Top Hat, a startup that digitizes textbooks and turns them into an interactive experience for college students, announced on Wednesday that it has acquired yet another business: Fountainhead Press. The acquisition marks Top Hat’s third scoop of a publishing company in the past 12 months.
Top Hat’s whole business proposition is a subtweet to Zoom University: It wants to make learning an active, online experience and completely digital. That focus has let them reach 3.5 million students and thousands of universities. With a new acquisition, Top Hat is bringing more content into its fold, and with it, more customers who need a better solution to a dusty textbook.
I caught up with Top Hat CEO and founder Mike Silagadze to understand what has triggered this string of content acquisitions. While the M&A isn’t tech-focused, we can learn about how a well-funded edtech startup is navigating the early innings of 2021.
We’ll talk about the shift from offline to online, edtech’s consolidation environment and why the “sell to Pearson or bust” mindset might officially be out the door for the sector.
Offline to online
In the past 12 months Top Hat has acquired three publishing businesses: Nelson HigherEd, Bluedoor and now Fountainhead Press. The result is more than simply ingesting a ton of new content, Silagadze says, it’s a customer acquisition tactic.
Top Hat’s focus mimics that of Newsela and Sketchy, two other startups that want to replace traditional textbooks for a cheaper, more engaging experience. Silagadze estimates that the traditional publishers, beyond the top five players, represent a $5 billion market in North America. That’s all technically up for grabs in Top Hat’s mind.
“We partner with and ultimately acquire traditional publishers and then migrate their customers,” he said. “Once we bring a print book online, we go to that customer and say you can keep using the book you love and are forced to use but now within the context of an interactive learning experience.”
The conversion process isn’t foolproof, but partnering with existing publishers gives Top Hat a low-lift way to get into students’ ears. After the Fountainhead acquisition, the conversion of students to paying Top Hat members was 60%. Silagadze points to COVID-19 as a big trigger for this conversion.
“Before, it used to be ‘you will pry this print book out of my cold dead hands’” he said. “Many of those customers are now happily switching to digital.”
Top Hat is closing in at $100 million in ARR, off of 120% growth in students between 2019 and 2020.
Next, let’s talk about some rumblings of consolidation and exits in edtech land.
Consolidation
Consolidation is going to be huge in the next few years for edtech, as bigger players raise enough financing (and gain profits) to be able to afford other businesses.
“We know students are not going to be willing to pay $50,000 a year for Zoom University,” he said. “[Startups] are looking for differentiation.” He pointed to Chegg and 2U as big players looking for acquisitions to take advantage of a bullish stock market and ample capital in the market. Vista’s $3.5 billion acquisition of PluralSight last month proves his point.
“What’s happening in edtech is that capital markets are liquidating,” said Deborah Quazzo, managing partner of GSV Advisors. Quazzo said the ability to move fluidly between privately held and publicly held companies is a characteristic of tech sectors with deep capital markets, which is different from edtech’s “old days, where the options to exit were very narrow.”
2U’s Chip Paucek told TechCrunch months ago, edtech exits used to be so rare that many companies in the sector thought that their only opportunity to exit was to sell to publisher Pearson.
The changing tides bring us back nicely to Top Hat’s decision to stay as an independent company. Top Hat isn’t simply choosing not to sell, it’s competing with Pearson and acquiring businesses that Pearson itself could look at.
“We’re getting close to the size to go public in the next 12 to 24 months,” he said. “So there’s just not that many players in education that are large enough to [acquire us]. Our focus is really on continuing to grow organically and be the acquirer.”
Edtech exits have steadily been on the rise, but post-pandemic, many in the sector see a revitalized energy around the sector finally getting some blockbuster IPOs.
Booming edtech M&A activity brings consolidation to a fragmented sector
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