One reason some venture capitalists and founders don’t enter edtech is because the space has a sluggish stereotype, thanks to red tape, slow sales cycles, and, in America, a fragmented customer base.
But data suggests that edtech’s reputation is not entirely earned. Byju’s is India’s second-most-valuable company. Since 2013, there have been 300 acquisitions in the space. And if you only understand success in terms of unicorns, two edtech businesses, Quizlet and ApplyBoard, were recently added to the $1 billion valuation club.
The tension between edtech’s stereotype and its potential for return, plus the surge in remote learning due to coronavirus-related shutdowns, poses an interesting challenge for the market.
In the beginning of the pandemic, TechCrunch talked to a group of edtech investors to get their knee-jerk reaction to the remote learning boom. Unsurprisingly, many commented that the heat-up of the sector will materially impact K-12 and higher education and unlock new opportunities. Others warned early-stage edtech startups about how newfound competition could hurt content, quality and effectiveness of their end product. Overall, the general message was that the boom is here, everyone is excited and waiting to see what happens next.
Fast forward a few months, mistakes and extended school closures later, edtech now has a better inkling on what the next billion-dollar business needs to get right. Last week, we got into trends that have promise in a post-pandemic world. Today, we’ll step out of sub-sector specific dialogue and get into the macro-impact of rapid change on edtech as a whole. You’ll get an eagle-eye view of what rapid change, adaptation, and for lack of better phrasing, popularity does for the market.
Today you’ll hear from the following investors:
- Ian Chiu, Owl Ventures
- Shauntel Garvey and Jennifer Carolan, Reach Capital
- Jan Lynn-Matern, Emerge Education
- David Eichler, TCV
- Jomayra Hererra, Cowboy Ventures
Ian Chiu, Owl Ventures
What’s the next “phase” of edtech we are entering?
We are now in a time where there is a fundamental acknowledgment that education technology will have a profound effect on the billions of worldwide learners of all ages. With the historical market challenges — of infrastructure, capital and talent — being rapidly removed, there is a major opportunity for the next generation of large-scale education companies that should better represent the enormous size of the six-trillion-dollar education market. Given the attractiveness of the sector, we are now seeing more talent entering the education space; a rapidly growing market for compelling international opportunities; and more companies at the intersection of education and other major sectors. Lastly, we believe that COVID-19 and the dramatic adoption of digital education during this time marks a profound turning point and acceleration in the market for education technology.
When do you know an edtech company can and should be venture-backed?
At Owl Ventures, we are looking to invest in visionary entrepreneurs to build transformative education companies that have the potential to achieve significant scale. More specifically, we are seeking to back companies that have achieved clear product-market fit, possess attractive business characteristics that catalyze growth while creating strategic moats and have a defined and scalable monetization strategy.
How has your appetite for edtech investment changed since March 1?
Owl Ventures has always been 100% focused on edtech since our founding in 2014 and has invested in 35+ companies in the sector. In the current environment, the market now fully recognizes the enormity of the opportunity in edtech and appreciates the value that edtech companies provide as an integral part of the broader education ecosystem. We believe that the secular growth of the edtech market is still very much in its early innings around the world and that edtech will continue to be an incredibly attractive investment sector in the years and decades ahead.
Edtech historically has had fewer IPO exits than other industries. Do you imagine that will change? Why or why not?
We believe this will change dramatically in the coming years as many edtech companies have been rapidly scaling, with an increasing number now approaching and eclipsing $100 million in revenue. As a result, the pipeline for potential IPO candidates coming from the edtech sector continues to grow larger. As one example of investor interest in a pre-IPO edtech company, Fidelity Management & Research recently invested in a Series E round of MasterClass. More broadly, based on data from HolonIQ as of 29 June 2020, there are 19 edtech Unicorns around the world who have collectively raised over $9 billion of total funding in the last decade. Byju’s, recently valued at $10.5 billion, is the largest privately held edtech company in the world. Meanwhile, the stock performance of public edtech companies like Chegg in the U.S. and TAL Education in China have meaningfully outpaced the broader indices and are now valued at $8 billion and $44 billion, respectively, drawing the attention and interest of many scaled public market investors.
