20130208091703-0 Edtech is a tricky beast for many reasons. One major challenge I’ve focused on during our online education month is the business model.

Plenty of edtech startups have built brilliant products that leverage technology to improve the way teachers teach and kids learn. But, as we’ve outlined, the fremium, lean startup bottom-up sales method that’s now popular in enterprise software doesn’t work in edtech. Teachers don’t have budgets or buying power, and schools require long procurement processes to implement new technology. Beyond that, schools are risk-averse — they can’t easily pivot away from a new technology when it doesn’t meet their needs.

There are a few ways a freemium edtech company can monetize. They can deliver eyeballs to advertisers, a model most schools find unsavory. They can get paid on commission when students or teachers buy things, but it’s unclear how much money exists in such a model as teachers have limited budgets for supplies and it’s hard to ask families to shell out for tech that’s not mission-critical. Of course, the startups can get paid if the tools actually are useful and mission critical; they can also get paid because they underwent the painful top-down process of selling into the school districts.

Plenty of edtech startups have taken a page from the sales model pioneered by the likes of Dropbox, Expensify and Yammer. They offer the product for free and try to sell premium products on top.

But hoping a product will trickle up to the district level, where the schools will decide to start spending money on the product, is a long shot. That’s why I was surprised that several ed-tech pros, both on the education and tech side, agreed that Schoology might be poised to crack the code on freemium business models.

The New York-based company is helped by its scale. Four years into its life and the company has accumulated two million users on its free platform. The company has built enough support for its course management tools from teachers that they are actually advocating to the districts on behalf of Schoology for an upgrade to the premium version.

The company’s early conversions are in line with its long-term expectations: Around five percent of users have converted to paid clients. Half of those paid clients have signed up for premium tools after using the free version. Teachers at more than 35,000 schools use Schoology; the company’s “few hundred clients” includes one-off schools and larger districts of 150 or more schools. Between 500,000 to 600,000 of the company’s two million users are premium users. This year, Schoology plans to grow its sales by 400 percent, says Jeremy Friedman, CEO and Founder. Schoology’s user base is expected to grow from two million to five to six million.

“If we were top-down only, we wouldn’t be able to convert as much as we have,” Friedman says. Still, selling into the districts is not an easy process. The sales cycle can take between two and eight months, and each sale involves a personal interaction. But Schoology directs its small, seven-person sales team to the districts most likely to buy by tracking engagement at each school and focusing on the schools with the highest penetration. Using that technique, the company went from zero sales in 2011 to a few hundred clients in 2012. It’s still slow and difficult, but in an industry with plenty of strike-outs, it’s a promising start.

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    1. Amish Jani
      Past Investor
    2. Paul Cianciolo
      Past Investor