Enterprise sales, without enterprise budgets

One of the many things that always bothered me about selling to K-12 schools—something that I did a ton of while I was running Coding Rooms—is that it’s very similar to enterprise technology sales in every way, other than how much money you should expect to make.

If you consider the fact that most successful enterprise technology companies are closing deals that are $100k/year on the lowest end of the spectrum1, their salespeople can easily justify spending the time to go through the tedious and often-sluggish motions of an enterprise sale. An outsized portion of enterprise software revenue also tends to come from a tight concentration of customers, AKA “whales,” who spend many millions/year for solutions to large-scale challenges.

Schools don’t spend millions on a diverse range of software from a bunch of different vendors the same way that even small enterprises do. Most enterprises allocate 10% or more of revenue to IT spend these days, with some of the larger and more tech-forward businesses spending up to 20%2. Reasonable estimates of K-12 IT spend, including payroll for tech staff, put us somewhere around 6% of spend, on a per-pupil basis3. It’s optimistic to assume that 30-40% of that goes towards software, with the rest going towards devices and other services. That yields a K-12 software TAM of around $17B (total school expenditures are around $800B, so optimistically software makes up 2-3% of that)3. For comparison, just the enterprise CRM market in the US is worth north of $40B4. The total enterprise IT spend in the US today exceeds $1.3T5. Lastly, the post-pandemic ESSR funding bump ends in 20246 and school budgets overall haven’t kept pace with GDP growth and inflation the same way that enterprise budgets naturally do, so edtech software gets squeezed even further over time7.8

Now, I’ll bite—$17B isn’t a small market per se. There’s a lot of room to build a valuable business there, right? Well, both theoretically and empirically, no. That $17B starts to get really small when you consider what it has to cover: everything! Schools have to buy lots of software just to cover their bases. You need an LMS, SIS, ERP, website, cybersecurity tools, networking software, curriculum, assessments, and other instructional tools. Once all of this funding has been apportioned, you’re unlikely to find many subsegments that are still in the VC sweet spot of $1B+.

All K-12 edtech unicorns fit into one of two buckets

In fact, there are only two archetypes, and associated market subsegments, for building unicorns in K-12 edtech. I’m convinced that you shouldn’t try to build a big, even possibly venture-scale business in K-12 edtech selling to schools unless you know exactly how your business fits into one of these two proven buckets:

  • Weekly or daily-use instructional platforms/curriculum that are not limited by a narrow range of grade levels or a single subject (although you can get away with being math or English only). For example, despite all the hype, there isn’t a single unicorn focused on computer science education for K-12 (and/or higher-ed for that matter). The reason for this pattern is simple — TAM. Back of the napkin math for K-12 computer science TAM is something like ~$100M, if I remember correctly from my Coding Rooms days. Many of the highest valued K-12 edtech startups belong to this group. One of the most valuable pure-play K-12 startups, Newsela, which is over 10 years old now to be fair, fits squarely into this bucket. Other examples include companies like Nearpod, Kahoot, and Peardeck. While it’s between categories, I’d also put platforms like Classdojo into this bucket as an aid to teachers across many subjects and grade levels, although you could argue that communication to parents is more a part of the “Enterprise” bucket.
  • “Enterprise” (ERP, office, etc.) tech: For some reason, the VC hype is unfairly low here, but it has been fertile ground in the past. The company behind Canvas (and a few other SaaS platforms, but mostly Canvas), is worth $4B today. PowerSchool is worth just shy of $5B. In many ways, it’s obvious why these players are making real money—they are solving a lot of mission-critical, institution-wide problems. Clever is probably the best VC-backed example (acquired for ~$500M) although they primarily monetize their SIS by charging vendors for SSO. A lot of money in this bucket also ends up going to companies like Google, Microsoft, Apple, etc., for cloud software and physical hardware too.

