How the Government Bets on New Educational Technology Companies

In a televised debate during his unsuccessful 2012 campaign to be nominated as Republican candidate for President, former Governor of Texas Rick Perry famously stated he would abolish three government departments that served no important purpose. He then went on to name two, but forgot what the third was. That public gaffe (the television moment seemed eternal) was widely thought to be the moment when his campaign entered a spin from which it never recovered. In any event, that third department was the Department of Energy. What Perry did not know was that one of the functions the DoE fulfills is overseeing the nation’s nuclear stockpile, including its entire arsenal of nuclear weapons, a role that Republicans in particular generally view as crucial.

Today, the Department of Education faces similar questions about its importance, but in this case also, once you look at some of the programs the DoEd operates, you find it engages in a wide variety of activities, many of which you might not associate with the Department. One example I am very familiar with, run by the DoEd’s research arm, the Institute of Education Sciences (IES), is the Small Business Innovation Research program (SBIR).

The focus of this program is to provide support for early stage development of new businesses operating in the educational technology market. (Many government departments run an SBIR program. The overall program’s motto is America’s Seed Fund.)

As with pharmaceutical research, the development of new educational products and services (at least, educational products that teachers, school districts, and parents can rely on to deliver what they promise) is a slow and expensive process, because of the need to conduct research before development work begins, and to validate products at every stage of development.

With pharmaceuticals, for-profit developers can usually secure massive amounts of private equity funding, because of the potential for highly lucrative revenues coming from a new breakthrough drug, which often delivers windfall profits on first release. In contrast, the annual revenue for any educational product or service is strictly limited, and moreover revenues tend to build slowly over many years. Consequently, the vast majority of early stage, for-profit educational product developers are not able to raise sufficient private capital to bring their first products to market.

This is where the IES SBIR program comes in. Established by an Act of Congress in 1982, a number of federal agencies have SBIR programs. (Among them, the Department of Defense, the National Science Foundation, the Department of Education’s IES, as well as Perry’s momentarily forgotten Department of Energy.) The primary goal of these programs is to award research contracts to small (fewer than 500 employees), American based and operated businesses, to engage in early stage R&D work to:

  • stimulate technological innovation;
  • meet Federal research and development needs;
  • foster and encourage participation by minority and disadvantaged persons in technological innovation; and
  • increase private sector commercialization innovations derived from Federal research and development.

Each participating government agency awards SBIR contracts by way of an intensely competitive submission process. Awards have three phases.

Phase I, which lasts six months, for the initial work on an idea or new technology, usually involving the creation and scientific evaluation of a functional prototype. Funding for Phase I is typically $150,000 spread over the six months of the contract.

Upon successful completion of a Phase I project, the company is then eligible to submit an application for the Phase II project, funded at around $1M over two years. This is when the main research and development work is carried out, along with scientific studies to establish efficacy of the new product.

Phase III focuses on taking the new product into the commercial marketplace. No government funding is provided for this Phase, but an applicant’s plans for Phase III, and demonstrated capacity to execute, are among the factors evaluated in awarding the Phase II contract.

Applications are reviewed by panels who look at five major factors: the likely impact of the new product in the declared domain; grounding for the product in basic science; for Phase II, scientific evidence of efficacy of the prototype created in Phase I; the company’s business plan (up to and including go-to-market); and evidence that the company has the expertise and the capacity to deliver on time. (There are other criteria, but these are the main ones.)

My own educational technology company BrainQuake, which brought out our first product (a mathematical thinking and problem solving video-game app called Wuzzit Trouble) in late 2013, won our first IES SBIR Phase I award in 2015 and a follow-on Phase II award in 2016. Last December, we attended an IES organized summit held at the White House in Washington D.C., where we met representatives from other SBIR contractees building game-based learning products.

Everyone at the summit was agreed on two things: SBIR awards are extremely valuable for an early stage company in the education market, and getting those awards involves a lot of work. The application process is very demanding, with the reviewers looking at every aspect of the proposal, and at the knowledge, skills, experience and achievements of the proposing team, including their knowledge and experience in business. It’s not enough to have a cool idea and the knowhow to build an app. IES looks for a grounding in solid science and scientific evidence of efficacy. On the positive side, simply winning an SBIR Phase II contract confers scientific respectability on company and it product(s), something very valuable to an early stage company operating on a shoestring budget.

