the dot-coms, the ride was indeed exhilarating and then daunting as obstacle after obstacle appeared. What is the fallout, and what are the messages remaining for our schools? The news is mixed.

Consolidation and Changing Models

It has been a turbulent ride in the last year, watching dot-coms gain attention and then fail or regroup with a new business model. It has been challenging to keep up with who is who, as companies grow by acquiring and partnering with others. If it has been a rough ride for the industry, it has been an equally confusing time for educator customers, who tend to purchase according to relationships and a history of trust and performance.

Consolidation of the ed tech companies has been a major factor in the last year and will continue in the months ahead. Some say this stifles product innovation; others counter that the dollars growing out of consolidation help develop more robust offerings for schools.

The good news is that the Internet has opened up an expanded world of opportunity for teaching, for learning, and for doing business. On the business side, it has afforded young entrepreneurial firms that have a new idea an easy vehicle to get up and running and in front of a customer base. We have seen the emergence of a host of new dot-coms sporting educational products from flash cards to activity sheets to tests to full-blown curriculum and delivering it via the Web.

When I returned from the FETC Conference last year, I claimed to have been “portalized,” as one exhibit booth after another offered an educational portal boasting a one-stop solution for teachers, parents, administrators, and students. (Come to think of it, how often have you observed educators choosing one solution?) But we have seen a variety of types of education portals developed -- for administrative services, for professional development, for academic services, for community services, for content and curriculum, for reference, for e-commerce and procurement, and others.

But just as the Internet has provided both opportunities and challenges for schools, business has experienced this same mix of good and bad. Their development cycles, sales and marketing strategies, distribution channels, and other core business processes have had to be reassessed and reorganized in new ways. As technologies rapidly evolve, management teams have had to struggle to lead their organizations smoothly through necessary transformations in such fast-moving times. Many educational administrators can relate to this kind of challenge.

Only the Strong Survive

A number of the stereotypical dot-coms were heavily focused on getting investments, building a board, branding to get their name out as broadly as possible, and similar activities. For too many, less attention was given to the product or service itself. And in retrospect, too many of these firms did not truly understand what it was that schools most needed. In the rush to be visible in the marketplace, too many released products and services that were not really complete or that had not gone through traditional levels of quality testing.

The list of companies your school may have purchased from or partnered with that have fallen victim to a dot-com crash reality includes names like iMind educational systems, nschool.com, wwwrrr, Inc., and Ysource. In each of these particular companies, there is little debate that they had talented minds and innovative ideas behind their offerings. Other creative companies, such as HighWired, have remained on the education scene, but only with drastically changed business models. Most of the dot-coms have been forced to change their initial business plans and models as well as many of their initial claims.

There are those who are surviving (as of this writing) in these turbulent times -- companies such as NetSchools, Classroom Connect, Learning Network, The Princeton Review’s Homeroom, bigchalk, and others. Content may indeed reign as king, as has been predicted. The investment in technology infrastructure in our nation’s schools will have little value without quality content to be offered. Investors will logically focus here.

From the Analysts’ View

The industry has watched many young companies go under, and it is a reality that the amount of venture capital raised by education companies has decreased in the last year. Companies continue to tighten up and cut back through staff layoffs and by cutting back on new development while focusing energies on moving current product inventory, perhaps causing one to think the picture looks dismal. The analysts will tell you, though, that the new ed tech industry has just been experiencing predictable growing pains and that it is maturing -- with every indication that the future looks bright and prospects strong.

Adam Newman at Eduventures.com points out that education companies raised $310 million in venture capital during the first quarter of this year. This represented a 70 percent decrease from the first-quarter figures of 2000. One might conclude that this paints a bleak picture for the future, but Newman counters by listing some key attributes that point toward long-term success for these entrepreneurial education firms and for schools:

- The education sector now has an increasing number of what he considers to be seasoned managers who can manage rapidly growing businesses.

- There is a growing number of recent graduates interested in contributing their knowledge and skills to the education community.

- The significant amount of private equity funneled into education ventures in recent years points to investors’ overall confidence in education, especially as it is transformed through technology.

- Leading strategic investors, such as Kaplan Ventures, Knowledge Universe, Pearson, and Sylvan Ventures, have begun to dominate the landscape and offer innovative solutions.

- Education is a top political issue in the Bush administration and 107th Congress.

These indicators are indeed encouraging. While schools work to reform and adapt for the new century, businesses are doing the same. Newman suggests it is a natural step to witness the reining-in of venture capital. As he noted in The Education Economy, “Similar to naturally occurring forest fires that strengthen an ecosystem by clearing away excessive overgrowth, the thinning of the number of vendors in crowded markets and/or with unsustainable business models ultimately serves to strengthen private sector education” (“Despite Challenges, Prospects for the Education Industry Remain Strong,” May 21, 2001).

Jessica Davis, editor-at-large at InfoWorld, echoes the belief that all is not doom and gloom as she looks at start-ups and dot-coms across all market segments. In her April 9, 2001, article, “Gloomy Economy Reports Don’t Look So Bad After the Spring-cleaning Is Done,” Davis references a news analysis from Kinetic Information that concluded “the recent dot-com die-off is more of a ‘speed bump than a sinkhole.’” The study found that the number of dot-com firms that fail roughly parallels the 50 – 80 percent failure rate of all start-ups in their first five years of business. It goes on to state that these companies typically fail for reasons of being undercapitalized or lacking market focus. The latter of these two seems to be at the heart of what has been observed for companies who have gone under in the education space.

Finding the Positives

The Internet is still in its infancy, and we are only just beginning to imagine all of the ways it will help revolutionize schools and lifelong learning, as well as the overall tapestry of our lives. We continue to watch the lessons learned in the rough-and-tumble childhood of this revolution.

Consolidation and the forming of intelligent partnerships seem to be the key ingredients among the companies that are surviving these turbulent times. The most successful firms seem to be those who are forging relationships and collaborating as teams, with these functions not driven by but rather facilitated by the technology. Is this any different than what we have learned in our schools? It’s not about the technology -- it’s about how technology can support what we do.

Change takes time, and though schools are wired and seeking content to be delivered over those wires, there remain issues of access, training, alignment with testing and achievement, and more. As technologies expand opportunities for products and services and as schools grapple with current imperatives focused on accountability and student achievement, the checklist for what educators want from these companies remains somewhat constant:

- Give us something easy to use.

- Make it affordable.

- Be sure it is standards-based and aligned with state and national guidelines.

- Demonstrate through testing and research evidence of the validity of the program.

- Ensure that content is relevant for the age and grade level for which it is offered.

- Allow for flexible access to the content -- from the classroom, from a computer lab, from the media center, from home.

- Offer assessment options.

- Support us with training options that work for our schedules.

- Indicate ways to track effectiveness data that link student achievement to use of online content.

- Be consistent and reliable.

Expect the roller coaster ride to continue into the coming school year. And if you can believe the analysts, educators can look forward to robust and innovative offerings from firms that survive the ride and maintain a focus on their customers and education’s needs.

Vicki Smith Bigham is Managing Partner of Bigham Technology Solutions, a Houston-based consulting firm working with schools and organizations developing for and selling to the educational technology market. She is the facilitator of School Planning & Management’s Technology Advisory Board.