Deal Radar 2010: Knewton

Founded in the spring of 2008 by Jose Ferreira, Knewton is an online educational platform provider and test preparation service. Ferreira, who previously worked as an executive with Kaplan, was frustrated by what he saw as traditional, outmoded approaches to test preparation. He saw what he believed to be an opportunity in the market for a customized approach that would improve the quality of instruction to a wider audience and ultimately prove to be more effective for students than other methods. He saw many unproven instructors teaching at local test centers and wanted to be able to target students’ weaknesses at a more granular level.

After working quietly on the concept for almost fifteen years, Ferreira founded Knewton to help test takers maximize their scores by combining the latest adaptive learning technology with in-depth knowledge of how the test was designed. Ferreira was joined by industry experts, including the test makers who designed the LSAT, GMAT, and GRE. Knewton’s GMAT and LSAT test prepration courses each consist of 12 online classes taught by a team of instructors. The classes are taught in a live video classroom and are archived online for on-demand practice and review. Classes are supplemented by customized practice sessions that are based on Knewton’s adaptive learning engine designed to pinpoint and address each student’s mastery of specific test skills and tailor the preparation based on individual areas of strength and weakness.

The New York City-based Knewton estimates the total test prep market at a few billion and the market for its education platform at $7 trillion. Knewton competes with industry giants like Kaplan, The Princeton Review, and Veritas. Knewton aims to score over its competitors with its greater degree of customization. Its online learning platform is in-person and hands-on; a student can chat and email his questions to the teaching assistants at any time and get them answered instantly. If the question is relevant to the entire class, the assistants pass it along to the teacher, who addresses it for everyone. In comparison, The Princeton Review, for example, has an online GMAT course with five live classroom sessions and three tutor sessions.

Knewton offers students its test prep services and access to instructors for $690 for GMAT and LSAT preparation. Kaplan charges $1,449 for three months, The Princeton Review charges $899 for a three-month online GMAT course, and Kaplan charges $1,299 for its Premium Online GMAT course, which includes eight online classroom sessions and nine full practice tests, among other things. The live, interactive Virtual Veritas Prep GMAT course is $1,200 for 42 hours and seven weeks.

Knewton guarantees a minimum 50-point increase in students’ GMAT scores. If a student’s score does not go up at least 50 points, he or she gets a full refund. Additionally, the student is allowed continuous access for 12 months for any reason they desire. The Princeton Review, Veritas, and Kaplan guarantees allow for a refund if a student’s score does not improve 10 points. Otherwise, they offer a one-time course repeat.

Knewton also scores points in convenience. Since the company offers only online classes, students can set their own schedules for test prep. They receive a live course online without leaving their homes, and all of the materials are available on-demand round the clock. However, this could be seen as a disadvantage, since The Princeton Review, Kaplan, and Veritas all offer both physical courses with supplemental online materials or online courses and tutoring depending on what a student wants. The question is, then, to what degree will students shift to online only? Where Knewton does seem to stand out is in the depth and breadth of its online materials.

Knewton is also gaining recognition in the industry. It was a finalist in the 2008 Amazon Web Services Start-Up Challenge and was named by FastCompany.com in “5 Startups to watch for.”

Knewton has raised about $8.5 million so far: a $2.5 million Series A from investors including First Round Capital, Accel Partners, and Reid Hoffman in 2008 and a $6 million in Series B from investors including Accel Partners, First Round Capital, and angel investors such as Peter Stern (Datek co-founder and CTO) in April 2009. Knewton is also thinking about raising more money in early 2010 to meet growing demand.

Knewton has doubled its growth for four consecutive quarters. Though it did not give the amount of annual revenue earned, the company did say that it has earned revenues of between $1 million and $10 million thus far. The company ruled out exit as an option and said that it plans to release its third product line, prep for the SAT, in February 2010.

Knewton appears to be taking a more aggressive approach to customization than its major competitors in what seems to be the next evolution in the test-prep cycle: according to Kenneth E. Clow and David L. Kurtz, in the 1980s The Princeton Review grew rapidly to challenge Kaplan, which had a near monopoly in the market, with smaller classes and later significant investment in software and online courses. Kaplan responded with its own software and online options. These two companies remain fierce competitors, and Knewton has its work cut out for it in taking away their market share. Will customization be the way to do it? The next generation of test takers will be the ones to answer that question.

Related Readings:
*Helping Failing High School Students Pass: Revolution Prep Founders Ramit Varma and Jake Neuberg
*Deal Radar 2009: Lakshya Institute
*Deal Radar 2008: Grockit

This segment is a part in the series : Deal Radar 2010