The New Learning Economy: AI, Startups, and Incumbents

The New Learning Economy: AI, Startups, and Incumbents

As we navigate the third school year of the Covid era, it's clear that the education landscape has undergone significant changes. Students are chronically absent, technology adoption in classrooms has accelerated, and parents have pulled their kids out of public schools due to the inadequacies of the current system. But amidst these challenges, there is a glimmer of hope for the future of education.

The Learning Economy is a much broader sector than most people realize. It encompasses all the different ways we develop as human beings, whether it's picking up a new hobby or honing our skills as a boss, parent, or friend. In this new era, partnerships between education businesses and individuals are crucial in delivering products that facilitate learning, whether through content aggregation or establishing behaviors like accountability and consistency.

One of the silver linings of the pandemic is the once-in-a-lifetime economic opportunity it has created for early-stage companies. With millions of parents seeking alternate educational routes for their children, startups have a ready and eager customer base. By leveraging funding opportunities like ESSER and Title 1, these companies can make inroads into the K-12 school market and offer products that link learning to tangible outcomes such as promotions or new careers.

Technological advancements have played a pivotal role in shaping the new learning landscape. Traditionally, education has lagged behind in adopting new technologies, but the past two years have witnessed significant progress. This presents exciting opportunities for startups to capitalize on underutilized resources, ranging from teachers to homeschooling parents to top students. Marketplaces and communities like Flock enable parents to monetize their homeschooling lesson plans, creating a win-win situation for all parties involved.

While the focus has largely been on the impact of AI in the education sector, it's worth exploring the broader implications of AI in the startup ecosystem. Historically, incumbents have captured the lion's share of value from AI, with startups struggling to make a dent. In the internet wave, companies like Google, Amazon, and Facebook emerged as dominant players, while incumbents like Microsoft and Apple extended their franchises onto the internet. The split was roughly 60:40 or 70:30 in favor of startups.

In the mobile space, incumbents like Apple and Google maintained their dominance, but startups like WhatsApp, Uber, and Instagram managed to carve out significant market share. The split was more skewed, with startups capturing roughly 20% of the value. However, when it comes to crypto, startups have enjoyed near-total capture of value, with very little participation from existing financial services or infrastructure companies.

The question then arises: How can startups beat incumbents in the AI space? To overcome the distribution, capital, and pre-existing product moats of incumbents, startups must build products that are dramatically better. This may involve targeting new customer segments or focusing on distribution moats that incumbents cannot serve. In other words, a 10X better product is often the key to success.

The current wave of AI feels different from previous iterations. The speed of innovation is unprecedented, and the technology itself is dramatically stronger. This means that startups have a greater opportunity to create products that can overcome incumbent advantages. While GPT-3 may not have sparked a wave of startups building big businesses on it yet, a 5-10X better model could usher in a new ecosystem of startups while augmenting incumbent products.

Infrastructure-centric companies with broad adoption and growing usage have emerged in the AI space. OpenAI, Stability.AI, Hugging Face, Weights and Biases, and others are leading the charge. These companies provide the necessary infrastructure and access to AI technologies, opening up more opportunities for startups to thrive.

The key to success in this exciting era of AI is to identify actual end-user needs and unserved product markets. Startups must avoid the trap of creating solutions in search of problems. By focusing on the needs of users and leveraging the power of AI, startups can unlock real value and make a meaningful impact.

In conclusion, the convergence of the new learning economy and the AI revolution presents a unique opportunity for startups in the education sector. By building innovative products that address the evolving needs of learners, leveraging technological advancements, and capitalizing on the potential of AI, startups can carve out a significant share of the market. The future of education lies in the hands of those who embrace change and harness the power of technology to transform learning.

Actionable advice:

1. Focus on building products that are 10X better than existing solutions to overcome incumbent advantages.
2. Identify actual end-user needs and unserved product markets to ensure market fit.
3. Leverage the infrastructure and technologies provided by AI-centric companies to fuel innovation and growth.