How near is edtech’s consolidation phase? Will we see more companies joining forces?
Consolidation has already been happening for some time in the more mature segment of the edtech market. Companies like Frontline Education, PowerSchool and Ascend Learning have all been incredibly acquisitive over the years. Anthology is another timely example of consolidation, with three companies joining forces in the higher-ed market. In addition to more mature businesses combining, we are also seeing younger startups getting acquired by larger edtech companies like Chegg.
Jennifer Carolan and Shauntel Garvey, Reach Capital
When do you know an edtech company can and should be venture-backed?
Jennifer Carolan: Same reasons apply in edtech as in other sectors — is it scalable, technology-enabled with a large market potential.
How has your appetite for edtech investment changed since March 1?
Jennifer Carolan: We have always been an education-focused fund, but it sure is nice to see so much additional capital coming into the space and leading later-stage rounds. Truth is, we have been busier than ever before. Our pipeline has increased 50% year-over-year and we are actively investing in new companies and follow-ons.
How are you managing edtech’s spur of growth with privacy concerns?
Shauntel Garvey: We are encouraging our companies to continue to keep safety and privacy considerations at the forefront of product development. Educators and administrators will need to make quick decisions on which tools to adopt for remote learning and may be unaware of all the safety and privacy implications. Edtech companies that not only design their products with privacy and safety considerations in mind, but also make their privacy policies plain and clear will be at an advantage. We also recommend that companies work with third parties like Common Sense Media and the Future of Privacy Forum who schools often rely on to vet privacy practices.
Jan Lynn-Matern, Emerge Education
What’s the next “phase” of edtech we are entering?
Phase one was about workflow efficiency, producing big infrastructure companies like Blackboard and Ellucian. Phase two was about bringing content online, producing platforms like Udemy, Udacity, Coursera and Codecademy.
We are now entering phase three, which is about bringing teaching and learning online: pedagogy as a product.
One way to think about it is that the next wave of successful edtech companies will be schools, not tools. Being a school can be lucrative: The world’s largest education businesses are universities, together generating somewhere around $2 trillion in tuition revenues.
Tackling inefficiencies in the provision of higher skills is the next frontier.
When do you know an edtech company can and should be venture-backed?
It’s successfully tackling one of the massive growing market opportunities in education:
- Disrupting or supporting the growth of higher education provision, gaining a share of their tuition revenues.
- Consumer re-skilling — companies that enable career arbitrage at scale and can take value off the table from that.
- Corporate upskilling — solving access to talent at scale, through hands-on training and access to global talent.
- It’s highly scalable, implying that it can grow efficiently relative to customer lifetime value.
- High-value courses/degrees that provide genuine career outcomes (selling short courses can be just as expensive as selling full degrees).
- If you are offering a lifeline/new revenue stream to universities you can scale extremely fast.
- If you can just be a reliable source of talent at scale for big employers, you can scale infinitely.
How has your appetite for edtech investment changed since March 1?
More bullish.
How near is edtech’s consolidation phase? Will we see more companies joining forces?
Over the last five years, volatility in universities’ financial performance has reached unknown heights. We will see consolidations amongst universities. Same should happen in the infrastructure, learning software and courseware space through players like publishers, Chegg, etc.
David Eichler at TCV
What’s the next “phase” of edtech we are entering?
Edtech is no longer optional … it’s a requirement for success. Specifically, it’s no longer optional to leverage technology given the current pandemic and forced remote environment. For instance, Varsity Tutors, a TCV company, has quickly transitioned [from] part in-person, part online tutoring, to 100% online, plus they have launched a handful of group-learning sessions and “virtual summer camps” aimed at school-age children to keep them engaged while at home.
When do you know an edtech company can and should be venture-backed?
