Office Hours: The EdTech Industry, Why European Startups Fail to Scale, and the Global Brands of the Premier League and NFL

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1:11Welcome to the Prop 2 Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at propgmedia.com. Again, that's officehours at propgmedia.com. First question. Hi, Scott. My name is Abdigali. I'm from Almaty, Kazakhstan. I'm a longtime listener of your podcast, and thanks to you and to my wife who introduced me to your great work. I have a question to you about education tech. What are your thoughts generally on the industry?

1:49And I know that you are long on LinkedIn. Do you think it would make sense to acquire Coursera? It appears to me that at current valuation, it might be a really good target. Thanks. Abdigali, thanks so much for the kind words. Almaty, Kazakhstan. Gosh, you live in a place called Almaty. That's pretty cool. Anyways, I appreciate you listening. So I know enough to be dangerous about EdTech. I started an EdTech company called Section, and the basic value proposition is 80 % of an elective and an elite business school for 10 % of the price. And we, by the way, if any of you are interested in taking a course and can't afford it, courses usually a year-long membership costs a thousand bucks, just send an email, and we have a very rigorous scholarship process.

2:31You sent us an email saying, I can't afford this and we'll let you take the course free. Anyway, so I know something about EdTech. Let me be clear. The EdTech business has been an enormous disappointment from an investor standpoint. And that is, it just made sense. The travel industry got disrupted. The auto industry, you know, obviously the advertising industry has been disrupted with, you know, all caps. One by one, these industries have been disrupted by an unlock around digital innovation. And it just made sense that education was going to be next. It's grown faster than inflation. It's stuck its chin out.

3:04There's just got to be a better way. And we keep waiting for it and it keeps not happening. I started Section, raised a bunch of money, shot out of the gates, really strong with COVID. And to be blunt, the last 18 months, last 24 months have been really tough because people don't want to be inside staring at a computer screen taking courses. In addition, what has really shocked me and that I got wrong is that the elite universities have come back stronger than ever. I thought that remote learning was going to sort of peel the curtain back and show that the$7 ,000 that my university was charging for my course was, in a word, just ridiculous.

3:44And it hasn't happened. Now, unfortunately, the administration and leadership of universities have adopted a nimbyous bullshit, a rejectionist strategy where even though they sit on the GDP of a small nation in terms of their endowment, they want to keep freshman seats static so that they can feel better about themselves. and just as people show up to the local review board and to want to approve new housing, alumni and admissions directors and the deans don't want to increase the size of their freshman classes, which in my mind should mean they're not eligible for federally backed student loans or should, and I believe should lose their tax-free status.

4:18But anyways, that's a different talk show. So I always thought that EdTech should in fact just kick the shit or its time was coming and I I was very excited about it. And the venture capital industry up until about two years ago, three years ago, was very excited about it. Data suggested the ed tech industry is continuing to grow. A 2022 report from Grandview Research revealed that the global ed tech market had a value of$123 billion, expected to increase the compound annual growth rate of 14 % from 2023 to 2030. So where is that growth coming from? Because I don't see it in the stocks. You know, I just don't.

4:54I'm trying to figure out. I'm trying to reconcile all these analysts saying the market's going crazy. And yet all of all of these ed tech stocks have gotten absolutely the shit kicked out of them. I was looking at 2U and I think the stock's gone from 60 to like three. As for Microsoft and LinkedIn acquiring Coursera, Coursera has seen a stock plummet since going public largely due to its initially high valuation based on expectations that just weren't realized. After going public in 2021, Coursera was valued at seven billion. They've raised about half a billion in funding over 14 rounds. And their total revenue in the second quarter of 2023 was 153 million, which is up 23 % from a year ago.

5:32So according to the World Economic Forum, Coursera saw registered students increase from 71 million in 2020 to 92 million in 2021. Now Coursera has more than 100 million registered users. The LinkedIn edtech platform LinkedIn Learning, formerly known as Lynda.com, has more than 27 million users. Among those, users include 78 Fortune 100 companies. So what the fuck is going on here? Why is this industry not booming? Why is it not aggregating or creating a ton of capital and market capitalization? I think it's a few things. One, they don't appear, these ed tech companies don't appear to have pricing power.

6:06And that is people still want, if you're going to charge them, you know, decent margins, they want some sort of certification that increases their currency in the marketplace. And a lot of ed tech companies have sort of digressed to low cost,$19 video courses that people mostly in China and India take because it doesn't command the type of price premium you get from some sort of certification that an employer will appreciate. Also, I think universities haven't struck back, if you will, but they have done a little bit better with their online offerings. And there still is this gestalt in our society where, especially among the wealthy, that this is the finishing school.

