Textbooks are so yesterday. Yet student backpacks are still weighed down by them. Replacing those textbooks with software has been one of the great white whales of computing going back at least to Alan Kay’s original Dynabook concept 40 years ago (which he is still working on). Today, there are a slew of startups tackling the problem of e-learning (Brightstorm, iKnow, Grockit, PrepMe), and some progress is being made.

The low-hanging fruit seems to be test preparation and video tutorials, but the bigger prize over time will be augmenting or replacing printed textbooks and increasingly penetrating the global education market. One small startup with the ambition to take that prize is Knewton.

Based in New York City, Knewton raised $2.5 million last May from Accel Partners, First Round Capital, Reid Hoffman, Ron Conway, and other angels. The company was very much under the radar until it showed up as a finalist for the Amazon Web Services Start-Up Challenge last month (see video below). The company is built entirely on Amazon’s cloud computing services (EC2 for computation, S3 for storing video tutorials, and Mechanical Turk for fine-tuning its test questions). And currently it is leading in the voting for the Startup Challenge, with 51 percent of all votes cast. (That kind of online voting can be easily gamed, of course). Actually, the Startup Challenge already has its winner: Yieldex. Knewton did win the popular vote, though.

The founder and CEO, Jose Ferreira, used to be an executive at Kaplan, the test prep giant. Knewton’s two chief test designers, Len Swanson and Robert McKinley, wrote the scoring algorithms for the adaptive learning tests used by, respectively, the Educational Testing Service (which administers the SAT, GRE, and AP tests) and ACT.

Adaptive learning tests are taken on computers. The questions get progressively harder or easier depending on each student’s answers. Thus, they adapt to each student’s knowledge and abilities. Knewton is taking the adaptive learning concept and applying it first to online test preparation services. It is not cheap. Right now it offers a year-long subscription to prepare for the GMAT test that costs $1,390. The company guarantees a minimum 50-point jump in a student’s test score or their money back.

The service combines live video chat with an instructor in a whiteboard environment, along with learn-at-your-own-pace sample questions and tutorials. Knewton finds the best teachers it can get and pays them $500 to $800 an hour. In addition to the virtual classroom, Knewton keeps track of each student’s progress in mastering the thousand or so concepts that can be covered in each test. A “concept queue” keeps the students abreast of what concepts they have mastered and which ones they are weak on. They can click on each concept tag to dig deeper. (See screenshots below).

A big “Knewton’s Law” button automatically presents the next concepts and tutorials each student is ready for at that particular moment, based on what they’ve covered and how they’ve done so far. The content is delivered in whatever format (text, video, animation) and difficulty level that student learns best from for that particular concept.

A color-coded progress bar tells them how they are doing in different categories such as math or verbal. Knewton also shows students what their score would be on the test if they took it that day, based on the questions they’ve actually answered. Students also receive alerts for upcoming classes, homework deadlines, office hours, and the like.

Knewton plans to expand beyond the GMAT to other standardized tests, but the really big opportunity is to apply its learning engine directly to online textbooks. Ferreira explains the concept:

We tag content down to the atomic level. A student who accesses a digital textbook, for instance, any given day they come in, instead of the same syllabus every day, they get a new syllabus based on the concepts they know and the ones they don’t know. If they learn best via video, they get that. If they learn best with text they get that.

Several textbook publishers big and small are talking to Knewton about pursuing partnerships, says Ferreira. Baking adaptive learning techniques right into the textbooks could one day make the online versions of textbooks much better learning tools than the offline versions. Not everubody learns the same way, and the one-size-fits-all approach that the textbook industry takes today needs to be changed.

But can textbooks, tweaked with the right software, ever become good teachers in their own right? The prospects of such a future raises more than just pedagogical questions. The Teacher’s Union might have a fit if software like Knewton’s ever threatens their jobs, but education is so broken in this country that anything that make students smarter should be embraced with open arms. Unless, of course, textbooks are going to cost $1,000 online instead of $100 in print.

(For more of our coverage of e-learning startups, read our profiles of TC50 finalist Grockit and Japan’s iKnow).

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Watch a video of the awards ceremony here.

