Investment in K-12 education innovation is soaring, but it’s not all rosy

When it comes to public education, it looks like private investors and entrepreneurs are ready to rally like it’s 1999.

After several years of relative drought, K-12 education, which has long been seen as a tough nut to crack for private business, is starting to draw investment at nearly record levels, outpacing higher education financing for the first time in several years.

According to GSV Advisors, a Chicago-based investment firm that specializes in education, in 2011, transactions in K-12 education climbed to $389 million, which is up from a low point of $13 million in 2005 and more than three times the investment in the sector in 2010. By comparison, even though online education startups like Coursera, Udacity, 2tor and others have attracted big buzz for major funding rounds, higher education as a whole received about $271 million in financing in 2011, a decline of 13 percent since 2010.

“It was the first time in a long time that the K-12 sector had more financing than the higher ed sector,” said Deborah Quazzo, founder and managing partner of GSV Advisors. “There’s a lot of enthusiasm around trying to find innovative ways to bring greater access, lower costs … to drive better learning efficacy.”

Overall, transaction activity in the broader education market last year surpassed activity in 1999 – the peak of the Internet boom – with more than 127 companies receiving funding, compared to 106 in 1999.

Policy changes, ed startup accelerators, technological shifts drive growth

Historically, private businesses have been reluctant to push into education because of bureaucracy, regulation, rigid procurement processes and market fragmentation. But Quazzo said several factors have changed the opportunity landscape for investors, including policy changes at the federal and local levels (such as Race to the Top and No Child Left Behind), new education-centric startup accelerators (like Imagine K12) and new talent from the education and tech fields (from Teach for America alumni to engineers from successful Silicon Valley companies). Of course, the rise of mobile devices, cloud computing and unlimited bandwidth is underlying recent growth in the space.

The successful exits of ed startups like Wireless Generation (which was purchased by News Corp.(s NWS) in 2010) and Schoolnet (which was bought by Pearson(s PSO) last year) have made investors and entrepreneurs increasingly confident about their potential for profit, Quazzo added.

Indeed, a Reuters story Thursday describes a very eager crowd at a recent University Club event in New York on private equity opportunities in for-profit education.

“You start to see entire ecosystems of investment opportunity lining up,” Rob Lytle, a partner at consulting firm The Parthenon Group, reportedly said in his keynote to a packed house. “It could get really, really big.”

School district budget constraints challenge entrepreneurs

But despite the growth and enthusiasm, the picture isn’t entirely encouraging.

While the timing is far better than it was in 1999 in terms of talent, technology and content creation, Quazzo said the purchasing environment in K-12 is very difficult given budget constraints that are worse than they were a decade ago.

On the upside, that is forcing people to think differently about how they allocate spending and penetrate schools, but she said companies selling to school districts can’t be naive and under-estimate the expertise needed to operate in a regulated environment.

Additionally, while data-driven adaptive learning platforms, such as Knewton, as well as other educational software services, from Dreambox, Wireless Generation and others, are getting kudos from educators, some educational leaders continue to be outspoken in criticizing the motivations of for-profit education ventures.

Speaking to Reuters, education historian and New York University professor Diane Ravitch, said she doesn’t have confidence in the overall quality of products from private vendors because “the bottom line is that they’re seeking profit first.”

“They’re taking education, which ought to be in a different sphere where we’re constantly concerned about raising quality, and they’re applying a business metric: How do we cut costs?” Ravitch said.

In 2012, growth in educational investment continues

A National Education Policy Center study last month showing that K12 Inc.(s LRN), a leading online education company, falls behind charter schools and traditional public schools across a range of academic standards is likely to do little to improve that poor perception of some for-profit education firms.

Other critics say that historical investments in educational technology really haven’t led to much learning improvement and have actually been more of a distraction from the bigger structural issues in education.

Still, a major difference between the environment now and the one a decade ago seems to be the talent and experience of the people leading the innovation – from former Teach for America teachers to top-quality engineers to ed tech entrepreneurs learning from their mistakes ten years ago.

“The jury is still out on some of the new models,” Quazzo said, but she added that in 2012, “velocity is continuing… there’s a lot of cause of optimism.”

(Image from winui via Shutterstock.)