6:45This is the tattoo you need on your forehead for the rest of your life. But the honest answer is, I don't know. I don't know what's happened here. And I don't know why this industry hasn't grown faster. According to this data, we've seen the industry grow fast, but it clearly doesn't have the pricing power or the margins that get the stock market excited. I don't know if LinkedIn would buy Linda again for whatever it was, over a billion dollars. This could be an industry, I'd like to think, where those stocks that are beaten down, especially among the leaders here, are probably decent investments at this valuation.

7:19And EdTech companies, I can tell you firsthand, are going out of business. We get called, I wouldn't say every day, but every week at section by other ed tech companies that are looking to be acquired, that are kind of running out of cash or never found product market fit. But there's just no getting around it. Ed tech to date has been an enormous disappointment for investors and principals in the industry. Does that mean it's not going to happen? No. We were early here. What Bill Gates said is maybe the way we should close this. And then he said that in technology, what's supposed to take 10 years takes three and what's supposed to take three years takes 10.

7:52EdTech and disruption in higher ed was supposed to take three years, and it looks as if it might take 10. Thanks for the question. Question number two. Hello, Scott, the dog. This is Michael speaking from Belgium. I'm a long-term listener and a huge fan of your work. Thanks so much for bringing intellectual insights, as well as a smile to all of our faces every week across your podcasts. I am moving from a big corporate secure job to the unknown world of startups with a company based out of Europe. Having lived in US your whole life and more recently moved to UK, I'm keen to hear your thoughts on why it is that small companies have struggled to scale from Europe when you compare them with US or other countries such as Israel or China.

8:44And then also the VC environment is very different. As a startup looking to raise funding, what would be your advice in targeting VCs and angel investors in US versus Europe or other regions? And what would be your approach in having those conversations? We are a company in the gaming industry that has a vision of becoming a tech firm with huge potential to scale. Always keen to learn from your insights and would love to hear thoughts on my situation. Thank you very much. Michael from Belgium. Thanks for the thoughtful question. And so Belgium, I went backpacking. I did that sort of, you know, I don't know the standard.

9:35After UCLA, threw on a backpack, bought a Ural Pass. I remember it was 400 bucks for a first-class Ural Pass. And went with my buddy, one of my closest friends, Lee Lotus. And just one of those trips just remember the rest of my life. And the thing I remember about Belgium was going into Bruges and we'd been walking around. And for some reason, we stayed at one of these hostels that plays this crazy loud music at 7 a.m. telling you to get the hell out. And we had to walk around the city with our backpacks. It was hot. And we stumbled on this little brewery, and it's probably famous. And the glasses were like really tall shot glasses.

10:11And they came over, and this guy, this big Belgium guy, just immediately didn't even ask us, just poured us a beer on these long glasses. It was like gone in a second. And he poured another one. and I had three beers and it was just the best tasting thing I'd ever had in my life. And I wasn't a big beer drinker up until that point. And it was not anything to do with what you asked. But this is a huge topic. Why can't Europe get to growth? And this has been an enormous issue for their economy. The rise of China did not come at the cost of the U.S. If you look at the total number of unicorns. Globally, the U.S.

10:50still has the same percentage. Who China has really crowded out is Europe. A lot of Chinese growth in tech has kind of come at the expense of Europe. Data collected by the European Investment Bank, the EIB, and Crunchbase reveals that Europe grapples with substantial scale-up shortfall with only 0.5 % of European startups expected to scale. So in In other words, the company you're thinking about starting, it's got a one in 200 chance of scaling. That's not very encouraging. According to the same EIB report, Europe trails the U.S. in terms of startup numbers by a factor of three. So the European economy in aggregate is about the same size of the U.S., but it has about a third of startups.

11:30My guess is it has a tenth, maybe even a twentieth of the number of unicorns out of private companies that gets over a billion dollars. Some other key findings were that European startups achieving high growth are more constrained than U.S. startups in terms of access to private funding and talent. Also, high-growth European startups are much more likely to use public support than their U.S. counterparts, funded by the government as opposed to the private markets. There are so many cultural factors here. The first is that one of the amazing things about America is that risk-taking is in our DNA.

11:59Think about the people who originally came here, and I'm not talking about people who came here or were imprisoned and brought here against their will. I'm talking about the original settlers. These were the original, I don't know, entrepreneurs. So I'm so risk aggressive. I'm willing to risk everything to go somewhere else. A lot of people say in the U.S. we embrace failure. That's bullshit. You don't want to fail. It's not like that's a positive thing on your resume, although some people say someone who's failed actually has an easier time raising money. But they need some success in their background.

