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bootstrappingBy Christopher Nyren of Educelerate. Republished with Permission. Originally published on EdReach.

Stories of frustrated founders quitting their old-line company jobs out of an inspiration to “hack EDU” from their garage figures frequently among the current class of EdTech start-ups.  But, in fact, you can go all the way back to the 1960s to hear stories of hackers and programmers productizing their EDU domain expertise, building what would become the leading K-20 EdTech companies of today, including Ellucian (SunGard-SCT), Scantron (Quality Computing) and Amplify (Wireless Generation).  Such bootstrapped success may not generate the headlines of $60mm invested into the SnapChat of K-12 or nearly $90mm for the Facebook of K-12, however, the less sexy cases probably provide all the more relevant, actionable insight to the aspiring education entrepreneurs trying to unravel the byzantine markets of K-12 education (read more in our EdTech Failings of Silicon Valley).  And they have the added benefit of providing a more capital efficient model to scale, thus boosting returns for both school district clients and founders.

A Tale of Two Start-ups

The August 2014 merger of Frontline Technologies and Aspex Solutions generated few headlines, but these two 16 year old K-12 start-ups provide a compelling case study.  Back in 1998, a young programmer Abe Reese quit his job at the once high flying United Stationers (est. 1922) to start Aspex Solutions. As the son of educators, Abe had a passion (and a few contacts) in K-12.  Running Aspex Solutions as a dev shop, he was able to build a number of customer-financed products (e.g., textbook inventory management, certification renewal tracking, etc.) until focusing on his “AppliTrack” web-based teacher hiring app.

Certainly, Abe and AppliTrack benefited from the unprecedented discontinuity of the Internet, where individual school departments were granted the latitude to “go online” in ways they had no experience (whereas such technology projects had previously fallen under the purview of IT).  Abe found that he could sell his simpleaccessible and affordable hiring app directly to HR departments, especially when priced as low as $850 per district per year through an ASP model (i.e., Application Service Provider or SaaS before it was SaaSy).

In this way, not only did AppliTrack avoid board approvals or competitive bid processes, but the HR department could just buy the product out of their recruiting budget (it was literally cheaper than paper).  And while K-12 is notorious for opaque buying decisions, their pricing strategy bypassed this while further taking advantage of the relatively transparent buyer identities within the market.  Abe downloaded information on each Illinois school district, dividing them into large / high, medium, and low ($850 for schools with less than 1,3000 students).  From there, word of mouth coupled with good old-fashioned mail campaigns (literal handwritten letters) helped AppliTrack scale to over 3,000 districts without ever raising outside money.  Along the way, Aspex cross-sold new adjacent products such as a behavior based candidate assessment pre-screen and an HRIS (all built off the same tech stack).  AppliTrack’s extensive market adoption probably also played a part in their sister site K12JobSpot‘s growth into the most frequently visited K-12 job board  in the U.S. (compare this to the Comcast / GE Ventures dotCom flameout HotChalk, as described by Sramana Mitra in Are We in a Golden Age of EdTech?).

But in the ultimate tale of two divergent paths, Aspex’s acquiror Frontline Technologies was also founded in 1998 around an even more niche substitute teacher management app, Aesop.  Along the way, they raised outside capital accelerating their expansion such that Frontline could attract a massive growth equity investment in May 2014 from Insight Venture Partners (one of our profiled Most Active Investors in EdTech”), just three months before acquiring Aspex Solutions.  It is unknown to this author which founder equity was ultimately worth more.

Advice from Chicago’s K-12 Start-ups

Of course, scaling strategies for outcome minded education entrepreneurs is not always about making more money.  Its certainly not about a quick buck as the long 16 year path of Aspex Solutions is actually quite typical: per our research, the largest EdTech Unicorns took a median of 14 years to achieve critical scale (i.e., above $300mm in value).  In surveying the entrepreneurs behind some of the leading Midwest K-12 start-ups like Abe Reese of Aspex and Jay Alter, a founding team member at Edline, we have arrived at the following fundamental core principles for monetizing and scaling in K-12:

