Exploring EdTech Funding and Monetization Methods
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The world of edtech is dynamic yet innovative enough to attract hundreds of success-seeking entrepreneurs to step up and make a difference. Entrepreneurs in the edtech market face unique challenges and opportunities in addition to navigating through several crucial aspects of building a successful business.
Two of those important aspects are monetization and startup funding. With multiple monetization strategies and no way to identify the perfect monetization strategy, devising an effective analysis is crucial. Similarly, getting funds from the right source is as important as all the other aspects of building a successful startup.
In this article, we will explore the types of monetization strategies edtech startups can choose and what funding sources they can avail.
Strategies for Monetizing Your EdTech Application
EdTech startups or for that matter all kinds of startups face failure because of the wrong business model. In-depth research is required to build the best-in-class solutions and similarly, the same level of efforts are required to have the right business model.
A business model comprises several components, including the value proposition, customer segments, distribution channels, and more. One of its crucial elements is the monetization strategy. Whether you are thinking of offering a free trial, or inspiring students, parents, teachers, or administrators to use your product, choosing the right monetization strategy is essential for effective planning and growth.
Here are a few edtech startup monetization strategies prevalent in the edtech market:
Freemium or Free Trial
Under this model, some features or functions of a product are provided for free. For advanced or better features, the users are asked to pay and the free features can be used without limitations.
The motive here is to get customers to start using the product for free. Once the user starts using the product and realizes its importance or gets used to it, they are more likely to pay for the additional features.
However, the biggest concern here is converting the free user to a paid one. The freemium model conversion rate is between 2% to 5%. Platforms like Coursera are using this model where they offer a course at zero cost but charge the student for the certificate for that course.
In this business model, edtech founders connect with the key decision-makers in the administration. This method is mostly used to sell edtech solutions to schools, colleges, and organizations.
EdTech founders connect with government agencies, administrators, regulators, campus CIOs, CTOs, etc. The founders have to convince the decision-makers in educational institutions or the government to buy their product/solution.
These decision-makers then supervise the implementation of the solution in educational institutions. However, for this approach, you need a robust product and an even better pitch to convince the representatives.
The benefit here is that you will attract high-scale contracts and sometimes a nationwide customer base. However, securing such large-scale contracts requires time and a lot of effort.
Schoolzilla has achieved success with this approach. Currently used in 140 schools across the US, Schoolzilla provides data-driven insights to the users to improve student’s learning experience.
The companies using this model approach parents and teachers primarily through educational institutions. They introduce the solution in these institutions to get the students and teachers familiar with the features. Often the institutions get to use the solution for free, they accept the offer.
As the students benefit, teachers can recommend that parents should get this tool for their children to use at home. The parents are then asked to buy the premium version directly from the company.
The bottom-up model is a good way to capture the market and boost user adoption. However, this model does ask for a lot of cash burn. As schools use the product for free and there might be a delayed response from teachers and students to adapt the solution at home, companies choosing this model must be prepared for delayed conversions.
A good example of this model is Scholastic, which offers some content for free in schools. But, when studying at home, students are required to pay for additional content. Since teachers support the product, they recommend parents to get supplementary material from Scholastic.
EdTech startups, while offering their products for free, can allow ads to run on their platform. Here, third-party platforms will pay you for the ads, which gives them exposure.
You can also run ads for your products and additional course material while allowing third-party ads to run on the platform. More popular platforms generate higher revenue with advertisements.
However, the biggest concern is that ads quickly become a nuisance and an obstruction. While trying to focus on studies, ads can ruin a student’s concentration. Hence, for this model to succeed, you must find ways to make advertisements unobtrusive while continuing to generate revenue.
Duolingo is using this model to generate 12.1% of its revenue while providing access to content for free. Users who don’t want to see ads can pay to access premium content without any obstruction.
Marketplace (Massive Open Online Courses)
This is where you build a marketplace for the users to buy and sell courses while earning a commission from every sale. MOOC platforms like Udemy host user-created content and courses.
Consumers can buy courses from the platform while the creators make money, and you make a commission. On top of hosting third-party content, platforms like Udemy and Coursera have launched their own certification courses.
This model is highly scalable, and your primary task is to provide creators with the right infrastructure to host their content. However, maintaining content quality is a big challenge for the edtech startups using this model.
In the beginning, they cannot allocate funds to check every creator’s content and verify its authenticity. Bad-quality content can ruin a startup’s reputation.
One of the most common business models, the subscription model, is where customers pay a recurring fee. The users can either pay every month or once in a year. EdTech startups can combine this model with the freemium model, where they provide access to some services for free and others at a subscription model.
However, one of the issues here is acquiring and retaining subscribers. To ensure continuous retention, platforms need to provide access to high-quality content regularly.
Platforms like MasterClass and BibliU have a subscription model where users pay to access content.
EdTech startups have quite a few options to choose from for monetizing their services. It is possible to combine more than one monetization strategy, depending on the requirements.
To choose the ideal monetization strategy for your startup, understand your target audience and their preferences. The motivation to pay for services may differ with corporates, schools, parents, self-learners, etc.
