StirEdu

Brooke gathered her team. She just came back from a meeting with one of the main VC’s in the city, and
she realized they had to decide which direction to go. The partner was willing to invest, but only if they
chose which market to focus on. He wanted Brooke and her team to come back with a more concrete
plan. Brooke started StirEdu as an IT services firm with a focus on creating corporate training modules for
sales force training. Given her background in education, and position as an HR manager, she realized the
need to reduce cost while improving the effectiveness and efficacy of the practice. However, after creating
the modules, she started getting interest in using these in business schools across the country and
different online MBA programs. While the modules were not designed for this purpose and had to be
mildly adjusted, they received great feedback.

Brooke had long ago decided that there was a market for her online modules because existing solutions
were not adequate and she felt validated after reading the feedback. Yet the challenges facing her seemed
daunting—how to get her entrepreneurial idea off the ground and create a profitable company out of her
product. Brooke knew that the online education space was highly competitive, with many entrepreneurs
recognizing that online learning would someday replace or supplement a significant part of many
education programs. In addition to entrepreneurs entering the market, it was clear that many companies
are already serving the education market were pursuing online learning. These were huge established
organizations like textbook publishers, universities, and consulting firms. However, she also felt that much
of the online learning content that was available at the time did not take full advantage of the interactive
and data-driven capabilities available and was often of low quality.

Brooke was passionate about the market and the product, but several fundamental questions nagged at
her. First, what types of customers should she initially target—corporations, universities, or individual
students? Brooke felt that the market for academic subjects was less competitive than the markets for
corporate training, but it had also been less lucrative in the past. Second, each of the business models her
team had explored seemed to have a serious trade-off. One model she explored was to develop tutorials
“speculatively” by trying to anticipate what the market wanted, then packaging and selling them as off-
the-shelf products. This fit better universities and business schools. An alternate model was to continue
and focus on developing customized learning tools for corporations, addressing their corporate training
needs.

Education and the online market

Since 2014, the US EdTech market has achieved a compound annual growth rate of 8.81% and is expected
to grow to US$43 billion by 2019. It is made up of over 1,500 companies and 150,000 education
applications. Within the EdTech sector, the higher education and lifelong learning (post-secondary)
segments comprise 54 percent, not accounting for corporate training, with K–12 the remaining 46
percent. This split is predicted to stay about the same over the next three years.

Reflecting broader technology developments, applications are an essential element of the EdTech
ecosystem. The educational applications market in the US was valued at US$2.5 billion in 2016 and is
predicted to reach US$5.8 billion by 2019. In 2016, pre-primary education made up 40 percent of the
market; primary and secondary education 39 percent; and higher education 21 percent. The segments are
predicted to stay reasonably constant over the next three years (see figure below)
The corporate-training market was served by companies that offered specific training, certification, or
developmental content to its employees and its clients. Over and above traditional education, US
employers are investing an estimated US$70 billion per year in further training and education for their
staff where the global market has reached $360B in 2017 (see figure below)

The benefit of online learning, according to its most prominent proponents, was that the medium enabled
students to replace the traditional learning environment—the instructor, blackboard, and classroom—
with online lessons. These proponents believed that the Internet allowed the world’s best instructors to
share their expertise anytime and anywhere, giving students around the world the same high-quality
education that was now given only to a select few, at minimal incremental cost. Students could review
lessons repeatedly on their schedule, and education/training could be personalized and infinitely scalable.

While some argued that online learning would eventually replace the classroom, others held that online
learning was a supplement to the classroom and would allow teachers to spend more time on subjects
that were particularly suited to a classroom environment. Students could then use these options to review
what was covered in class or to explore topics in more detail.

Among EdTech firms, several business models emerged:

(1) Platforms: online platforms provided the “plumbing,” or infrastructure, for online learning efforts.
Platform companies ran the gamut from providing instructor-led, Internet-based video-conferencing,
such as Centra’s product, to software that administered students' grades and managed student data, such
as Learning Management Systems (LMS). Among the latter, the main players were Canvas and Blackboard.
(2) Aggregators: these offered an organization or a student consolidated access to learning and training
resources. Many aggregators were content-consolidation businesses, providing a simplified way to
discover or use training content from many different providers on a single website. These aggregators
were essentially a new marketing channel for content and offered a convenient way to manage and
consolidate material from multiple creators. Some aggregators added platform features, such as tools to
consolidate student performance information across a user organization. Companies such as Coursera
and Udacity were examples for such aggregators.
(3) Content and application creators: Content creators could be segmented into stand-alone content
producers and service providers. Stand-alone content producers created prepackaged learning tools that
were essentially sold “as is” directly to students, as course supplements, complete courses, or whole
online degree programs (e.g., 2U). In most cases, these companies retained the intellectual property of
their course content (i.e., they owned their content). In contrast, service providers developed content for
specific companies or university courses. These organizations worked with clients to provide customized
learning content that met specific criteria. Firms such as Real Time Cases and Forio are examples for the
latter.

