Bill Gates' favorite teacher

FORTUNE -- Sal Khan, you can count Bill Gates as your newest fan. Gates is a voracious consumer of online education. This past spring a colleague at his small think tank, bgC3, e-mailed him about the nonprofit khanacademy.org, a vast digital trove of free mini-lectures all narrated by Khan, an ebullient, articulate Harvard MBA and former hedge fund manager. Gates replied within minutes. "This guy is amazing," he wrote. "It is awesome how much he has done with very little in the way of resources." Gates and his 11-year-old son, Rory, began soaking up videos, from algebra to biology. Then, several weeks ago, at the Aspen Ideas Festival in front of 2,000 people, Gates gave the 33-year-old Khan a shout-out that any entrepreneur would kill for. Ruminating on what he called the "mind-blowing misallocation" of resources away from education, Gates touted the "unbelievable" 10- to 15-minute Khan Academy tutorials "I've been using with my kids." With admiration and surprise, the world's second-richest person noted that Khan "was a hedge fund guy making lots of money." Now, Gates said, "I'd say we've moved about 160 IQ points from the hedge fund category to the teaching-many-people-in-a-leveraged-way category. It was a good day his wife let him quit his job." Khan wasn't even there -- he learned of Gates' praise through a YouTube video. "It was really cool," Khan says.

In an undistinguished ranch house off the main freeway of Silicon Valley, in a converted walk-in closet filled with a few hundred dollars' worth of video equipment and bookshelves and his toddler's red Elmo underfoot, is the epicenter of the educational earthquake that has captivated Gates and others. It is here that Salman Khan produces online lessons on math, science, and a range of other subjects that have made him a web sensation.

Khan Academy, with Khan as the only teacher, appears on YouTube and elsewhere and is by any measure the most popular educational site on the web. Khan's playlist of 1,630 tutorials (at last count) are now seen an average of 70,000 times a day -- nearly double the student body at Harvard and Stanford combined. Since he began his tutorials in late 2006, Khan Academy has received 18 million page views worldwide, including from the Gates progeny. Most page views come from the U.S., followed by Canada, England, Australia, and India. In any given month, Khan says, he's reached about 200,000 students. "There's no reason it shouldn't be 20 million."

His low-tech, conversational tutorials -- Khan's face never appears, and viewers see only his unadorned step-by-step doodles and diagrams on an electronic blackboard -- are more than merely another example of viral media distributed at negligible cost to the universe. Khan Academy holds the promise of a virtual school: an educational transformation that de-emphasizes classrooms, campus and administrative infrastructure, and even brand-name instructors.

Quick, free, and easy to understand

Distance learning and correspondence courses have been around since the invention of mail. And private, for-profit schools flourish; the University of Phoenix has half a million students enrolled, most of them online. Other private operations, like the Teaching Co., specialize in amalgamating "great courses" from nationally known teachers: the 12-hour Game Theory in Life, Business, and Beyond, from one academic star, costs $254.95 on DVD.

What's remarkable about Khan Academy, aside from its nonpareil word of mouth and burgeoning growth, is that it's free and prizes brevity. Remember your mumbling macroeconomics teacher whose 50-minute monologue in a large auditorium could bore the dead? That isn't Khan. He rarely cracks wise -- if you want shtick, check out Darth Vader trying to teach Euclidean geometry on YouTube ("The Pythagorean theorem is your destiny!") -- but in less than 15 minutes Khan gets to the essence of the topics he's carved out.

Online critics question whether he amounts to a dilettante who's turning learning into pedagogical McNuggets. But while you obviously don't learn calculus in one session -- the subject is divided into 191 parts, which doesn't include 32 more in precalc -- Khan's components seem to hit the sweet spot of length and substance. And he covers an astonishing array. There are the core subjects in math -- arithmetic, geometry, algebra, trigonometry, calculus, and statistics -- and the de rigueur science offerings, like biology, chemistry, and physics. But Khan also gives lessons in Economics of a Cupcake Factory, the Napoleonic Wars, and the Alien Abduction Brain Teaser.

