Building an Education Startup: Cost is King

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Primary Venture Partners

8 min readFeb 8, 2021

“A basic element of the American dream is equal access to education as a lubricant of social and economic mobility.” — Nicholas Kristof

When we think about the ideal America, we think about the ability of everyone, no matter where they are born or the color of their skin, to build a successful and rich life. One essential input in this vision is education, which in practice should be “a lubricant of social and economic mobility,” as the journalist Nicholas Kristof so aptly notes. In the best version of America, good education unlocks a better life. And, that good education is widely available to bring the American dream to fruition for the masses.

However, this is clearly not the reality that exists, as education outcomes have become stratified based on socioeconomic status. While only 9% of students who do not enroll in college come from a top income quartile family, 41% of them come from a bottom income quartile family. 75% of students at colleges deemed to be “most competitive” come from the top quartile, while only 5% come from the bottom quartile. And, while 75% of top quartile students ultimately graduate with a 4-year degree, only 9% of bottom quartile students do. In tandem, socioeconomic mobility in this country has stagnated. Adults born into the lowest income quintile are disproportionately likely to stay there. Only 30% of them even reach the middle quintile, and only 4% reach the top 20%.

This reality is not the one we should want. Education is a powerful tool for enabling better lives, but we are not properly utilizing that tool. Today, that tool lies disproportionately in the hands of people who are already well off. This begs the question: how do we fix the system? How do we deliver higher-quality education to the people who need it in order to help them earn more and live more fulfilling lives?

If you find these questions compelling, keep reading. If you think the answer lies in technology businesses, even better. We think that part of the solution lies in new business models (enabled through technology) that can reduce or even eliminate the cost of high-quality education for students. This article outlines why cost is the key issue in education, how different business models address cost, and where to go from here.

A Big Market With a Big Problem

The education market is massive, at nearly $2 trillion overall. Even relatively niche categories within education, like professional learning and development (L&D) and non-traditional schools like trade schools and certification programs, are $100b+ markets and represent large opportunities. However, education is an ancient market that has developed over hundreds of years. Unsurprisingly, it has some serious structural issues. Unfortunately, those issues disproportionately impact lower-income individuals.

The biggest problem in education by far is cost and the associated student debt crisis across the U.S. In this country, student loan debt has reached $1.6 billion, and it is growing 2% annually with no sign of slowing down. Part of this issue stems from dramatic increases in tuition. From 1973–2013, tuition per student increased almost 4x. Simultaneously, income for the top 1% of families increased over 2x, while income for the median household remained stagnant, adjusting for inflation. In simpler terms, school got more expensive for everyone, but it got a lot more expensive for families outside the top 1%.

The result is that lower-income students are less likely to access education due to cost barriers. In a study of students who did not attend their first choice college despite being admitted, about 40% cited reasons related to cost. The cost issue becomes even more demoralizing when we inspect what is driving tuition increases at large universities. As an example, let’s take a deeper look at the University of Virginia’s financials.

Revenue drivers:

Patient services (associated with the hospital): 43.3% of revenue
Student tuition and fees: 15.0% of revenue
Investment income: 10.1% of revenue

Cost drivers:

Compensation: 54.1% of costs
Supplies and other services (primarily associated with the hospital): 33.3% of costs
Depreciation: 6.7% of costs

For a university like UVA to reduce tuition, it would need to dramatically increase alternative sources of revenue or reduce costs. However, its options are limited. Competition drives up compensation for faculty and the need to invest in higher-quality facilities. Alternative sources of revenue from the hospital and the investment company are hard to significantly change. As certain costs rise over time, the easiest revenue lever for schools like UVA to pull is tuition. So, that’s exactly what they do, and unfortunately lower-income students suffer disproportionately.

The cost issue does not end with traditional 4-year universities. Competition has also impacted the cost structure for less traditional schools like community colleges and online bootcamps that rely on online advertising to acquire customers. The customer acquisition cost for an online bachelor’s degree and master’s degree is now $4,000 and $14,000, respectively, ultimately leading to higher prices for students.

Where does this leave us? Costs continue to rise with no clear ways of changing this trajectory. The answer requires rethinking the cost of education from the bottom-up. Digitally-enabled business models should be part of the solution.

New Education Business Models

In order to build solutions to the cost problem in education, we need to utilize new business models that lessen the burden for students. We have identified four such business models:

Income Sharing Agreements (ISAs): Students pay for their education by committing a predetermined percentage of future earnings post-graduation (with a cap), instead of taking out student loans to pay for their education upfront.
Co-Op: Students learn through immersive, hands-on experiences working for actual companies, paying for their education and earning credit through their work (also called “apprenticeship”).
Third-Party Payer: Students (or employees) have their education sponsored by a third-party. This third-party is typically an employer but can also be the government or another institution.
Digital Platforms: Students have educational content delivered to them digitally, requiring fewer fixed costs and driving prices down.

Another way of thinking about the above business models is by breaking down the root causes of the cost problem. This issue results from (a) the high cost of attendance and (b) a lack of ability to pay. Therefore, we can think about solutions as needing to either decrease the cost of education or increase students’ ability to pay. The above four models fit neatly into this framework.

A Framework for Education Business Models

Once we have an understanding of the different business models that can help alleviate cost, we can try to spot pockets of opportunity. There are many companies across all four of these business models, but ISAs and digital platforms are particularly saturated. Digital platforms are likely the oldest and most legacy players within the education startup ecosystem. Companies like Coursera and Udemy have been delivering content online, direct-to-student for the last decade, and other B2B online infrastructure companies like 2U are not newcomers either. ISA startups are generally newer, but there has been a flurry of activity following the success of Lambda School. Overall, although still relatively nascent, this business model has seen a lot of activity. The following is a non-comprehensive, but hopefully representative, market map showing that less activity, and therefore perhaps more whitespace, exists in the third-party payer and co-op business models:

A Representative Education Market Map Across Business Models

Conclusion: Focus on Costs (and Some Other Stuff Too)

So, what now? We hope first and foremost that any reader can learn something about startups and education from this write-up. However, we also invite prospective entrepreneurs to use it as a guide for thinking about how and where to potentially build a business in the education sector. To summarize, cost is king in education. If you want to build a successful business, start with the question of how to monetize education while reducing (or even eliminating) the cost burden for students. We outlined four business models that provide different approaches and answers to that question and also noted that there has been less focus on the co-op and third-party payer models. In particular, the co-op model lacks a really large success story. We think there could be interesting opportunities to build apprenticeship platforms that help people get an education and transition careers through on-the-job learning. Paul Graham, founder of Y Combinator, certainly seems to be a believer in this model as well:

Paul Graham Tweeting about The Co-op Model

Finally, even though cost is where you should start, there are other success factors to consider as well. In order to truly provide value to students, do not only focus on removing costs, but also work on (a) increasing content engagement and (b) measurably improving outcomes. We think the best education platforms will be able to demonstrate all three quite seamlessly. That has certainly been the case for some of the category’s biggest success stories, regardless of business model. Below are three examples, but the story remains true across others as well.

Cost, Engagement, and Outcomes are all Key Success Factors

This article is part of Primary Venture Partners’ market teardown series by their MBA associate cohort. See here for the full series.

Building an Education Startup: Cost is King

A Big Market With a Big Problem

New Education Business Models

Conclusion: Focus on Costs (and Some Other Stuff Too)

Sources:

Written by Tobias Citron