The first thing we do when evaluating any potential investment is talk to customers. It’s critical for a company to have strong market demand. Once there is evident demand, we then look for a plan to efficiently and effectively scale product and/or sales and marketing.
How has your appetite for edtech investment changed since March 1?
We have been active edtech investors for two decades, and our appetite for edtech investing continues to grow as we see the combination of acceleration of market demand, as well as the continued formation of great companies and products.
Edtech historically has had fewer IPO exits than other industries. Do you imagine that will change? Why or why not?
Going public is financial strategy choice, and while there have been many great edtech companies, it is true that many have chosen to remain private. Granted, many were once public and went private (Blackboard, Renaissance Learning, Instructure among others). Part of that is because a handful of the historical market leaders have been very focused on inorganic growth and consolidation. It is hard (and sometimes inefficient) to do that in the public markets.
That said, there are a handful of strong organic growth edtech companies getting close to the scale required to go public, and there could be quite a few edtech IPOs in the next 3-5 years.
How near is edtech’s consolidation phase? Will we see more companies joining forces?
Given the fact that there are so many ways people learn, and so many idiosyncratic needs — edtech has always been a category that’s been ripe for consolidation. We believe that will continue as companies gain market share and seek to add additional capabilities.
How are you managing edtech’s spur of growth with privacy concerns?
We have always been highly focused on great learner experiences and outcomes, and a component of ensuring those is teacher/learner privacy. We actively forward invest in security to ensure the privacy of customer information.
Jomayra Herrera, Cowboy Ventures
What’s the next “phase” of edtech we are entering?
Edtech is such a broad market (pre-K, K-12, supplemental versus core, higher ed, continuous learning, etc.) and there are new phases within each of those categories. I’d answer this question in two ways: (1) Overall, I believe changing practices come before software, especially in education. As educators have been forced to embrace and use online learning solutions and develop new practices, this may be an opportunity to accelerate tech adoption in classrooms and transform traditional teaching practices. (2) In adult learning, in particular, I believe we are now entering a phase where we can expand “bootcamps” beyond software engineering and data analytics and where the requirement for credentials may hopefully be changing on the employer side.
When do you know an edtech company can and should be venture-backed?
Most of the highly valued companies in the sector tend to be platforms that are operating in huge markets and have more traditional software-like margins (e.g., 2U, Instructure, Coursera, Udemy, Pluralsight and Guild Education). If the company is more services than software, low-margin and doesn’t have a credible path to becoming more of a platform, it will likely have a hard time raising venture capital.
How has your appetite for edtech investment changed since March 1?
It hasn’t materially changed. We’ve always known there is a lot of opportunity in the sector and I think this time period has just accelerated the urgency in creating and adopting new solutions.
Edtech historically has had fewer IPO exits than other industries. Do you imagine that will change? Why or why not?
In the near term, it’s very possible we will have a spike in IPO candidates. There are quite a few edtech unicorns who have massive tailwinds like VIPKid, Udemy, Coursera, Duolingo, Guild Education and Quizlet. That said, large tech companies and staffing agencies have been very acquisitive in the edtech market and I believe that will still be a credible exit path for many companies.
How near is edtech’s consolidation phase? Will we see more companies joining forces?
I think we’ve already seen a lot of consolidation in the edtech market, both in K-12 and higher ed. If you review all of the bootcamps that have arisen over the last decade, many have been acquired by other players (e.g.. Trilogy Education, Hackbright, Flatiron, General Assembly, Bloc, Thinkful, Fullstack Academy, etc.). Similarly, in K-12 there is a history of smaller edtech companies being sold to Student Information System (SIS) providers that act more as platforms. I expect we will continue to see consolidation in the market, but likely at the same historical pace.
How are you managing edtech’s spur of growth with privacy concerns?
Privacy is hugely important, especially if it’s related to learners under 18 years old, so asking questions around managing privacy concerns is always part of our diligence process.
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