The Bubble Bursts for Education Dot-Coms
Downturn in Internet stocks speeds a shakeout for the industry
The Chronicle of Higher Education – from the issue dated June 30, 2000
By SARAH CARR and GOLDIE BLUMENSTYK
For dot-coms hoping to ride their college-portal and distance-education businesses to small fortunes or big Wall Street
paydays, the bubble has burst.
I.P.O.'s are out. Venture capitalists are asking tougher questions about profit potential and demanding larger stakes in young
companies in return for their investments.
Analysts and corporate executives say some companies that sell courseware and other Internet-related products and services
to colleges will begin to disappear over the summer, either through mergers or through fire sales to larger competitors.
"I don't know if it is coming faster or sooner than it otherwise might have, but I can tell you that the shakeout is happening right
now, and it is happening quickly," says Alec Hudnut, chief executive officer of University Access, which works with professors
to develop online business courses. "Times may be tough for newer entrants or folks who have had to change their business
For colleges, the shakeout could be both a problem and a blessing. Institutions that depend on companies for some services
might find those services disrupted or delayed. But as dot-coms merge or even disappear, the process of choosing a company
to do business with could become simpler.
Takeovers and sinking fortunes for some businesses are a natural part of the evolution of any relatively new industry, company
officials say. "There are a lot more companies in the e-learning space than the education industry needs," says Oakleigh Thorne, a major investor in eCollege.com and its new chief executive officer. He replaced the Colorado distance-education company's high-profile former president and founder, Robert C. Helmick, about a month ago.
ECollege and Mr. Helmick have been among the most visible players in online education, and the company was the first of its
kind to go public.
After raising $55-million in that initial public offering, in mid-December, eCollege.com has seen its stock sink steadily, from a
high of $17.50 a share to about $3 as of last week. As just one consequence of this decline, Mr. Helmick was forced to sell
part of his stake in the company to cover unrelated losses he incurred in other investments.
ECollege isn't the only outfit being roiled by the market. The online bookseller VarsityBooks.com went public in February with
a share price of $10. Within a month, the price began to plunge, and shares have been trading below $2 since late May. Two
other companies that had intended to go public, CollegeClub.com and Embark.com, have canceled those plans -- at least
CollegeClub, a Web site that markets a variety of academic and recreational services to students, had hoped to raise
$85-million after buying up a number of smaller Internet businesses, including a course-notes site called Versity.com. With that
route now closed, CollegeClub says it will now explore "a variety of strategic options" to support its growth. Those include
finding new investors, a merger partner, or a company interested in acquiring it. CollegeClub also has replaced its chief
executive officer, Michael C. Pousti.
Embark.com, which offers online admissions services, cited market volatility in canceling the company's planned public offering. Other industry insiders say the privately held Hungry Minds, a portal for students looking for online courses, may soon be bought. The company has reportedly had trouble raising venture capital.
College administrators say that since the companies with the strongest business models will survive -- at least in theory --
choosing a dot-com company to work with could become somewhat less dizzying. "A shakeout will simply help us sort out
who the viable contenders are," says Michael J. Offerman, dean of continuing education at the University of Wisconsin System.
Investors and officials at a range of dot-coms say many companies with bad business models will find it harder to land venture
capital from now on. And even some companies with stronger models are feeling the pinch. "I think there has been a reality
check in the entire market," says John E. Kobara, the president of OnlineLearning.net, a company hired by the University of
California at Los Angeles and others to help market and deliver their distance-education courses.
"There are still billions and billions of dollars out there, but investors have really changed the criteria for investments," Mr.
Kobara adds. "What matters today is profitability, having a recognized brand, and having management over the age of 22, and
not much of this mattered six months ago" -- when Wall Street loved anything with "Internet" attached to it.
Tyler Thatcher, director of investor relations at Campus Pipeline, a portal company, says that, until recently, "any company that
had a good story -- even if it was a me-too story -- was getting funded." Now, he and others say, investors again want
companies with profit potential and some advantage their competitors lack.
