How to make money in edtech
Jonathan Lau, co-founder and COO of InStride, shares how he approaches complex problems as a founder and three ways to validate demand for a product. He also outlines the different ways to monetise edtech products and five go-to-market strategies to share your solution with the world.
Welcome to the Emerge Product-Market Fit Academy series, where we bring you practical insights and advice from accomplished operators and founders in edtech. This series is dedicated to helping early stage edtech founders navigate the challenging path to achieving product-market fit.
In this case study, we are joined by Jonathan Lau, co-founder and COO of InStride. Jonathan is an experienced edtech founder, consultant, product leader and investor. As co-founder and Chief Operating Officer of InStride, he worked with the TPG RISE Fund and Arizona State University to build a profitable double-bottom line company that has grown double digits since inception. InStride partners with corporations to provide workforce education programmes that deliver business impact while advancing employee careers.
Before InStride, Jonathan was Senior Vice President and General Manager of Skills at Cengage, a leader in higher education. There, he led the $300m Skills group, re-invigorating a 350+ person organisation. He also launched Cengage Unlimited, a subscription service to significantly lower the cost of textbooks, which required reskilling 400 employees to take on new roles and resulted in $50m+ in cost savings.
Prior to Cengage, Jonathan was a leader in the Technology, Media and Telecom group at Temasek, a $200B investment firm, where he invested in more than 20 companies globally, totalling $1.4B. He was also a product manager at Microsoft and a consultant at McKinsey.
By the end of this article you’ll understand more about:
- Unpacking complex problems with the Five Whys
- Strategies for solution validation
- Paths to profitability in edtech
- Sell twice, win big: edtech go-to-market strategies
UNPACKING COMPLEX PROBLEMS WITH THE FIVE WHYS
Understanding complex problems can often feel like untangling a large knot. When unraveling such knots, Jonathan uses the Five Whys framework to get to the root of a problem to then build a solution. Here’s how he applied it at InStride and how you can use it for building your own startup:
- Identify the overarching problem
Find an problem you want to solve. For Jonathan, he started with a societal issue: increasing income inequality in the US. - Keep asking ‘Why?’ (at least five times)
Jonathan asked ‘Why is income inequality increasing in the US?’ One answer was the high cost of education preventing people from accessing higher paid jobs. Asking a series of whys revealed that education funding often relies on individual income or loans, further complicating access to quality education. - Identify a root cause you can address
Continue the questioning process until you uncover a root cause of the problem that aligns with your ability and resource level to solve. For InStride, they identified that corporations, the primary beneficiaries of a skilled workforce, were not investing enough in workforce education. Why? Many corporations did not see a clear ROI from such investments. - Formulate a solution
Your solution should respond directly to the problem identified through your Five Whys analysis. InStride’s solution was to help corporations understand the benefits of investing in workforce education and how it can help them achieve their business objectives.
Big societal problems, like those in education, are typically multifaceted, interdisciplinary and complex. A mistake founders make is lacking focus on the precise issue they’re solving. The Five Whys forces founders to employ first principles thinking, gain a deep understanding of the problem they want to solve and formulate a targeted solution, accelerating their path to product-market fit.
STRATEGIES FOR SOLUTION VALIDATION
Once you have hones down on the precise problem you are solving for, the next step is validating the idea with the target audience. In Jonathan’s experience, there are three main strategies for validating an edtech solution.
- Prototyping and testing
Develop a minimum viable product and subject it to rigorous testing. The goal isn’t to create a perfect product, but to create a simplified version that captures the core idea and functionality. This way, you can get a sense of the solution’s viability without overcommitting resources. - Custom build services
Identify a client with a specific problem and build a custom solution for them before transitioning it into a more generalised product offering. By building for an existing need a client is paying you for, you are building for a customer and adopting a customer-centric approach from day one that will later help you scale the product to others with the same problem. - Fake it until you make it
Create a comprehensive marketing campaign before having the finished product. Akin to the Kickstarter model, this is about testing demand and generating buzz. The focus is on the market’s reaction to the proposed solution.
