Special Report: E-Commerce

Something Ventured

Where the big-money investors are placing their bets

By LISA BRANSTEN

Where is the smart money going?

In the past year, venture capitalists have dramatically increased their investments in e-learning. Last year, $2.7 billion in venture dollars flowed into educational companies, and some 94% of that, or $2.5 billion, went to e-learning concerns that focus on electronic initiatives. In 1999, just 38%, or $981 million, of the $2.6 billion in education funding went to e-learning companies, according to Boston market-research firm Eduventures.com Inc. (www.eduventures.com).

To date, few of these ventures have made money for their investors. But many celebrity financiers, including Microsoft Corp. co-founder Paul Allen, financier Michael Milken, Oracle Corp. CEO Larry Ellison and venture capitalist John Doerr, remain committed. That's at least in part because they believe these companies can solve some of the country's education problems -- from a shortage of educated workers to a growing divide between haves and have-nots as education grows more high-tech.

But it's not all about altruism. "There's not easy money, there's not quick money, there's not Internet-bubble money," says Mr. Doerr, a partner at venture firm Kleiner Perkins Caufield & Byers in Menlo Park, Calif. But, he adds, "you can do good and make money."

Follow the Money

So where is the money going? Of the $2.7 billion that flowed to e-learning companies last year, about $817 million was invested in post-secondary-education companies, according to Eduventures. Some $782 million went to companies that sell employee-training materials to corporations, and about $764 million went to companies that serve kindergarteners through 12th-graders. Plus, there was $181 million invested in consumer companies that offer adult-education courses.

For his part, Paul Allen has made a number of investments in the educational sector through his Seattle-based firm, Vulcan Ventures. William Savoy, president of Vulcan, says he is particularly optimistic about Apex Learning Inc., a Bellevue, Wash., company that Mr. Allen helped start in 1997. Apex started by developing online advanced-placement courses that it sold directly to parents and individual schools. About six months ago, the company changed its business model and is now selling an array of online classes targeted at whole school districts and even state departments of education.

Vulcan won't disclose how much money it has put into Apex, but the e-learning concern raised $20 million in January 2000 in a round of investment led by Warburg, Pincus Equity Partners LP.

Michael Milken is another high-profile backer of education companies, mostly through Menlo Park-based Knowledge Universe Inc., an educational company he founded in 1996 with Larry Ellison. Tom Kalinske, president of Knowledge Universe, also has high hopes for some of the firm's investments.

Among those: UNext.com Inc. (www.unext.com), based in Deerfield, Ill., which offers graduate-level courses over the Internet. Knowledge Universe put in the seed money and owns about 20%. UNext owns Cardean University, which offers an M.B.A. online with course work developed with faculty from Columbia Business School, Stanford University and other traditional universities. Mr. Kalinske says he invested in UNext because he thought companies would pay to have their employees get a good business education online rather than lose those people for the time it would take to get a more traditional M.B.A.

At the moment Cardean offers only business classes, but UNext plans to expand into other kinds of graduate work. To date UNext has raised about $120 million from Knowledge Universe and a number of other investors. Mr. Kalinske says outside bankers have put a valuation of about $800 million on the company.

Home Schooling

Another of Knowledge Universe's e-learning plays is K12 Inc. of McLean, Va., which is developing online course work for kindergarteners through 12th-graders. Knowledge Universe put up $10 million for a majority stake in the company, which was co-founded by William Bennett, the former secretary of education.

K12 targets parents teaching their children at home and others who are dissatisfied with the classes their children are taking in school. By next fall, the company hopes to have full course work for kindergarten to second grade and then start adding three grades a year. Mr. Kalinske says bankers value K12 at about $800 million.

Mr. Milken's company also invested an undisclosed amount in LeapFrog, a division of Knowledge Kids Enterprises Inc. best known for its LeapPad interactive books. Mr. Kalinske says his company saw a need for better toys that could help children with skills such as reading and math, and he has been impressed with the results to date. Last year, he says, LeapFrog was profitable with revenue of about $172 million, and the company had one of the top-selling toys in the country.

To be sure, investing in e-learning companies takes a strong stomach. One example of how discouraging the sector can be is Lightspan Inc., a San Diego company that makes educational software for parents, teachers and students in kindergarten through eighth grade. The company, which was founded in 1993, attracted big backers, including Mr. Doerr of Kleiner Perkins and Jim Breyer, managing partner of Accel Partners, a Menlo Park venture firm. But so far those investments haven't exactly paid off.

In four years and three rounds of private financing, Lightspan raised a total of $102.5 million. Then in February of last year the company raised $90 million in an initial public offering. Despite those infusions of capital, Lightspan has a market value of only around $139 million and its shares are trading below the $12-a-share IPO price and even below what most investors paid to invest when the company was private.

'Hard to Build'

Lightspan "has not been one of the great successes of Accel Partners," Mr. Breyer says. "The education market is highly cyclical and seasonal, and it's been very hard to build an Internet education leader that has critical mass."

Despite such disappointments, Mr. Doerr remains convinced that the educational market will pay off in the end and that big, successful companies will emerge. In addition to his for-profit investing, Mr. Doerr is a founder of a new nonprofit called New Schools Venture Fund, which will invest $20 million in both for-profit and not-for-profit educational companies. Other supporters of the New Schools Venture Fund include Jim Barksdale, former chief executive of Netscape Communications Corp. and now a venture capitalist, and Steve Case, chairman of AOL Time Warner Inc.

Among the for-profit investments the fund has made is Carnegie Learning Inc., a Pittsburgh, Pa., company that has developed software to teach math and science to kindergarteners through eighth-graders. The hope is that such for-profit companies will generate enough money to pay for the nonprofit groups funded by New Schools.

"It takes longer, but the markets are big and the revenues are recurring," says Mr. Doerr.