Companies are responding to the market volatility and investor finickiness in a variety of ways. Some are actively looking to be
bought out before their funds dry up. Several people knowledgeable about the industry say that Hungry Minds is seeking to be
Stuart Skorman, the company's chief executive officer, said last month that Hungry Minds had changed its model after realizing
that many consumers were not willing to purchase pricey online courses. At the same time, many universities were reluctant to
offer the free content that Hungry Minds needed to draw potential students to its site, Mr. Skorman added. In an effort to lure
more traffic to the site, the company began to feature "subject experts," who offer free advice on such topics as investing and
Mr. Skorman said at the time that Hungry Minds was "having a bit of a struggle," and added that "all companies in the Internet
space are having a hard time getting good content." He and other Hungry Minds officials did not respond to repeated requests
to be interviewed for this article.
Jack Goodman, the publisher at a privately held company called Final-exam.com, says it plans to pursue "strategic
partnerships," such as a merger or sale to a larger company, instead of venture capital, because of changes in the financial
market. Final-exam.com publishes professor-written, online study guides for students in survey courses.
"Before, companies could raise two to three rounds of capital in between 12 and 24 months, and now that is no longer
possible," says Mr. Goodman, who was once an intern at The Chronicle.
Some companies are trying to drum up business by growing. For example, to provide colleges a fuller array of services,
eCollege's Mr. Thorne says his company would be interested in either forming an alliance with or buying a company that sells
Blackboard, another company that sells a platform for online courses, is eyeing companies that could provide academic
resources to its users.
In May, one of the bigger suppliers of administrative software to colleges, SCT, invested $10-million in WebCT, another
company that sells a platform for online learning. That investment, plus the transfer of some other assets, gave SCT a stake of
nearly 10 percent in WebCT. SCT also owns about 40 percent of Campus Pipeline. The three companies are now
collaborating to market one another's products.
While some companies consolidate, others have tried to reinvent themselves to burn through cash more slowly. Most are at
least trying to cut costs. Campus Pipeline's Mr. Thatcher, for instance, says that now "you can't really be flamboyant with your
Kevin J. Berk is the director of business development at MindEdge.com (formerly known as New Promise), a company that
has created a large, searchable database of online courses. He says MindEdge plans to expand its focus, continuing to serve as
a portal but also offering such distance-learning services as enrollment, billing, and marketing.
MindEdge had to "figure out a way to become more than just a distributor of content," Mr. Berk says. "If we have to, we will
get out of the 'portal' business."
VarsityBooks.com has planned a name and identity change as part of efforts to generate profits. Jonathan A. Kaplan, its vice
president for strategic planning and communications, says the company plans to change its name to Varsity Group. The
company also plans to shift its focus from e-commerce to marketing.
Until now, VarsityBooks employed "student representatives" on campuses across the country to hawk its textbook service;
now it plans to put those students to work as marketers for other companies, such as Staples, the office-supplies giant, says
Mr. Kaplan. VarsityBooks also hopes to offer similar marketing services to other companies, such as soft-drink manufacturers
and financial-services providers. It will also continue to sell textbooks.
Mr. Kaplan says he does not view the changes as a reinvention of the company, but as an extension of its existing services.
"The marketing aspect of our business was always a part of the strategy," he says.
But he does say that bottom-line considerations spurred the changes. "The marketing aspect of what we do has higher profit
margins, and the shift will help speed the path to profitability," he says.
Trace Urdan, an equity analyst at the investment firm of W.R. Hambrecht & Company, says only the "hottest companies" will
be able to go public in the coming weeks. Moreover, he says that 400 companies of all sorts are in the line waiting to complete
I.P.O.'s, meaning that those without formal announcements of their plans will probably have to wait until next year, because the
market can't bear that many offerings at once.
The performance of the companies that have gone public isn't exactly encouraging, adds Mr. Urdan. "You have eCollege
hanging out there as a specter, and whatever efforts they have made to rehabilitate themselves haven't worked," he says.
Mr. Thorne, while clearly unhappy that the current value of eCollege stock casts a pall on the company, says he's not sorry it
went public when it did, because it was able to raise more money that way than it could have privately. "I'd be totally
disingenuous if I didn't say we took advantage of a bubble and got public," he says. But that's not the end of the story, he adds.
"We have $40-million in the bank, and that should be enough money to get us profitable," he says.
He predicts that eCollege will post a profit by the end of 2001, assuming it can double its revenues within a few quarters.
