For years, Silicon Valley has failed to breach the walls of higher education with disruptive technology. But the tide of battle is changing. A report from the front lines.
After the guests leave, Michael and I retire to the living room with one of his colleagues, Nick. The conversation comes around to how the money works. Nick explains that, nowadays, there is a basic philosophical divide among venture capitalists. One way of thinking goes like this: technology is a winner-takes-all world. For every Facebook, there are dozens of Friendsters lying in a pile of dead companies with silly made-up names. The difference between winning and losing everything often comes down to timing and execution. Everyone knew social networks would be huge. Mark Zuckerberg just did it better, so he won. Talent, meanwhile, is always scarce. So the VC guys try to identify the smartest people with the best teams in their quest to back the winner who takes all.
The second way of thinking—the one that Nick finds more plausible—is that the world is too complicated and chaotic to accurately predict which company will have the exact combination of talent, luck, and timing to be victorious. There’s no way to know who will come out of the scrum with the ball. Therefore, the smart strategy is to invest in the entire scrum—to bet on categories, not people. The recent surge of money into higher education startups reflects growing interest in the category. My goal is to find out what it’s like in the middle of the scrum.
It’s 10:30 a.m. on my first full day in the valley. I’m in San Mateo, twenty miles south of San Francisco, at the offices of Learn Capital, an education-focused venture capital firm. Having driven down from the city in Michael’s Honda CRV, he and I take the elevator to the second floor, where one of the firm’s partners, Nathaniel Whittemore, brings us into a glass-walled conference room. We walk by five people sitting around a table, some with headphones on, each staring intently at a thirteen inch MacBook Air. “Do they work for you?” I ask, nodding at the people outside the glass, assuming they’re junior investment analysts or somesuch.
“No,” he says. “They’re one of our investments. That’s OpenStudy.” By which he means: the entirety of the company known as OpenStudy—its personnel and infrastructure—was sitting around that table. Open- Study is a Web site that allows people to create online study groups, for free. “Tired of studying alone?” their site asks. “Connect with learners studying the same things you are.” OpenStudy says it has 100,000 students from 170 countries and 1,600 schools. Because all of the computing capacity, electronic memory, secure backup, and related telecommunication infrastructure necessary to do this can be bought as cheap commodities from a remote provider, the actual physical infrastructure needed to run an ed tech start-up like OpenStudy consists of, in its entirety, five lovely aluminum computers (nearly everyone I meet in Silicon Valley has a thirteen-inch Air), five ergonomically designed black chairs (they are always black), one table, and a wi-fi connection. I ask Nathaniel about how Learn Capital sees the world. Is the real money to be made, per Marc Andreessen, in eating the existing education industry? Or will it be in providing service to the industry, helping them do what they do better? In terms popularized by Harvard business professor Clayton Christensen, this is the difference between “disruptive” and “sustaining” innovation.
Nathaniel says that’s an “ideological” question. Learn Capital looks for two things, he says: “highly relevant niche plays,” which sound like a sustaining innovation, and winner-takes-all “platforms,” which sound like university eaters to me. In fact, if one word defines the dialogue of my trip to the valley, it is “platform.” Investors want to put their money in platforms, and start-ups want to build platforms, because right now, and for the foreseeable future, platforms rule the world.
The idea itself isn’t new. Wal-Mart builds platforms—actual, physical platforms, made of concrete, with walls around them and a roof overhead. Then it connects those platforms to several gigantic networks of transportation, telecommunications, and commerce, thus connecting tens of thousands of companies that manufacture things to hundreds of millions of people who want to buy things. Because Wal-Mart owns the platforms on which those transactions take place, it makes money with every sale. Because Wal-Mart is unusually good at figuring out where to put platforms and how to manage those gigantic networks, it is currently the world’s largest private employer.
Making a lot of money on the Internet tends to involve building platforms for electronic commerce. The great thing about it is that you don’t have to build thousands of different platforms that are physically located near your customers. You only have to build one. EBay? A platform for auctions and person-to-person sales. Amazon? First a platform for books and now for a great many other things. Craigslist is a platform for buying and selling things that are inherently local, like concert tickets, apartment rentals, used stereo equipment, and prostitutes. Netflix is a platform for buying and selling movie rentals, iTunes for music, the iPhone for apps. The platform builders are kings of the virtual universe. And, of course, Facebook: the social platform. With a key difference. The first generation of platforms involved taking small pieces of larger transactions. Wal-Mart had $447 billion in revenues last year, but in a way that overstates the size of the company, because it also had over $400 billion in expenditures, most of which went to buying things from manufacturers and reselling them to customers.
When a customer rings out of Wal-Mart with a bill of $100, most of that money doesn’t go to Wal-Mart shareholders. It goes to a combination of Wal-Mart’s suppliers and the millions of people who work as employees in Wal-Mart stores.
Facebook is different. Its pays nothing for the untold terabytes of valuable information exchanged on its platform. The users generate it themselves. It doesn’t pay for the telecommunications infrastructure needed to exchange information—that’s between users and giant telecoms like Verizon, Comcast, and AT&T. The only cost to Facebook is software development and data storage, which becomes ever cheaper as Moore’s law and its storage equivalents march on. And because it only has to build one platform, not thousands, it only has to employ a few thousand employees, not, like Wal-Mart, more than two million. In May, Facebook launched the largest tech IPO of all time.
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