Show Me The Money: K-12 Edition
Can you make money from the K-12 ed tech market?
We’re looking for opportunities where we can have a meaningful impact, fulfill strong user needs, and build a sustainable business. We’ve evaluated the opportunities for meaningful impact in K-12; in this post, we’ll be looking at the K-12 school system from the perspective of creating a sustainable business.
It’s no secret that raising money in today’s VC market is getting tougher both in general and in ed tech specifically — which means we have to think more concretely not only about the user needs we’re addressing and the impact we’ll make, but also about how we can build a self-sustaining business. We know anecdotally that we spend a lot on education as a nation — but we didn’t have a clear grasp of the details. We wanted to dig in and make sense of the numbers.
In particular, we wanted to know:
- How big exactly is the K-12 education sector?
- Where does the money come from?
- What is the average spend on education per student?
- How much is spent on educational technology? Is it large enough to start a company in that space?
Armed with that information we can then decide if K-12 is a market worth entering. So what did we find?
Total US K-12 Education Spending is over $630 Billion
First, the US spends a lot of money on education in aggregate — an expected $634B for the 2015 school year. It’s the third largest government expenditure behind healthcare and social security, making up ~10% of total government expenditure.
Majority of Funding for K-12 Comes from State & Local Budgets
Such a large outlay gets funded at multiple levels of government. The federal budget contributes ~$80 billion of that $634 billion with the remaining 88% split evenly between state and local funds.
States generally fund their education spend with income taxes, fees and lotteries. K-12 education is generally the largest area of spend for states, followed by healthcare and post-secondary education. On the local side, 65% of local education funding comes from property taxes.
Per Student Spending Varies Enormously Between States
Because 88% of a school’s funding comes from state and local sources, there’s a tremendous amount of discretion left to those state and local constituencies to decide how much to raise (through taxes) and how to spend it. That leads to a big range in per student education spending at the state level — from $6.6k in Utah to $19.8k in New York.
There’s also meaningful variation within states. States funding for education has declined ~1% on average over each of the last 3 years; local governments are left to make up the difference but because local funding for education largely comes from property tax, those communities with less of a taxable base (low income communities) have less ability to increase funding. This can reinforce some of the challenges facing schools with large proportions of low-income students that Sushmita covered in her previous post. Some states, like California, have attempted to address this by sending more money to lower-income school districts.
UPDATE: NPR Education has started a series on funding and schools — the first article is here and it’s good. Check it out.
K-12 Education Technology Market is $8–10B
Our interest extends beyond the aggregate spend on education — we also want to know how much is currently spent on technology. We find that the estimated amount spent on public K-12 ed tech is $8–10 billion with a forecast for growth of 8% over the next 5 years. On the one hand, that’s a meaningful market to be going after — not enormous, but certainly not small either. On the other hand, that’s a very small percentage of overall education spending (~1.5%). Perhaps that shouldn’t be a surprise — our education system is still a very human-driven undertaking and technology is a relatively recent (last 10–20 years?) line item in the school budget, competing with the many other initiatives and opportunities that schools could spend money on.
Of that $10 billion spent on ed tech, it’s estimated that roughly $5 billion is spent on devices — laptops and tablets mostly. That leaves roughly $5 billion for software and services. That’s helpful for us to know because it’s pretty unlikely that Sushmita and I are going to be building hardware — not impossible, but definitely unlikely.
So our target market in the public K-12 space (software and services) is currently roughly $5 billion and growing around 8% per year. That works out to roughly $50,000 per school or $1,600 per teacher or $100 per student in spend. Good to know!
In Summary: Big Sector and a Meaningful Target Market
Going through the exercise of how much is spent on education, how those schools get their funding, and how much is spent on technology has provided us with a better understanding of the market we’re headed into. Before pulling together this data, we were a bit worried that the only way to build a healthy education business would be to target the college or adult learning markets; however, seeing the size and the growth in ed tech spend has given us confidence that the K-12 market is one that would support a sustainable business if we can build a product that fulfills strong user needs.
We’ve now built up a better understanding of both the opportunity for meaningful impact and creating a sustainable business in the K-12 space; next we will step back and take a look at the opportunity for meaningful impact in the pre-K and post-secondary parts of education in order to decide whether K-12 is the best target.