As a public company, eCollege also has stock with which it can make acquisitions. At the moment, though, the buying power of that stock isn't particularly strong: It's worth about 80 percent less than when the company went public.
The falling value of eCollege stock has also created some serious distractions for the company. This month, Bank of America
informed eCollege that it planned to sell off some 1.4 million shares of the company's stock. The shares had been pledged as
collateral by Mr. Helmick, the former C.E.O., and others when they borrowed money from the bank to conduct stock trades.
The bank said it was acting because the pledged stock -- then trading at about $3 a share -- would no longer cover the loan to
Mr. Helmick and the others.
To avoid having such a large chunk of its stock suddenly dumped on the market -- which would further depress share prices
and hurt the company -- Mr. Thorne and others spent several days scrambling to find investors willing to buy the shares. Mr.
Thorne's investment fund bought about one-fifth of the shares, increasing its stake in eCollege to about 10 percent. He says he
found friends and associates to buy the rest.
Because about 1.1 million of the shares had belonged to Mr. Helmick, his stake dropped to 22 percent from 29 percent. He
still owns about 3.4 million shares.
The sale of those shares and the underwhelming performance of the company's stock have not gone unnoticed by some of
eCollege's clients. Bob Tolsma, the director of the University of Colorado's distance-education program, CUOnline, says he's
"not terribly worried" about eCollege's survival, but does want to meet with the company's new management soon.
CUOnline is one of eCollege's biggest customers, with more than 90 percent of its online courses delivered with eCollege
"The risk that we have is the investment we have in the software development," says Mr. Tolsma. He says the university isn't
completely vulnerable, because it also uses another company's software for some courses, and because eCollege is converting
many of CUOnline's courses to a format that would allow the content to be more easily moved to another platform. Still, he
notes, making such a transition could be time-consuming and disruptive.
Mr. Tolsma says that the eCollege situation illustrates the particular danger institutions face "when they depend on an outside
vendor that doesn't have a long track record."
Other publicly traded companies that market Internet-based services to colleges and students also have seen their stock prices
fall. Among stocks that have declined in value by 70 to 90 percent from their 52-week highs are those of CollegeLink.com, a
college-admissions site; Lightspan, which owns Academic Systems; Youthstream Media, which owns the MyBytes portal; and
Student Advantage, which offers marketing discounts to students.
Yet even as companies and investors adjust to the changing climate, many are mindful that the pool of capital is far from dry.
According to one oft-cited projection, some $4-billion in venture capital could flow to the education and training industries this
year. EduVentures, the Boston-based company that sells education research and services and that developed the projection,
says that about one-quarter to one-third of that amount will go to companies focusing on higher education.
There may be "a lot of train wrecks along the way," adds S. Joshua Lewis, a general partner in the investment firm Forstmann
Little & Company who manages venture-capital deals. But there is also still "great room for entrepreneurship in the education
and training industry."
Just last month, in fact, Mr. Lewis's company announced that it had invested $35-million in a newly accredited online institution
called Capella University. Although the institution lacks a high profile, it has 1,400 students, a faculty, regional accreditation,
and an experienced C.E.O. -- all elements that Mr. Lewis maintains made the investment seem worthy.
A far-more-established player in online education, the University of Phoenix, expects to go ahead this summer with a plan to
raise more money on Wall Street, despite the shaky market. The Apollo Group, the university's parent company, is hoping to
raise $75-million by issuing a so-called tracking stock, which would be tied to the performance of Apollo's online operations,
not the company as a whole.
Some university administrators say the shakeout will put them in a new position of power. "There were a lot of players out there
and lots of different offers," says Mr. Offerman, of the University of Wisconsin. "And the companies were not really laying their
warts out and weren't sure of what their weaknesses were. Hopefully, the marketplace will help sort it out."
Mr. Offerman says he has not yet seen a decline in the number of Internet companies with deals to offer universities, but he has
noticed that company officials are more anxious than they were a few months ago, and push harder to make a quick sale.
That aggressiveness may backfire on the companies, he says. "The more they are going to pressure us, the more we are going
to wonder what is going on. It really puts them into a quandary."
© 2000 by The Chronicle of Higher Education