While vendors in these spaces rarely build really big companies—I don’t think I’ve seen a valuation above $5B, and that’s not just K-12 but any sort of edtech selling to traditional institutions—it’s at least long-term (7-12 years) possible to build a unicorn9. When people do successfully build these edtech unicorns, I believe it’s because their founders are total badasses who created top-notch products and were able to scale sales teams that willed their way through the staggering maze of bullshit known as public K-12 sales. Statistically speaking, your odds are almost certainly worse than if you picked a more fertile niche.

Why other K-12 edtech niches don’t produce big companies

Unfortunately, most of the edtech founders I meet or read about are building in a niche that is basically a one-way road to zombie land (aka lifestyle business or SMB) or the graveyard. The reason for this is pretty simple—you can’t make a big business running an enterprise sales motion for $10k-$200k ARR/deal in an already-small market. Now, you can absolutely build a successful, even venture-scale, business selling software for low prices if distribution weren’t so hard and the market were bigger. For example, like in SMB SaaS, where the sales process doesn’t require salespeople, running pilots, 3-12 months sales cycles, unreasonable data privacy agreements, odd indemnification coverage, politics, school boards, bad administrators, and the most pedantic variant of government procurement requirements that exist in the nation, but that’s just not the case with K-12.

Most of what I’ve laid out here is also broadly applicable to institutional higher-ed sales, and that plays out if you look at the valuations of companies in that space.

Closing advice to founders

In summary, if you want to tackle a problem in institutional edtech, think about your TAM and distribution critically. You don’t want to find yourself going through the same motions that someone is going through to make lots of money, but you’re not making lots of money. It’s a precarious place for a company to end up.

  1. Not only do enterprise software deals carry eye-watering price tags, but businesses of all sizes buy tons of cheaper software subscriptions. It’s exceedingly common for lower-cost software subscriptions to be put on corporate cards with the approval of a manager. The acceptance of low-touch software subscriptions in SMBs and enterprises alike means that great software often lands in a single team and then quickly expands across the org if it works well. In K-12, monthly subscriptions are simply not a thing—schools don’t have a way to handle them, teachers rarely have easy access to budgets, and the approval process is too complicated for vendors to not lock in at least a year’s worth of subscription fees upfront. Schools frequently have to do a lot of work upfront to organize and execute software pilots—a process that is pretty annoying in and of itself, especially for things that don’t really need pilots—in large part because they cannot be nimble in their approach to software. ↩︎

  2. https://www.statista.com/statistics/1105798/it-spending-share-revenue-by-industry/ ↩︎

  3. https://edtechevidence.org/wp-content/uploads/2021/07/FINAL-K12-EdTech-Funding-Analysis_v.1.pdf ↩︎ ↩︎

  4. https://www.statista.com/outlook/tmo/software/enterprise-software/united-states - check the in-scope/out-of-scope page to see how narrowly they defined enterprise software and how enormous it remains ↩︎

  5. https://www.expertmarketresearch.com/reports/united-states-it-spending-market ↩︎

  6. ESSR ends on Sept 30, 2024, however, the money can be used for multi-year contracts that extend beyond 2024. The practical implication of this is that schools have pulled forward vast amounts of spending for software by leveraging their ability to pay upfront. Without more funding parachuting in, which isn’t going to happen, schools are likely going to be spending a lot more time thinking about what software to cut instead of what to buy in the coming years. ↩︎

  7. https://educationdata.org/public-education-spending-statistics ↩︎

  8. On top of huge US TAMs, enterprise software in most verticals has the potential to scale outside of the US. That’s simply not the case for most edtech. Most schools outside of the US tend to have truly microscopic software budgets and their needs are too localized (curriculum, desire to buy local, etc.) to be served by US-focused vendors. The only segment that seems to be suitable for meaningful international scaling is LMS, but even that tends to go towards post-secondary where needs are more standard internationally anyway. ↩︎

  9. It remains to be seen how this will play out over the next 5 years with ESSR funding and all the demand that has been pulled forward. It’s easy to imagine that it could be more challenging than ever, especially if you’re not filling a net-new need that has an obvious funding source. ↩︎