The StirEdu Learning Idea

StirEdu's fundamental belief was that every student was different and that each should explore a concept
at his or her own desired pace and level of difficulty, and use his or her preferred method of learning.
Research suggested that people learned best when they approached a subject using their own personal
“learning style.” StirEdu used interactive and multimedia capabilities, as well as novel deep learning
methods to deliver learning tools that students could adapt to their own needs. For example, for those
students who found it more difficult to understand or retain text-based learning, StirEdu provided
interactive, audio-visual animations and short video clips to illustrate key concepts with pictures and
sounds. For students who learned best by applying concepts, StirEdu developed simulations and games.
StirEdu used machine learning and novel assessment methods to develop intelligent adaptive learning to
refer the student to the best text or sub-module required by him or her to understand the material better.
The technique worked well for training the sales force of several S&P 500 companies and surpassed
expectations with business school students.

Brooke strongly believed that StirEdu should not be out to replace the teacher and classroom experience.
Many new EdTech companies had been set up to replace university and corporate-training classrooms.
This approach seemed attractive because it allowed students to learn the material without the physical
presence of a teacher, resulting in a more convenient and possibly less-expensive education. However,
dropout rates at pure online universities were high, and many students—both at universities and
corporate-training sites—seemed to value the classroom experience. So it was not at all clear whether
pure online education would ever replace a significant part of the classroom, as some experts had
predicted. Brooke wanted to produce supplemental tutorials using online technology to reinforce
classroom topics and allow students to explore issues that they may not have retained from previous
coursework.

Creating the Initial Modules

Brooke had first considered the online education market while working as a human resources trainer for
her employer. At the time, she witnessed how on-boarding of salespeople took longer than expected and
was not very effective. Truly skilled and knowledgeable trainers were hard to find. Many consulting
companies were struggling to train their clients, and most computer-based training applications were so
poorly designed that they were practically useless. Students would either lose interest a few minutes into
the program or, if they managed to push through, forget what they learned within days.

When Brooke left that firm, she recruited James, her high school friend who worked as a CTO for several
startups, and they together started StirEdu, as an IT, project-based, content creator. They secured a
contract with a firm to create a module to train their salespeople and hired several specialists for the
project, from learning specialists to video and audio professionals. Brooke believed that a critical element
of the StirEdu idea was to create a process that, from the start, immersed the development of the
application with student feedback at every stage of the production process. She and the team were
continually striving toward this ideal, though they knew that using this type of operation meant that
projects would take longer to design and cost more to produce. The client firm was delighted and
contracted with StirEdu to create a sequence of these modules for salespeople in different sectors.

Choosing the Model and Customer Segment

Brooke was confident about her company’s ability to produce a tremendous educational product, but she
was still unsure exactly how she should position her company in the market. She knew that product
companies generally had higher margins and valuations than service companies, especially when that
product was software. This made building a library of content that StirEdu could sell off-the-shelf an
appealing approach. Brooke knew, however, that any approach involving a long period of upfront
development to create a library of content was risky. It might be some time before the founders knew if
their product was salable, and considerable resources would be required in the interim.

While the business model decision was the most pressing, Brooke knew there were other issues she would
have to address. She had to consider the problem of which customer segments to pursue. Universities
had lots of experienced educators who would be great partners in developing content, but they were
notoriously difficult to work with profitably. She knew from her interviews that many corporate-training
departments wanted more custom development, but that these could not be shared across organizations
given the need to customize them to the specific needs of the organization. While Brooke felt she had a
potential customer base in both corporations and universities, she wasn’t sure which market she should
pursue first. Was a focused approach to customers appropriate, suggesting that she should pursue one
market to the exclusion of the other?

Brooke knew that in the long run, owning content could be significant. If StirEdu owned the content and
customers found it useful, incremental sales of that content would be very profitable. However, Brooke
knew that this would require a significant investment in developing the platform and the content. She
also knew how important it would be to select the right content areas. She wondered which subjects
might be most likely to be profitable and how he might go about predicting market needs on an ongoing
basis. The advantage of the off-the-shelf market was that the distribution channel for it already existed,
given that around 90% of the content was purchased and discovered over Harvard Business Publishing.
That distribution was reasonably expensive though, taking 20% cut of all sales revenues.

