Venture Capital: Online education attracting support
By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER
Friday, January 24, 2003
Starbucks Chairman Howard Schultz, who revolutionized the retail coffee business in the 1980s and 1990s, now wants to help transform online education.
Working through his Seattle venture capital firm, Schultz yesterday invested $7.5 million in Capella Education Co. -- an online university with more than 7,000 students in 40 countries.
The 10-year-old Minneapolis academic institution, which offers degree programs in business, technology, education, human services and psychology, is already a leader in the growing field of online learning. It posted revenues of $50 million last year and has achieved more than 85 percent annual growth since 1998. But Schultz and his team at Maveron have bigger plans.
"I have been fortunate enough to be part of two companies that have come along once in a lifetime, which is Starbucks and eBay, and I think in both those cases, we were able to transform the marketplace and take the road less traveled," Schultz said. "When we started looking at Capella, in my view, it is emblematic of that kind of opportunity, to transform the marketplace."
Schultz is not alone in that view. Online education has attracted some heavyweights in the past five years, including financier Michael Milken who co-founded Knowledge Universe, The Washington Post Co. which bankrolled Kaplan Inc.'s online program and investment banker Herbert Allen, who pumped $20 million into Global Education Network.
But the promise of the technology has not developed as fast as some would have hoped.
Even though the luster came off the sector to some degree during the dot-com bust, investors have not completely soured on it. Shares of the University of Phoenix, one of the largest purveyors of online education, have nearly doubled in the past two years. Its online campus had 49,000 students as of August.
Schultz also is extremely bullish.
"The more we looked at (Capella), the more enthused we got about how big this could be and transformational it could be," he said. "I think this is a once-in-a- lifetime opportunity in a very large category that is in the infant stages."
In fact, Capella was not the only online education company announcing venture fund raising yesterday. Seattle-based Headsprout, which has developed an interactive reading course for children 4 through 7 years old, landed $6.3 million in new funding from Roser Ventures, Sofinnova Ventures and Raisin Fund.
Headsprout co-founder and Chief Executive Officer Greg Stikeleather is equally enthusiastic about the promise of online education. And he said the market is starting to pick up.
"The overall financing market for everything remains tough, but VCs are starting to pop up again and need to put money to work," said Stikeleather, who co-founded the company in 1999. "There are some big problems in the educational arena and we think we are tackling one of the biggest."
Big problems usually translate into big money-making opportunities. And that attracts venture capitalists. It certainly captured the attention of Chris Roser, who led the $6.3 million investment in Headsprout. He said online education is only now becoming possible with the widespread adoption of broadband and other technologies.
Last year's report from The National Center for Education Statistics indicated that 99 percent of U.S. schools now have Internet connections, with the vast majority using broadband connections. That makes a huge difference for com- panies such as Headsprout, which delivers 30-minute interactive reading programs to schools in Seattle, Cleveland and New York.
"There's been a convergence of a number of technologies that make the online education solution more attractive and not cost prohibitive, where five years ago it didn't have that infrastructure," Roser said.
Capella, which caters to working adults in the age range of 25 to 55, also has benefited from broadband adoption. CEO Stephen Shank said online education has become mainstream in the past three years. About 125,000 people in the United States are pursuing degrees online. Just last week, The Wall Street Journal reported that premier colleges such as Duke, Stanford and Harvard will begin offering entire courses online next year.
With the numbers increasing and the technology hitting a critical mass, entrepreneurs such as Shank and Stikeleather are not slowing down as they try to bring online learning to those ages 4 to 54.
"I think now is the time," Stikeleather said. "But by no means are we kicking our feet up on the coffee table and smoking Havanas. We need to get the word out."
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