The monetization strategy you choose is also pivotal in getting funding for your edtech startup. In the next section, we have explored different funding options for your edtech startup.
Exploring Funding Options for Your EdTech Startup
Funding is the fuel that will keep your startup running and growing. Whether you bootstrap your startup or get investors through a series of funding rounds, every startup needs recurring funds. Let’s explore different funding options.
State and Federal governments support edtech startups with specialized funding programs. These programs provide adequate funding to edtech startups to promote innovation and development of services for the common good of society.
Hence, to ensure continuous efforts, the state and federal governments provide grants, funding support, and resources for edtech startups.
Make sure to check for funding programs in your respective country. While government funding comes at a subsidized rate, it is challenging to secure these funds. The government has strict guidelines and criteria to provide funds.
The government funding schemes can provide funds from $5,000 to millions of dollars. However, the exact amount varies according to the scheme and program.
Angel investors are high net-worth experienced individuals. EdTech startup founders can approach angel investors with their products, services, and innovations to secure funds for developing the product further.
These investors usually invest against equity shares in the startup and provide critical early-stage funding to the startup. The majority of these angel investors are successful entrepreneurs who own one or multiple companies.
Angel investors bring money, share knowledge, and provide access to their network and resources which helps startups benefit immensely. They become mentors for the startup founders and provide unique solutions to the problems startups face from time to time.
Crowdfunding involves a group of people donating money for the development of a product or service. Several people contribute in small to large amounts to the project or a cause.
EdTech startups can raise funds through crowdfunding, but with a few prerequisites:
- Have a goal in mind. Social cause-related projects are more likely to get funding than others.
- Crowdfunding platforms are known to support a particular type of project. For instance, Kickstarter supports creative projects. So, an innovative edtech service or solution can get accepted by Kickstarter.
Similarly, always analyze the crowdfunding platform. Choose the platforms that have supported similar projects or startups in the past. Mindstone, an edtech startup from London, got around $2 million through crowdfunding.
Bootstrapping is when startup founders invest their own saved money to start the project. Physics Wallah, which has turned into a unicorn today, is a bootstrapped project.
However, this approach is also a big challenge for startup founders as they might end up investing all they have and not generate any revenue. Hence, bootstrapping is a risky investment for any founder. The amount of money you spend here depends on your capability.
Venture capitalists represent a private equity-based financing firm. A group of investors form a pool of funds to invest in startup companies. Some of the popular names in this category are Brighteye Ventures (invested in YouSchool), Owl Ventures (invested in MasterClass), GSV Ventures, and Emerge Education (invested in Spartwise), among others.
Venture capitalists look for things like team structuring, business models, addressable markets, and the product’s USP before investing.
Then there are the mammoth venture capitalists firms like Sequoia Capital, SoftBank Vision, etc. These institutions have raised billions of dollars of funds to invest in startups. Institutional funding organizations invest hundreds of millions of dollars worth investment in later-stage startups.
Taking money from venture capitalists often comes with a set of conditions. But it also brings the much-needed expertise of the experts in the field, which can help a startup grow.
A traditional way of funding edtech startups is taking a bank loan. Banks often charge high interest rates on business loans, but some government or bank schemes promote startup growth.
Focus on the loan products with relatively lower interest rates, however with bank loans repayment is essential, irrespective of the fact that your startup succeeds or not.
While these are the major sources of funding for your edtech startup, we want to share some important information on edtech funding.
Why should an edtech startup take funding?
Funding brings the fuel startups need to launch, grow, and scale. The exact purpose of securing funds depends on the current state and stage of a startup. However, a few examples to get funds include product development, marketing campaigns, customer acquisition, MVP production, and capital investment.
When should a startup take funding?
The time to secure funding depends on the startup’s stage. Early-stage startups ask for funding for product development, validation, and launch. Similar startups with a proven business model (Series-B) startups ask for funds for the expansion and scaling of their product.
The timing and amount of funding a startup requires aligns closely with its goals and stage of development.
When not to ask for funds?
There is always a right time and right reasons to ask for funding for your startup. But there are several reasons why you should never knock on an investor’s door.
- To pay off debt: Investors won’t be interested in providing funds to a startup that wants to pay its existing debt. Indebted startups need to pay off debt before asking for funds.
- For operating expenses: Generally, investors expect startup founders to have enough capital to cover operating expenses. A startup that cannot cover its operating expenses may not have a sustainable business idea.
From donations to taking a business loan or getting investments, edtech startups are required to prove their worth. Everyone invests in a business for some gain, even the ones giving donations want to promote their philanthropic plans. As a startup founder, you need to be sure about taking funds from one or multiple sources based on your goals and plans.
No form of investment should impact your business negatively, hence always tread carefully here.
To Sum it Up
Raising a startup from scratch is akin to nurturing a plant. You need to be careful about how you grow (monetization) the plant and who has access (funding) to the plant.
As we have discussed the intricacies of each monetization strategy and funding options for an edtech startup, our motive is to arm you with the right information.
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