While many Americans think of the United States as the most developed country in the world, American kids’ STEM (science, technology, engineering, and math) skills are actually significantly worse than those of children in many other countries. The most recent results from a large international education study, the Programme for International Student Assessment (PISA), revealed that the U.S. places at 38th out of 71 countries in math proficiency among 15 year olds, and 24th in science proficiency. Indeed, only 29% of Americans rated the U.S.’s K-12 STEM education as above average, and among scientists, results were even worse: only 16% feel that K-12 STEM education in America is above average, and a full 46% said it is below average. 

The United States’ faltering STEM education system is causing dramatic skills gaps in the workforce. A study by Deloitte and the Manufacturing Institute found that there an estimated 3.4 million manufacturing jobs to be filled through 2025, and only 1.4 million qualified workers to fill those roles. Sharon Robinson, president and CEO of the American Association of Colleges for Teacher Education (AACTE), told Congress that “It is well known that the country’s ability to succeed in the global economy is lagging and that we are losing our unrivaled edge in mathematics, science, and innovation to competitor nations.” 

The National Conference of State Legislatures (NCSL) recommends that STEM subjects be included in educational curriculums as early as possible, particularly because research has shown that early math skills are the strongest predictor of future academic achievement. However, NCSL notes that certain barriers inhibit early integration of STEM education. Many teachers lack specific STEM content knowledge and know how to teach those subjects; furthermore, STEM skills are often seen as reserved for older students in middle or high school, or for “smart kids” rather than the full student population.

Digital Dream Labs (DDL) is an educational technology company and game design studio developing toys and software to teach children STEM skills. DDL’s first product is Puzzlets, a hardware plus software combination toy encouraging children to place small puzzle-piece-like “blocks” into slots on a Bluetooth-enabled play board, resulting in activity on a connected screen. Essentially, Puzzlets makes abstract understanding of computer science more tactile by allowing children to “code” computer characters, robots, and drones with tangible programming steps. 

The Puzzlets RFID technology is paired with software games like Cork the Volcano and Abacus Finch. Kids interact with the educational games on screen while manipulating physical pieces on the Puzzlets board, enriching logic, sequencing, and fine-motor skills through the connection of the abstract and physical worlds. 

In preliminary classroom studies, Puzzlets spurred a 10-25% gain in logic and sequencing skills in just eight weeks, with the most dramatic gains shown by struggling learners. DDL believes that early development of STEM skills reduces later gaps in middle and high school, ultimately building a solid foundation for more advanced education in higher grades and careers in STEM. 

Puzzlets has been recognized by organizations including the Gates Foundation and Digital Promise for its ability to hone STEM skills through gameplay. Carnegie Mellon University researchers remarked that “Puzzlets shows promise in promoting 21st century skills of communication, collaboration, creativity, and computational thinking in students.”

Puzzlets is only the first in a pipeline of STEM education projects on Digital Dream Labs’ roadmap. The company plans to expand into software-only games with their late 2019 release of Monstrous Molecules, a chemistry game for middle school students. They also plan to launch 3D Puzzlets in 2020, building on the success of the existing Puzzlets toy to create a more advanced physical building environment reminiscent of Minecraft. 

Digital Dream Labs is led by Founder and CEO Jacob Hanchar. Jacob received a Ph.D. in neurological science from UCLA, plus a Masters in Business Administration from Carnegie Mellon University. According to his LinkedIn profile, Jacob previously led a coal company and ice cream company in addition to his educational pursuits.

Since launch, DDL has focused on distributing Puzzlets units directly to schools, demonstrating proof of concept and building an enthusiastic audience of educators. In fact, the positive reception of schools has led to a backlog of 20,000 units slated for distribution, and a pipeline of $3.8 million in expansion accounts. DDL expects school accounts to make up half of their revenue in 2019, and about two-thirds of their revenue in 2020. 

DDL’s business model is based on both hardware and recurring software revenue. Their download-only games pull in a high 90% margin, and hardware margins for the Puzzlets tray are a healthy 50%. The Puzzlets unit costs $99.99, with a 10% discount for educators; additional games can be downloaded to supplement the hardware, or buyers can download software content without purchasing hardware for a subscription fee. 

The educational technology market is rapidly expanding, projected to hit $341 billion by 2025. STEM edtech products are a large segment of the market, and DDL believes that STEM education for primary school students is a particular market opportunity. They project that full implementation of their product for kindergarten through second grade in the US alone would generate $5 billion in revenue. 

• Undeniable need for better STEM education: Digital Dream Labs is innovating in a market that virtually every educational professional deems important: STEM education, particularly for younger students. As the United States continues to pace behind other countries in science and math skills, and the lack of quality STEM education drives a skills gap in the workforce, demand will only grow for tools to promote quality STEM education will only increase.
• Diversified revenue and software margins: While DDL’s current hardware product, Puzzlets, generates a decent 50% margin, the company is smart to diversify revenue in coming years by developing software-only content that returns much higher margins, up to 90%, to complement their hardware products. They also intake recurring subscription revenue for their software content, which diversifies and stabilizes their traditional hardware unit revenue lines.
• Traction with school partnerships: Digital Dream Labs initially focused on sharing their Puzzlets product with schools to validate in the market and build an engaged audience of educators to evangelize the benefits of hardware-plus-software STEM education. Now, that audience has the potential to generate significant revenue, with a $3.8 million sales pipeline from schools alone. While this popularity has generated a significant 20,000-unit backlog, which is a risk for the company, demand is evident and will hopefully carry over to additional products introduced in years to come. 
  

While competition certainly exists in the educational toy space, Digital Dream Labs’ Puzzlets product has built an enthusiastic community of educators nationwide who are eager to extend integration and purchase additional units and software. In addition, DDL plans to expand their product line to include software-only educational games, which return a higher margin than hardware toys. Backed by research success and partnerships with leading universities and national science organizations, Digital Dream Labs is positioned to become a recognized leader in STEM education tools. 

Edtech funding in the United States has increased dramatically over the years, with $1 billion in venture capital already invested through the first half of 2019 alone. While some edtech companies like Coursera may exit through an IPO, acquisition is a more common path for edtech companies. For instance, Turnitin, an anti-plagiarism software company, was acquired by a family office media conglomerate for $1.75 billion in 2019. Digital Dream Labs could have many acquisition offers if success continues, ranging from traditional educational content providers like McGraw-Hill or Perason to toy companies like Hasbro or Mattel. 

In sum, Digital Dream Labs has shown early traction with its marquee Puzzlets product, and is positioned to debut exciting new products and continue sales of Puzzlets to grow significantly in the next several years. In addition, given the urgency of improving STEM education in the United States, plus recent buzz and exit opportunities for edtech companies, Digital Dream Labs has the potential to create quality return on investment. Therefore, it’s a Deal to Watch.