The suitability of each method depends on the context, Jonathan notes. Faking it until you make it might work for B2C, where high demand may enable the option of crowdfunding or market pull can be used to attract investors. For B2B, he recommends custom build services because businesses are accustomed to buying services, and it’s easier to then productise and scale the solution.
The aim of these validation methods is to ensure the product has real market demand before committing large amounts of resources. A solution’s success isn’t only determined by the problem it solves but also by the market’s willingness to embrace it, also known as product-market fit.
PATHS TO PROFITABILITY IN EDTECH
One of the biggest questions on the minds of edtech founders is: how do I make money?
For many years, it was a challenge to persuade people that there is money to be made in edtech. Covid-19 certainly helped with shining a light on the potential of edtech and as of 2023, there are more than 30 edtech unicorns, collectively valued at $89B. Yet, monetisation remains a big challenge for many founders in this space.
Jonathan breaks down key three business models categories in edtech, each with unique characteristics and monetisation strategies: service-based, product and platform, and content-based.
- Service-based models
Here you charge based on the effort you put into a service. This could be as simple as a contractor’s cost-plus-time model, or more complex, like a fixed-duration strategy consulting project, or an outcome-based model where fees are dependent on successful transactions. The challenge with service-based models is driving enough value to justify the cost and balancing that at scale. However, with automation and AI, elements of these services can be productised for efficiency. - Product and platform models
These models generally scale with user volume. They might be:
License and support: a traditional model where you offer software and its support at a fee. Today, this could involve open-source technology where users pay for licenses or support.
Subscription: a popular model because of the predictability and recurrence of revenue. Subscription models not only allow for growth within existing customer accounts, but also through acquisition of new customers.
Ad-funded: although advertising can be a bit more difficult in the education sector due to high stakes — you need to ensure you are showing the right ads to the right people — ad funding is another potential revenue source. Another route that some education platforms opt for is generating revenue through lead generation, which works in a similar way. - Content-based business models
Charging for content can be done in several ways:
Subscription: this involves recurring revenue for access to a library of content. The key here is to continually deliver value that justifies ongoing subscriptions.
Transaction-based: this is a one-time payment for permanent access to specific content.
Outcome-based: similar to service-based models, this involves charging based on successful outcomes, such as income share agreements.
Choosing the right business model — or, as is common in edtech, a mix of them— depends on the nature of your product or service, the value it offers, its cost and your target audience. In fact, your business model will likely evolve over time.
Jonathan shares a good example of this — he oversaw a critical business model shift during his time at Cengage, which provides education content and technology to support the learning goals of millions of digital learners worldwide.
Cengage traditionally followed a transaction model, where it sold textbooks as one-time purchases. Every three to four years, it would create and sell new textbooks, leading to significant sales spikes. Recurring revenue was a challenge — Cengage had to continually produce new textbooks and push one-time purchases to customers. As it grappled with the diminishing appeal of the one-time purchase model and the emergence of a used book market, an innovative solution surfaced, courtesy of Amazon and Chegg.
Amazon and Chegg began buying textbooks from Cengage to rent out to students, turning Cengage’s one-time sales spike into steady subscription revenue. Recognising an opportunity, Cengage considered, why not partner with them? This would enable Cengage to transform its transactional revenue stream into a subscription-based one. By leveraging its partners’ existing systems, it could expand its reach without drastically increasing the cost of creating textbooks.
Cengage continued to migrate towards digital offerings. Instead of selling access to each course separately, it bundled multiple courses together, providing students with a subscription to all their digital products. This gave students the flexibility to explore various disciplines without the financial burden of buying each course separately.
The strategy behind this was to lower the barriers to access different courses. A student might not invest in an English literature, history, or biology course upfront but, given access to the material, they might find it engaging — and even decide to take the class. This became the genesis of Cengage Unlimited, a single subscription that gave students access to all digital Cengage resources.
By analysing different business models, Jonathan was able to rethink the company’s monetisation strategy. By focusing on the customer’s needs and the possibilities of digital transformation, he was able to create a more sustainable and profitable business model. The shift from one-time transactions to a subscription model shows how businesses can stay relevant and profitable by continuously evaluating and adapting their strategies to changing market conditions and customer needs.