On the other end of the spectrum, if StirEdu continues with specializing in creating customized content,
the firm would avoid the problem of anticipating market needs and would require much less startup
capital. Cash flow would come almost immediately, and she and her team could gradually build their
product development expertise without a long cycle of fundraising. Brooke noted that if she were to
continue and follow the custom-market, she would need to hire a dedicated sales force, further increasing
her costs. While this approach had its virtues, Brooke worried that the custom-module approach meant
slower growth. Furthermore, StirEdu would be building content for its customers, who would retain
ownership of the final product.

Brooke also had to consider the financial ramifications of her decision. Based on her experience the
amount of time and the willingness to pay differ significantly based on the type of module:
(1) Level 1: Passive. Limited interactivity; no animations. Primarily video content with some limited
assessment. The learner merely acts as a receiver of information.
(2) Level 2: Limited interactivity, with the learner offering simple responses to instructional cues.
(3) Level 3: This level has complex interactions that request the learner to make multiple and varied
responses to prompts.
(4) Level 4: These real-time interactions create life-like sets of complex cues and responses.

All modules that StirEdu created until now were level 4 and indeed Brooke specialized in tightly balancing
and establishing a process from the research stage, through curricular development, until the final editing,
testing, and calibration. These modules were usually praised as being best in class, primarily as
demonstrated by the level of engagement and content retention by the students. Based on her
experience, she estimated the needs for each of these types of modules and the willingness to pay in the
business school and college market:

Passive Limited Complex Real Time

Research 5 10 20 20
Curricular development 5 10 20 20
Tech development 10 20
Assessment development 5 10 20 20
Video recording and editing 20 20 30 20
Writing 5 15 15 20
Final Editing 2 5 7 7
Testing and calibration 1 10 15
Total Hours 42 71 132 142
Total Cost in $ 5,880 9,940 18,480 19,880
Price Per Participant in $ (College) 10 12 15 20
Brooke also estimated that in steady state, each of these modules would be used by ten schools, wherein
each school around 60 students will be using it (but with some variation across schools). Given the
emphasis on the relevance of the modules, Brooke anticipated a shelf-life of 3 years for each of these
modules. Much shorter than a typical case study, but that was also a differentiating factor for StirEdu.
Brooke was hoping to start by having 50 such modules, but over time grow to have a few hundreds of
each. Based on the current market, she anticipated having to create an equal number of modules of each
of these four types, if indeed she pursues the off-the-shelf market.

Two critical aspects of the online off-the-shelf market are the need to develop a platform to host and run
these modules and the need to have a contact-center to support the needs of students and faculty using
the modules. James anticipated that it would take 12 months with four developers working full time to
develop a sustainable and scalable platform, resulting in about $1,536,000 in cost (assuming $200 per
hour per developer). James noted that Brooke should budget a similar cost on an annual basis given that
with more participants, the number of mobile platform and integrations with different systems is going
to increase rapidly, requiring constant refactoring and feature development and maintenance. Since
Brooke wanted StirEdu to be known as providing a superior experience, not only in terms of educational
experience but also in terms of tackling problems, she wanted to have a contact center with full-time
StirEdu customer support and success specialists. She anticipated that around 10% of the students would
call or contact the support center throughout their usage of the module, but forecasted that every case is
going to take around 15 minutes to resolve. She budgeted for every such specialist 160 hours per month
and $25 per hour as the cost of employment.

For the custom-solution market, Brooke knew that she can settle with having pat time developer, and will
need a full-time salesperson (at the cost of $120,000 per year) which can sell around two modules per
month. The cost of developing the module itself was expected to be the same as the cost of developing
the Real Time module, as indicated in the table above. She noted that she could control the rate of growth
by having more or fewer salespeople. She also knew that the price per module is $40,000, given the higher
willingness to pay of corporate clients.

The long-term financial impact of the business model decision was also weighing on Brooke’s mind. A
venture-funded product company could likely reach profitability within a few years and might be ripe for
selling in as few as four years. A bootstrapped company would grow much more slowly, having to rely on
internal cash flow for expansion, and realistically might not see liquidity for ten years (or maybe ever).

The Decision
Coming back from the meeting with the VC Brooke felt good about the progress her team had made
toward building StirEdu into a viable company. She had developed a successful set of modules, identified
a good group of the core team, analyzed the market, and defined what she thought was a sound
development process. Despite this progress, many decisions still needed to be nailed down. The promise
of online was enough to motivate her, but she had to figure out the best way for StirEdu to fulfill that
promise.