Some of the White House participants we met had won several SBIR awards over several years (as many as nine awards in one case) and had attended previous summits. For me, it was my first time at the White House. (We were invited in 2015, but I was unable to attend, though one of my co-founders attended on behalf of BrainQuake.)

Among one of the regular company participants at the White House was the developer of Sokikom, an online collaborative math learning program. Sokikom is one of the products discussed in a recent profile of the IES SBIR program by ed tech writer Tony Wan, in the online ed tech publication EdSurge. The Sokikom team turned up a day early to receive an award as a high performing, multiple SBIR recipient.

Taken across all 11 participating federal agencies, the SBIR program has to date awarded more than $40 billion to small businesses, and currently invests around $2.5 billion each year. Each participating agency has an R&D budget over $100 million, and is required to spend between 2 to 3 percent on their SBIR program.

Compared to the multi-million dollar investment deals Silicon Valley venture capitalists are famous for, SBIR contracts are small scale. But for a company setting out to turn a good idea into a viable product that is proven effective, they are the best option around. As one of my former Stanford students–now a major league venture capitalist–once told me, a VC’s goal is to maximize the return on an investment within the shortest possible time span, and, like it or not, scientific grounding and solid efficacy research are in general not important in that regard. To a VC, sales figures or download numbers are more significant than a stack of research findings, no matter how good those findings are.

It was a recognition of the particular difficulties faced by early stage companies in areas such as the education marketplace, where science matters, that led Congress to establish the SBIR program in the first place.

Just as the workplace continues to be changed dramatically by new technologies, so too with our educational systems, though the unavoidable, extremely high dependency on regular, personal interactions between teachers and students in small classes, means that the effects of technology are strictly limited. It can at best enhance the process, not disrupt or replace as in many other industries. The primary reason for introducing new technologies into the school system is not to make the process cheaper or more efficient, rather to make the learning more efficient and effective, and to prepare our children for a future in a technology rich world.

To achieve that goal, we need to develop high quality, technology-based learning materials, built on sound principles from learning science, and backed up by scientific studies that prove they work. (Many education products on the market are not backed up by research, and in all likelihood they will not do what is promised on the company website. Unfortunately, while a pharmaceutical company is not allowed to market a drug that has not been proven to be at the very least safe, there are no restrictions on educational products, for which my best advice is Buyer Beware.)

The IES SBIR program meets that need for proven new learning materials, not just by supporting the development of quality educational products, but also by building the nation’s manufacturing infrastructure, ensuring that there is a healthy pipeline of new companies that will continue to provide valuable new products long after any one company has need for early stage seed funding. If this model sounds familiar, it should. It was how America created Silicon Valley, spending large amounts of Department of Defense DARPA seed funding in the 1960s and 70s. The scale is very different, of course, but the concept, and the need, are the same.

Talking of Defense Department funding, and emphasizing how government spending on fundamental science can pay off in unexpected ways, some of the fundamental ideas behind the products my own company BrainQuake is developing come from counter-terrorism research I did in the early post-9/11 years for the now-defunct Advanced Research Development Agency (ARDA). Being in the education world, I recognized that the problem facing an intelligence analyst was essentially the same as that facing a student in a classroom. Each is looking at a fast flowing river of incoming information, from different sources, none of which makes much sense, and much of it downright confusing, and their task is to sift and sort all that information so that, bit by bit, everything falls into place and eventually does make sense. With the large budgets available for DoD research, in the ARDA project we were able to look at ways technology could make that sifting and sense-making process faster and more effective. I am not sure how much impact my contribution had on the intelligence analysis community (I did not have security clearance, so do not know what happened to my work after I delivered my final report), but today I can see what happens when my company builds products on similar principles and puts them in front of children in a math class.

And who knows, maybe one day we will notice something about the way children use our technology in the classroom that has implications for intelligence analysis. Science working the way it does, that is certainly a possibility. To be honest, I think it very unlikely in this case, and I would not put any money on it. But, given the stakes, maybe the government should. Fulfilling their mission of keeping the nation secure, competitive, and prosperous requires that they constantly place bets on the future. Make that our future.

For a look at the current state of learning science research, see this Huffington Post article

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