SELL TWICE, WIN BIG: EDTECH GO-TO-MARKET STRATEGIES
When talking about money, another key question arises: who should foot the bill for your product?
A key consideration in edtech is the distinction between the buyer and end user. In many edtech models, the stakeholder paying for the solution (parents, schools, universities, organisations) is not the end user (children, students, employees). Overlooking this is a grave mistake. The best edtech companies understand that this distinction involves ‘selling’ your product multiple times, understanding how to appeal to the different stakeholders. Jonathan highlights five predominant go-to-market strategies for edtech companies:
- Direct-to-consumer
This approach requires creating awareness about your product among individual consumers, often through digital marketing campaigns, such as Google AdWords. If successful, it offers one of the quickest paths to scale, given the direct accessibility of consumers online. This strategy is frequently seen in the marketing of college degrees or online certificate programmes. - Decision-maker purchases
This involves targeting a decision-maker who is not the end user. This is usually a parent or an employer who pays for the service and expects the learner or employee to use it. For example, with a coding camp for children, selling to parents often involves marketing to parents through parent groups, word-of-mouth referrals, or school recommendations. Though the parents (decision-makers) are paying, if the children (end users) hate the product, they are unlikely to keep coming back. The same applies to organisations and employees. - Decision-maker recommends
A more challenging approach is when the decision-maker can only recommend the product to the potential buyer, without the power to enforce its usage. This requires convincing both the decision-maker and the buyer of the value of the product. A familiar example is in higher education, where professors may suggest certain courseware or textbooks, but the students decide whether to purchase them. - Central buyer
A central entity, such as a government body, makes purchasing decisions on behalf of large groups. It’s often used in K-12 education, where state-level decisions determine which educational resources will be used for several years. It’s a high-stakes strategy with substantial potential profits but also significant risk if you fail to secure contracts. - Direct B2B
This is the traditional B2B strategy, where your product is sold directly to businesses. Your sales targets could be the CEO or CHRO, IT departments, or even individual business leaders, depending on the nature of your product and the specific company structure. From Jonathan’s experience at InStride, it’s crucial in this model not only to sell to the decision-makers but also to ensure that the end users are aware and excited about the product, and willing to use it.
The right go-to-market strategy in edtech depends on a careful analysis of who derives the most value from your product, how that relates to their willingness to pay, and how easily they can be reached by your marketing efforts. There is no one-size-fits-all approach; your strategy may need to shift as your business grows and evolves. But this list above provides a starting point for determining the best path for your startup.
Jonathan’s final advice to edtech founders? Remember that whilst a great product is important, don’t underestimate your role in selling it. Founders, more often than not, are product centric. Their focus lies in building innovative products that solve significant problems. Although they might wish that their products could sell themselves, this is seldom the case. Jonathan urges founders to actively participate in the sales process, and be the evangelist for their product. A sales team might be necessary for closing deals, but the initial momentum has to come from the founder, as their passion, knowledge and belief in the product can significantly impact its market reception.
SUMMARY
In this article, Jonathan Lau shares his expertise on achieving product-market fit in edtech, providing valuable tools such the Five Whys for deciphering complex problems. Sharing strategic advice on solution validation, Jonathan emphasises the need to strive for a minimum lovable product, a captivating offering that resonates with users beyond mere functionality. Discussing edtech business models, he spotlights the critical distinction between the buyer and the end user, a fundamental understanding that can shape the trajectory of your edtech product’s success. Finally, Jonathan breaks down five practical go-to-market strategies and highlights the crucial role founders must play in passionately advocating for their product.
Emerge is a global pre-seed fund backed by 100+ of the world’s best edtech operators. Our vision is to democratise access to opportunity — by being a catalytic partner for early-stage edtech founders. If that’s you, get in touch and submit your deck on our website.
This article is part of our Product-Market Fit Academy, where we bring you practical insights and advice from our world-leading community of Venture Partners. To keep up to date with our episodes, follow us on LinkedIn, Twitter, Medium, YouTube and Spotify. You can also subscribe to our newsletter to stay up to date with our latest insights for early-stage edtech founders.