Three jam-packed days, and 52 startup demos later, we finally have a winner for this year’s TechCrunch50. Every day, the presentations just seemed to get stronger and stronger. There were so many strong contenders this year that we are awarding five jury selection prizes, in addition to the top prize. But there must be a winner, and that winner is…Yammer.

Yammer

Yammer is Twitter with a business model. Created by an existing company, Geni, to scratch its own itch, Yammer takes the familiar Twitter messaging system and applies it to internal corporate communications. There is such a huge demand for this type of service that 10,000 people and 2,000 organizations signed up for the service the first day it launched on Monday. Anyone with a corporate email can sign up and follow other people in their company. But if a company wants to claim its users, and gain administrative control over them, they will have to pay. It’s a brilliant business model.  (Watch a video of the the winning demo).

The runners up are:

Atmosphir

Atmosphir is a gaming platform that anyone can use to create their own immersive, 3D levels. The tool works by dragging and dropping level elements into place – pieces of land, bridges, hazards, etc. To play your level, all you have to do is hit “play” and you can even go back to the editor after entering gameplay. Atmosphir is available for Macs, PCs and Linux machines and was developed by Minor Studios.  (Watch the video).

FitBit

FitBit produces a small gadget that can be clipped discreetly to your clothes. It tracks your movement throughout the day and delivers reports on how active you’ve been. These reports can be accessed through a website and used to learn not only how many steps you’ve taken but your sleeping patterns and caloric burn as well.

GoodGuide

GoodGuide helps consumers find better and more comprehensive information about the products they buy and the companies that make those products. The site ranks products on their health, environmental and social “goodness”, empowering consumers to buy conscientiously. The founders say they have enlisted the support of scientists and technologies, as well as hundreds of information sources, to make the service as accurate and informative as possible.  (Watch the video).

Grockit

Grockit is an online, interactive learning tool that brings students together to answer quizzes with each other. The startup has raised $10 million for what it’s calling a “Massively Multi Player Online Learning Game”, which takes its cue from World of Warcraft and applies that game’s concepts to SAT-like study groups. Grockit features a chat room where students can talk with one another as they deliberate over questions. They can also award each other points for their insight.  (Watch the video).

Swype

Swype introduced a radical new gesture-based way to input text on touch-screens. Created by Cliff Kushler, the same man who co-invented the T9 predictive text entry system found on over 3 billion phones, Swype lets you simply connect letters on a touch-screen keyboard by making squiggles between them using your finger or a stylus.  (Watch the video).

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Grockit, the mysterious online learning site that has been operating in stealth for the past year and has raised a total of over $10 million, has finally revealed itself to the public, and it doesn’t disappoint. The site calls itself a “Massively Multi Player Online Learning Game”, taking gaming concepts that have made World of Warcraft a massive hit and applying it to what amounts to an online SAT study group.

After logging in, users are presented with a list of active classrooms, each of which consists of less than a half dozen students. Once the session begins, the students are presented with a question along with a set of possible answers. Students can use an embedded chat box to debate on the possible choices, and can also leave comments beneath individual answer choices. After choosing an answer, Grockit highlights the correct one and an explanation detailing why it was the right choice.

As the sessions progress, students can award each other with “Grockit Points” for participating, which allow them to increase their Grockit rank (up to a level 10 blackbelt). The company says this leveling system gives users an incentive to play smart, and play often, and has worked well during its beta testing.

Grockit has the potential to be a huge hit – every year, millions of students spend hundreds or thousands of dollars on expensive prep classes for standardized tests like the SAT and the GMAT. Grockit may not be a replacement for these classes, but it’s a powerful tool nonetheless. Some of the panelists questioned the site’s virality, wondering why anyone would play this learning game in the first place. But they seem to forget just how far many students will go to ensure their success, buying handheld quizzing devices, test books, and the aforementioned prep courses. If Grockit can prove that it genuinely helps its students learn (and I think it will), then it should have no problem finding an audience.

Grockit originally launched in 2006, as an online video prep course for standardized tests. In 2007 the company abandoned the model and began developing the product that launched today.

The newest incarnation of Grockit launched at TechCrunch50 during the Games session. You can watch a video of its presentation here.