12:32But we tolerate failure. If I was born in Europe, I just wouldn't have the success I have. Why? Because I have failed. I have failed. I have raised money and started companies and lost it all. Lost it all. And as long as you're a decent person and you behave responsibly and you communicate with your investors, they're disappointed, but they're not angry. There is no other country where I would have the types of opportunities I still have. Because in Europe, when you lose other people's money, A, it's harder to raise other people's money, and B, when you lose it, it's more of a scarlet letter. So what do we have?

13:11What do we have? We have less capital, less craziness, and we've had less exits. Nothing creates a venture capital community like Michael Dell, like Michael Dell starting a computer company, a PC company in his dorm room at the University of Texas. This Dell creates tens of billions of dollars in shareholder value. And then a lot of those individuals fall in love, buy houses, start setting down roots in Austin. And they're rich. And they think, you know what? I don't want to work as hard as I did at Dell, but I'll start a small venture capital firm. And I will start investing in local companies in Austin.

13:46And before you know it, you have an ecosystem of lawyers, entrepreneurs, and people go to UT and decide, I'm going to start a company in Austin. Take this times 50, and that's what you're talking about in San Francisco. For all the shitposting about San Francisco, there's something about the West Coast, specifically the Bay Area, that continues to attract the secret sauce in any technology, information, economy business, and that is the best human capital. In addition, there's just so much capital there waiting to be deployed. But what my advice to you would be is that, one, this is going to sound fairly trite, but the majority of the economic growth, two-thirds of the economic growth in the world is going to happen in one of 20 super cities.

14:30So the first thing is get to a city, get to the biggest city in your country. And two, potentially, and I hate to say this, think about if you can, if you're young and you don't have and you have the opportunity, I would think about coming to the U.S. for a few years. I think the tattoo or the certification of being in a U.S. startup and making those types of contacts serves you well the rest of your life. But this is a much bigger issue that European leaders will be thinking about and wrestling with for a long time. Thank you for the question. We have one quick break before our final question.

15:06Stay with us.

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16:33It's up to you. We'll take the laundry. Rinse. Rinse. It's time to be great. Welcome back. Question number three. Hi, Prof G. This is Dave Anderson. I'm an accounting professor and a massive football that is soccer fan. In addition to teaching accounting and analytics, I also teach a course every few years called the Business of UK Football. In this course, we analyze football from a business perspective. This course also has a study abroad component in which we go to England over spring break and tour stadiums, watch matches, and visit with club officials. I plan on offering the course during the spring 2024 semester, and I'd like to ask the class a question about the NFL versus the Premier League, and I'd be very interested to hear your take on this question.

17:20My question is, can you compare and contrast how the Premier League has marketed their product, that is soccer in the U.S., versus how the NFL has marketed their product, that is American football in the U.K.? As a related question, in your opinion, has the NFL done a better job marketing their product? Or has the Premier League done a better job marketing their product? And why do you think that is? Thank you for your time. And I look forward to hearing your response. So Dave, occasionally you hear from someone you think this person is as good at life. So Professor Henderson, you have figured out a way to be an accounting professor and someone who teaches a course on football.

18:00I get the sense, Professor, that you're just good at life, that You figured out a way to do something very cool professionally. And my guess is the football part is the passion, and your domain expertise in accounting is probably what pays the bills. But to marry those two things. Anyways, boss, good for you. So let me talk more globally. I did a post on this. I think the best-performing asset class for the last 10 years and the next 10 years, simply put, is sports teams. Now, why is that? It's the perfect form of good things. Let's talk about the supply side. Supply is artificially constrained because these companies are effectively monopolies.

18:35And that is the NFL has a monopoly on professional football and they don't allow more than one team in a city. So what do you have? You have regulated monopolies that constrain the amount of supply. If I said I have a billion bucks, I want to start a team in Soho tomorrow, I just couldn't do it. Whereas if I have a billion dollars and I want to start a company in any industry and so I'm allowed to do it. So there's artificial constraints on supply. Now let's talk about the demand side. Who buys sports teams? There's incredible psychic return here. One, say I hit my late 50s and I started an e-commerce company and I wasn't exactly kind of socially, I wasn't exactly Brad Pitt growing up and I spent my whole life building this e-commerce company.

