Carnegie Penetrates Technology-Assisted Education Market –

PITTSBURGH – Carnegie Learning Inc., a developer of educational software and products, believes one of the best ways to learn is by doing.

The company’s products are based on learning tools developed from 15 years of research led by John Anderson, a professor of cognitive psychology and computer science at Carnegie Mellon University in Pittsburgh, along with 13 of his associates.

Carnegie Learning argues that its products work better than traditional methods of teaching because students learn interactively rather than simply watching a teacher in front of a class. Its three products – Cognitive Tutor Algebra I, Algebra II and Geometry – are geared toward middle school through university students, offering them practical problem solving mathematical exercises through software or textbook. Its Cognitive Tutor Algebra I software, for example, asks students to figure out the most cost effective cellular phone payment plan for heavy, moderate and light phone usage. The software allows teachers to move freely about the classroom while students learn at an individual pace and are given hints by the software along the way.

Gearing Up for the Web

Carnegie Learning has plans to expand its presence over the Web by developing ways to deliver human tutors in a virtual capacity, said Tom Patton, the company’s chief financial officer. In doing so, the company seeks to create a community or network of teachers who can discuss its cognitive tutor products. Since the Cognitive Tutor software is not intended for use outside the classroom, the challenge is to modify the product for use in an isolated setting such as at home. The company is working on ways to accomplish this task and expects to have portions of its business online within a year, said Carnegie Learning’s President and Chief Executive Officer Bob Longo, who was hired in 1998.

“This is a company that to date has not taken advantage of the Web and that [part of the business] can be grown very quickly,” said Jay Katarincic, a managing director at Draper Triangle, an affiliate fund of Draper Fisher Jurvetson.

The company charges $25,000 for its software, regardless of how many students are being taught at one location. The package includes a 10-year license for the product, four days of professional development and training, teachers’ manuals and a master set of student textbooks, which can be photo copied. Alternatively, schools can purchase complete student text books for $5 each.

During its development years, the product was tested through pilot programs in some 75 schools throughout the country. Carnegie Mellon researchers concluded, based on statistics taken from those schools, that there was empirical evidence the products enhanced student performance by about one letter grade and there was a standard improvement in SAT scores by some 25%, Longo said.

Incorporated in 1997, the company considers traditional textbook-makers its prime competitors. While there are companies that produce software for learning, most other technologies are teacher-independent, unlike Carnegie Learning’s products.

The United States Department of Education last year selected Cognitive Tutor Algebra I as one of its five “exemplary” curricula, and at press time, some 150 public and private schools across the U.S. were using Carnegie Learning products, about half of which had been in the pilot program. Quaker Valley High School in Pittsburgh, The Trevor Day School in New York City and Hamilton High School in Milwaukee, Wis., are some examples of schools using its products.

Strategic Financing

The company in January raised a $6 million first round of venture funding, led by a $3 million investment by Naples, Fla.-based Collier Investments Ltd., a unit of Collier Enterprises, which is wholly owned by the Collier family, known for investing in the citrus, financial services and real estate markets. Core Learning Group LLC backed Carnegie Learning with $1.5 million, along with $1 million from Pittsburgh-based Draper Triangle Venture Fund LP and $500,000 from Silicon Valley-based New Schools Venture Fund, Longo said.

While Collier could have supplied the entire $6 million round, Carnegie executives opted to create a syndicate that would provide the company with strategic assistance, Collier’s CEO Tom Flood said. After meeting the other potential investors, Flood agreed on the importance of creating strategic alliances. Collier Investments was formed in 1999 to make early-stage technology investments, an area in which Collier Enterprises does not typically engage. Education is a focus of the fund and Flood had reviewed about six other education-related companies before Collier decided to back Carnegie, he said.

Each member of the syndicate offers the company something useful: Core Learning provides the company with links to education circles; Draper Fisher offers a regional presence; and New Schools offers connections to high-level technology executives, Longo said.

Core Learning, a holding company with a $45 million fund slated to invest in education-related companies, backed Carnegie because it had a proven concept and an experienced management team, not to mention the company’s growth potential, said Susan Harman, a co-CEO at the firm.

The $53 million Draper Triangle fund focuses on technology-based education companies, as well as wireless and Internet businesses. The fund, which closed in November 1999, plans to invest in about 20 to 25 companies with between $500,000 to $3 million each, said Katarincic. The firm backed Carnegie Learning because it thinks its “product is superior and the brand name will lead to [subjects beyond] math,” he said.

Prior to receiving its first round investment, Carnegie Learning in 1998 secured $900,000 in low interest seed loans from The Heinz Endowment, the Buhl Foundation and Carnegie Mellon, Longo said.

The company will use the capital to build the internal development team and for sales and marketing efforts. And while Carnegie might seek additional rounds of financing, there are no definite plans to do so in the immediate future, Longo said. Another round of financing, however, seems inevitable for the company to reach its goal of an initial public offering. No predictions as to when Carnegie Learning will go public have been made, but the timing will be based on the momentum of the market, Longo said.

Carnegie Learning is about 18 months into its five-year business plan and projects that by the end of that period, the company will generate some $100 million in revenue, Patton said. By that time it will have captured about 7% or 8% of the Algebra I market, which is considered the “gate keeper course,” he said.