Expert Panelists

Robert Scoble – There are two kinds of gamers – World of Warcraft gamers play for hours on end. On other hand, me and my wife like to learn stuff we want to win play stuff and get out. This looks like lots of commitment, have to set up game time, then return to the site later…

Grockit – You can start a game instantly, just play for five questions.. As far as game mechanics are concerned… We want to give experts some recognition they can work towards

Robert Scoble – Are you going to partner with some of the book companies (SAT, GMAT, etc?)

Grockit – We aren’t affiliated with the tests, we created the site on our own. We could get in a situation where we license a bunch of questions from the College Board etc.. Eventually we’ll release an open platform so you can make what you want…

Robert Scoble – do you have a mobile client?

Grockit – We’ve got an iPhone preson we’re going to get on board, working toward it.

Sheryl Sandberg – Where do you think most of the content would come from? What about users?

Grockit – Once we vet the system and it’s scalable we’ll open it up. We already have it in there, just have to skin it.

Robert Scoble – Can you put media into the answers? For instance with a language?

Grockit – Any of the answer choices could be push or pull (can do media)

What’s the distribution model?

Grockit – Create sessions with your friends, there’s motivation for experts in system to get people in

Joi Ito – how do you invite people?

Grockit – Load Gmail account, or Facebook friends)

Joi Ito – seems like a new idea, so if I got an email that says let’s play SAT toeghetr, I think t doesn’t feel very viral..

Robert Scoble – That’s why I was wondering about ties to books. This would be good to study from the book.

Grockit – I guess the best way to think about it is study groups. If you get one of these people, it’s pretty natural to get friends in there.

Bradley Horowitz – At first I thought this was like Tom Sawyer’s multiplayer fence painting . But I could see this as a great virtual tool. How do you see this as it comes up against yahoo answers?

Grockit – Everything in game is archived, will be available for offline viewing..

Bradley Horowitz – Is it by search engines?

Grockit – Probably for free content, when you create your content that will be your choice.

Robert Scoble – Can i play all the way through, do i become credible source if I’m right?

Grockit – As you earn experience points you level up.

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If it seems like everybody is starting their own virtual world, it is because they are. A report put out today by Virtual Worlds Management tracks $161 million put into 14 virtual-world investments during the second quarter of 2008. In the first quarter there was even more activity, with $184 million put into 23 virtual worlds and supporting technology companies. That brings the total this year alone to $345 million across 37 deals. Some notable deals (you can see the full lists by clicking on the last two links above):

Second Quarter 2008

Grockit——————-MMO Learning Game——-$8 million——-Integral Capital and Benchmark

Nurien Software——–3D social networking——-$15 million——-Northern Light, Globespan, NEA

PrimeSense————-Gestural Interface———-$20.4 million—–Led by Canaan Partners

Realtime Worlds———-MMOG Developer———$50 million——–Maverick Capital, NEA

Stanford Parallel —-Parallel Processing————–$6 million——-Sun Microsystems, AMD, Nvidia, IBM,
Processing Lab for Virtual Worlds HP, and Intel

Turbine———————-MMOG——————-$40 million————–Time Warner and GGV Capital

First Quarter 2008

9You———–Virtual World/Casual Games——$100 million——–Temasek Holdings

Dizzywood —————Youth World————— $1 million——-Shelby Bonnie, Charles River Ventures

EveryScape————— Mirror World————–$7 million——–Dace, Draper Fisher Jurvetson

Fix8 ———————- Avatar Content————$2 million ——–SK Telecom

Gizmoz ——————- Avatar Creation ———- $6.5 million——-DoCoMo Capital, ngi group

iOpener ——————–Mixed Reality ————-$6 million———Triangle Venture Capital

Sparkplay Media——Casual MMO with Games—–$4.25 million—–Redpoint, Prism Ventureworks

Unisfair ——————–Virtual Events Platform—–$10 million——-Norwest, Sequoia Capital

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We don’t know much about Grockit. The company is creating a new way to get people to learn online, and has spent the last year working away in stealth mode. Whatever it is, it’s apparently impressing investors: Grockit just raised $8 million in Series B funding from Integral Capital and Benchmark Capital, bringing its total to $10.7 million – impressive for a product that has yet to see the light of day.

