Reports on November 9 that a COVID-19 vaccine looks incredibly effective moved the market. Software stocks sold off and long-suffering industries hammered by the pandemic saw their fortunes rise. It was odd to see airlines soaring and 2020 high-fliers like Zoom taking blows.
But amidst all that noise, another sector that has great import for startups was also taking lumps: edtech.
Looking at how a number of edtech companies traded in the aftermath of the vaccine news helps us understand how public investors view the companies and assess their long-term growth prospects.
Simply put, selling edtech on the vaccine news — as investors did — was a bet that growth in the sector would be constrained by a return to normalcy, something a solid vaccine could hasten. This is a related concept to what TechCrunch discussed regarding software’s own November 9 selloff — that investors were betting that future growth for those companies, boosted in 2020 by the pandemic shaking up how and where people worked, would be limited by a quick return to regular life.
The vaccine’s reported efficacy changed how investors see the future. But how much did it change investor expectations for the future of edtech? Let’s examine the public market results before asking our own edtech expert Natasha Mascarenhas on what she’s seeing in the numbers and hearing from investors.
Edtech companies in the public markets
There aren’t many public edtech companies, but TechCrunch surveyed those that we knew about. Here’s where three stood after the closing bell rang on Friday, November 3:
- 2U closed at $39.55 per share. It closed Monday after the vaccine news at $31.46. That price decline was worth about 20%. The company’s equity has been roughly flat since.
- Chegg closed Friday the 6th at $77.23 per share. It closed Monday, after the vaccine news, at $69.51. That price decline was worth around 10%. The company’s equity has fallen further since.
- Kahoot closed Friday the 6th at 64.60 Norwegian kroner (kr) per share. It closed Monday, after the vaccine news, at 59.00 kr. That price decline was worth around 9%. The company’s equity has fallen further since.
Sadly, Instructure was sold earlier this year, cutting another edtech shop from the public markets. Despite scouring Microsoft’s earnings report, we could find nothing concerning the performance of LinkedIn Learning’s performance. So, our data is limited to the above.
Working with what we have, let’s pick on Chegg for a second. In its latest earnings report, revenue grew to $154 million from $94.2 million in Q3 2019. The edtech giant also projected Q4 revenue between $188 to $190 million, up from $125.5 million in Q4 2019. In 2021, Chegg is targeting total revenue of $775 million. All numbers were ahead of street expectations, but Chegg fell after its earnings report and, as we saw before, again after the vaccine news.
Perhaps investors expected more. Or perhaps they don’t believe Chegg’s estimates. But what Chegg shows is that any startup in the online education space needs to prove that it can offer pandemic-level returns in a sustained format or suffer a sharp repricing.
Still, we can see a clear pattern of rapid, and some cases a sustained drop in value of companies in a sector that has broadly benefited from the pandemic as that tailwind dissipates. But that’s the public market, where investors are infamously fickle. What about those stalwart paragons of constancy and grit, the private venture class?
Venture capital
While the trio of public market drops could breed trepidation among private investors, it’s a net positive for actual change-makers who are building edtech companies right now.
Let’s face it: Edtech has been categorically overhyped in recent months. That led to a flood of opportunists and hype cycles, forcing VCs to sort between who is actually attacking pain points with creative innovation, and who is merely jumping on the bandwagon.
The hype is symptomatic of the fact that it is easy to get market validation for remote learning when remote learning is the only available option.
For edtech VCs, the changing market sentiment could lead to more thorough due diligence. Malvika Bhagwat, a director of efficacy and outcomes at Owl Ventures, recently told us founders “often conflate engagement numbers of outcome numbers.”
“Something could get a lot of traction, but it doesn’t always mean it’s good for us,” she said. “Monthly active users and usage are important to know your scale, but it’s not always synonymous with outcomes.”
Jennifer Carolan of Reach Capital similarly urged startup founders to be more thoughtful when it comes to strategy. Even though edtech companies are pursuing unicorn-level growth, Carolan said they need to hire development and pedagogy specialists along with growth hackers.
Despite the frothiness in the market, investors remain optimistic that edtech will have more and more exits due to the capital gains the sector has made in 2020. Ian Chiu of Owl Ventures tells me that he expects the next three to five years to be filled with edtech IPOs, which could add more data points to how the public market reacts to the category. For now, sparse data points don’t tell a clear enough story simply because the sector has gone underfunded for so long.
In that optimistic view, the market drops could signal to founders that there’s still room to do the jobs that Chegg, Kahoot and 2U do, but better.
The fact that all three businesses aren’t pandemic-proof should rightfully signal that remote learning still needs innovation before it becomes more than just a surge-based trend that gets left behind when life returns to “normal.” Startups that are hoping to find another check to keep going should keep that in mind.
In conclusion, a potential reckoning could sort out 90% of the startup opportunists within the category and leave 10% of the committed founders as hyperfocused as ever. So, for the winners the public market chop could be a blessing in disguise — even if it is bitter medicine.
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