The seeds of education

Like so many entrepreneurial epiphanies, Khan's came by accident. Born and raised in New Orleans -- the son of immigrants from India and what's now Bangladesh -- Khan was long an academic star. With his MBA from Harvard, he has three degrees from MIT: a BS in math and a BS and a master's in electrical engineering and computer science. He also was the president of his MIT class and did volunteer teaching in nearby Brookline for talented children, as well as developed software to teach children with ADHD. What he doesn't know he picks up from endless reading and cogitation: His gift, like that of many teachers, is being able to reduce the complex. "Part of the beauty of what he does is his consistency," says Gates. Of Khan's capacity to teach, Gates, who says he spends considerable time trying to help his three kids learn the basics of math and science, tells Fortune, "I kind of envy him."

In the summer of 2004, while still living in Boston, Khan learned that his seventh-grader cousin, Nadia, in New Orleans was having trouble in math class converting kilograms. He agreed to remotely tutor her. Using Yahoo Doodle software as a shared notepad, as well as a telephone, Nadia thrived -- so much so that Khan started working with her brothers, Ali and Arman. Word spread to other relatives and friends. Khan wrote JavaScript problem generators to keep up a supply of practice exercises. But between their soccer practices, his job, and multiple time zones, scheduling became impossible. "I started to record videos on YouTube for them to watch at their own pace," Khan recalls. Other users tuned in, and the blueprint for Khan Academy was created.

Khan continued to work for the small hedge fund he had joined after Harvard, Wohl Capital Management. He said he took away "under $1 million" before the Silicon Valley-based hedge fund wound down, and briefly started his own fund in mid-2008, which didn't really get off the ground because of the financial crisis. ("I called it Khan Capital," he says, "but it never got much beyond 'Khan's Capital.'") He used his nest egg to buy a house with his wife, Umamia, a rheumatology fellow at Stanford Medical School, and as a reserve when he gave up his investment career. On a typical day he tapes a few tutorials, answers posts from students, calls experts when he's stuck on how best to explicate a concept, and fields queries from curious potential backers.

He maintains he has no interest in monetizing the operation by charging subscriptions or selling ads. "I already have a beautiful wife, a hilarious son, two Hondas, and a decent house," he declares on his website. But that hasn't stopped the inquiries, the most notable from John Doerr, the Silicon Valley venture capitalist, and his wife, Ann. Not long ago a PayPal donation on Khan's site came in for $10,000 (a typical gift is $100). Khan e-mailed the donor. Her name was Ann Doerr. He knew of a John Doerr but just assumed the name was more popular than he realized. He e-mailed her to say thanks. She suggested lunch.

When they met, Ann Doerr told him she couldn't believe hers was the largest donation. "This is, like, criminal," she said. "I love what you're doing." When he got home, he found a message from her: "There's $100,000 in the mail."

Khan is using that money to pay himself a salary. Later, he met John Doerr and has since relied on both Doerrs for entrée to others in the philanthropic establishment. After Gates mentioned Khan in Aspen, John tweeted it to his Silicon Valley legions. In July the academy received another $100,000 -- from John McCall MacBain, a Canadian entrepreneur who made a fortune in publishing. "If I had a million dollars," Khan says, he'd fund software development of more automated problem sets and extensive translations of his videos. Gates, whose foundation spends $700 million a year on U.S. education, plans to talk to Khan soon as well.

An academy or a library?

Khan has his skeptics in the education business. They don't doubt he means well and is helping students, but they question the broad impact of any tutorial that doesn't test performance or allow student-teacher discussion. "It's a solid supplemental resource, particularly for motivated students," says Jeffrey Leeds, president of Leeds Equity Partners, the largest U.S. private equity firm specializing in for-profit education. "But it's not an academy -- it's more of a library."

But Khan intends nothing less than "tens of thousands" of tutorials offering the "first free, world-class virtual school where anyone can learn anything." The advances envisioned by Leeds and others wouldn't hurt either. The education industry can use all the innovation it can find.