According to the company’s press release, Grockit is “a MMOLG (Massively Multi Player Online Learning Game) where people can connect to learn from each other”. The company hopes to release the product this fall.

Grockit originally launched in November 2006 as an online exam-prep class that competed with companies like Kaplan and The Princeton Review. In July 2007 Grockit announced that it had scrapped that idea in favor of their current plan, and raised a $2.7 million Series A round led by Benchmark and angel investors.

The company was founded by Farbood Nivi, who taught in the exam-prep business for years, and Michael Buffington, an experienced Rails developer.

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Prepme is one online test prep company coming out of the University of Chicago’s business incubator. Founded in 2001, the company offers test preparation for the SAT, PSAT, and ACT, using an adaptive algorithm to customize the preparation course for each student.

Unlike Kaplan’s online offering, Prepme doesn’t calculate the best lesson plan once, but continuously as you work your way through the material. Their system keeps track of what questions you get right and wrong, working you harder on the types of questions you miss.

Additionally, customers can connect electronically, using real time chat, with high scoring college students who serve as tutors.

With test prep for the SAT alone being a $130 million dollar-a-year industry, using web 2.0 technology to help students seems like a logical move. Seeing the threat, some of the major players in the industry, like Kaplan or Princeton Review, have been attempting to develop online test prep products to compete with new online offering like Prepme. Prepme charges around $300 to $500 for their lessons compared with Kaplan’s lowest offering costing $400.

At the same time, Prepme is expanding the tests which they provide preparation for to include the GMAT, MCAT, and LSAT and partnering with brick and mortar companies to provide comprehensive test-preparation services. Additionally, the company signed a contract earlier this year to provide their services to every high school junior in the state of Maine.

See also our coverage of Grockit, a Silicon Valley startup focusing on helping students study for the GMAT via P2P ideas evolved through MMOGs..

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Now they are funded – $2.7 million total ($2.3 million from Benchmark, $400k from angel investors Mark Pincus, Rob Lord, Reid Hoffman Thomas Ryan and others) in a Series A round was closed last month. And they are changing their model completely.

Instead of holding one-to-many classes via Webex, the company is building a new product from the ground up. Founder Farbood Nivi calls it MMOL, for Massive Multiplayer Online Learning (a play on the term MMOG). He says studies show that people learn best from eachother, not in a teacher-students situation. He, along with technical co-founder Michael Buffington (Price.com, MeasureMap, Stikkit), are going to try to prove this works. Beyond that, they aren’t divulging any details at all.

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Grockit was started by Farbood Nivi, who has been teaching exam preparation since 1998. He worked for Kaplan and was Teacher of the Year for The Princeton Review in 2002. Just a few months ago he decided to start his own prep school where students can attend WebEX classes.

Grockit is significantly cheaper than the major review schools but Nivi says his profit margin is bigger.

“The other guys tend to be enormously bloated as far as companies go,” Nivi said via IM on Thursday. “They have very inefficient operations. They spend $1.5 million to generate $1.4 million. The virtual world is cheaper and more pervasive.”

To start out, Grockit is offering 16 90-minute sessions plus the official GMAT review text books for $399. Kaplan online is $1,249, The Princeton Review is $899, and Manhattan GMAT Prep is $990. Nivi says that the Grockit price may go up a little within the next year but he doesn’t have actual plans to increase it.

“One student has dropped the course with a competitor and decided to buy a laptop with the money he is saving by taking Grockit instead,” Nivi said. “Taking one of the big guys means that just applying to a hand full of MBA programs is a couple of thousand dollars out of your pocket.”

For now, Nivi is satisfied using WebEX where students and teachers can chat and interact. In the future he hopes to develop his own software for interactive classes. He also hopes to branch out from solely GMAT prep and start ACT courses next year because he believes that the ACT “is going to eat the SAT.”

To promote his service, Nivi and his staff of teachers have signed up as experts on BitWine. They are also banking on word-of-mouth marketing, hoping that saving money is a major incentive for hopeful students.

The obvious question here is if Grockit is a get-what-you-paid-for type deal. Having not taken entrance exams in six years, I couldn’t think of appropriate questions to quiz Nivi with but his experience is impressive enough to say his school is worth serious consideration. Especially for anyone considering dropping major ducats on an MBA.

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