  1. Sell to Known People with a Known Problem: this sounds rather self evident, but as a current founder Ryan Hoch (Overgrad) succinctly puts it, “the so-called problems of bureaucracy in EdTech are felt most by those start-ups whose products are misaligned with one of the key issues affecting education.”  Make certain your product delivers tangible value for a core problem, but also focus on the largest and most influential schools (see point 3).  Once Abe had a critical mass of schools on his network, he achieved the mythical “network effect” with secondary schools having to be on AppliTrack in order to even get decent applicants.
  2. Keep it Simple: Even though AppliTrack was a back-end solution (hiring), it served as a front-end to teacher candidates (applicants), so it had to be clean and simple.  As both founder and CEO as well as the chief programmer, Abe could ensure the right features were launched at the right time.  In fact, AppliTrack only hired its first developer eight years in: this was clearly not an over-engineered (and thus, expensive) product.  Since their founding, AppliTrack has always maintained an approach of “Show, Don’t Tell”.  Leading with sales (our first point above) and focusing on the MVP / demo is effectively a regurgitation of the Lean Startup methodology, but this is particularly resonant approach in K-12 education.
  3. Selling to School Districts Takes Time: start-ups must not just plan for a school calendar based sales cycle, but likely face a two year sales process at their start.  K-12 is still largely an insular, relationship based industry and our founders believe it takes two years minimum just to “get recognized”. Consistency is key, as familiarity (i.e. touring the conference circuit) breeds trust.  Districts will look to their colleagues in other districts for advice, so seek to leverage each new regional sale to built out client referrals in that geographic market.  Of course, there is also the freemium route, but this is an article about bootstrapped scaling.  A more monetization-friendly strategy is to avoid getting caught up in centralized tech budgets and instead look to vertical / departmental pockets of funding (i.e., teacher recruiting).  And, remember, everyone gets their money in July or August.  That drives the timing of major sales efforts and product launches, but should also drive organizational flexibility and staffing (especially, under-funded bootstrapped start-ups).
  4. School Districts are Loyal Customers: Matt Greenfield has also written on this, but as an additional tip, note that some schools can actually take advantage of the occasional budget surplus to pre-pay for several years of their software subscription – a far cheaper solution for working capital needs than equity investment.  Moreover, in a perhaps anti-SaaS point of view, there is a particular K-12 risk of being locked into POs with one line item budget for the year.  Variable pricing (i.e., apps / users) can be deadly, so Aspex just structured their contracts with unlimited apps and users.  In this way, they could better plan their revenue and budget, but also led their school clients make AppliTrack by default a site license and pervasive across their district.
  5. Implementations are Hard: this is driving unprecedented school and vendor interest in Cleverand the N2N Integration Cloud, but implementations are more than a matter of APIs and legacy IT systems.  Our K-12 entrepreneurs have found that services are key: yes, services are lower margin than software, but at least they are positive margin unlike SaaS (at the start).  And in this way, our bootstrapped platforms have internally funded their start-up and seasonal working capital.
  6. No One Company Cleans up in K12: as previously noted, our research on EdTech Unicorns shows there have been perhaps a dozen exits greater than $300mm, with very few of those B2C models (e.g., Leapfrog, SchoolSpecialty, etc.).  Most exits will be under $50mm, so plan your investment needs/rounds (and valuations) accordingly.
  7. Teachers using Teacher-based Products are not Effective Champions for EnterpriseProducts:  This principle shared by Jay may come off as controversial, but merely reflects the reality that just because x% of a school’s teachers use any given Freemium Teacher App, does not mean a school district will / can find the requisite funding to pay for its premium upgrade.  Of course, there are freemium products achieving success in getting schools to upgrade, none more so than the former Chicago Public Schools teacher Jeff Scheur and NoRedInk.  And so in one last principle…
  8. Sell Your (Freemium) Product around a Measure of Utility or Engagement: This can be the number of questions answered / posted or assignments / assessments completed, but it should guide your product development and customer service focus and serve  as a proxy for learning such that the school can make a decision around it — and come to you to upgrade (eliminating capital intensive field sales staff).  As Jeff at NoRedInk shared with us:

    “Schools and districts are pitched on tons of stuff that they don’t want or need, which is unfortunate and largely unnecessary. I’ve always been a fan of freemium models in education because they allow teachers to discover and champion the products that actually help them do their jobs better. The approach is strategic for companies because it lets customers find them, and it’s also just good for the world since it helps school dollars get spent more efficiently. At NoRedInk, we really just try to add as much value as we can, and we’ve been fortunate that so many schools and districts have contacted us about the Premium version after getting comfortable with our software.”

By Christopher Nyren of Educelerate. Republished with Permission. Originally published on EdReach.