19:17Now I'm worth$60 billion in my arrested adolescence and my testosterone therapy and my creatine. And all of a sudden, I'm the sexiest man in the world. And I just have the mother of all midlife crises. And I want to be interesting and cool. But I realize that no matter how much money I have, I'm going to die at some point. So I know I'll buy the Denver Broncos or the Washington Commanders. Is that what they're called now? So you have the number of billionaires, which is effectively the demand side of this, because it is essentially arrested adolescence. And as long as we have more billionaires going through midlife crises, you're going to see the demand side go up.

19:55Now, what's happened? What's happened? The number of billionaires, check this out, the number of billionaires globally has quintupled in the last 10 years. Think about that. It's gone, I think, from 500 people globally to 2 ,500. That's just nuts. So you have regulated or artificial constraints on supply, and you have a massive increase in demand. In addition, the biggest billionaire has shown up and started bidding on sport leagues and teams, and that is the golf. Newcastle, Man City, they've basically done a creeping takeover of an entire sport with golf. They're now getting into tennis. The NFL is the most watched sports league in the U.S.

20:30The average viewership per game is 17 million. Also, it's one of the few pieces of content that you still get advertising dollars for, because it's one of the few things people are willing to watch. Like, I don't need to watch succession line, but I want to watch Arsenal make an incredible extra time rally. Oh, my God. 1-1 against Man U, and then boom and boom. Hello, cocaine and champagne, two goals in the last five minutes. Oh, my God, what an amazing game. My boys were at that game. This wonderful guy, David Giampallo, I think I'm saying his name right, gives me tickets to Arsenal, and I sent my boys.

21:04I'm in the U.S., as I mentioned before. Anyways, let's talk about the Premier League. On the other hand, 20 clubs, according to a report by Deloitte, Premier League clubs' revenues increased by 12 % during the 21-22 season to an all-time high of about£6 billion. According to data from BARB, I don't know what BARB stands for, but from BARB, the source of TV ratings in the UK, the Premier League 2022-2023 season has an average viewership of 3 million people per game. An advantage the Premier League holds is that it's spread across a nine-month period, which provides advertisers ample opportunities to connect with their desired audience.

21:37I can't get over how many football games there are. When I say football, I mean soccer, because I'm European. I'm European. NFL CMO Tim Ellis talks about a helmets-off strategy, saying that a major barrier to reaching a younger audience is that the youth fan base doesn't recognize the helmeted players' faces. His strategy is all about focusing on players' personalities off the field. There's a bunch of stuff here. One, the NFL guy I just quoted saying that helmets-off strategy, part of the reason that the NFL is still very profitable is that the individuals can't command the same types of salaries because they don't have the same type of brand recognition.

22:10When Messi goes to enter Miami, I mean, just he literally is like he's like the Taylor Swift of football. And no individual in football can do that because they don't have the type of brand equity because you never see their face. Maybe Tom Brady did a little bit, but I bet Tom Brady hasn't made a fraction of what Messi or Ronaldo has made. You also have this kind of relegation and promotion construct in the Premier League that a lot of people would say will always make them more successful in the MLS, and that is they have a much deeper talent pool, and it creates more excitement and incorporates more people into the sport.

22:44The NFL is incredibly well-run, incredibly well-run. I think one of the secret sauces of the NFL is the draft system, where something like of the, I forget, was it 32 teams, 28 teams? Something like 80 % of the teams have been in the playoffs in the last decade. And they have this draft system where the worst teams get the top draft choices, which creates a certain egalitarian or a certain, you know, everyone has a shot, if you will. You know, there's a whole other talk show about brain injuries in football. I would not let my kids play American football, not that they have those skills or even that size.

23:15But anyways, you're talking about the two best run leagues in the world. If I were going to bet on one, it would be the prem. I just think these are becoming global brands, personalities. I think it's a beautiful game. And the other real key point of differentiation, conversation. The other real difference between American football and Premier League football, in the fourth quarter, when Dallas is up, you know, by three touchdowns, by the middle of the fourth quarter, you've lost 20, 30, 40 percent of the fans. When I went to the Euro championship in Istanbul between Inter Milan and Man City, Man City beat Inter Milan.

23:54It was pretty obvious they were going to beat them. And they were up, I think, by at least one or maybe two goals. And not a single, not a single Inter Milan fan had left the stadium. And all of them were still there 30 minutes after the match had ended to celebrate their team's incredible season. I mean, these fans are just amazing. The energy, the vibe, the commitment, the bringing of the community together. It's just, it's inspiring. I have no interest in sports. I use football or soccer as a means of connecting with my boys. But the thing about the game, I just love watching the fans. These are just people who are, it's so nice to see men, and it is men, it's about 97 % men in the prem, come together and have a vehicle for sharing emotions and feeling closer to each other.