After years in the backwaters of venture capital, edtech had a booming 2020. Not only did its products become must-haves after schools around the globe went remote, but investors also poured capital into leading projects. There was even some exit activity, with well-known edtech players like Coursera going public earlier this year.
But despite a rush of private capital — which has continued into this year, as we’ll demonstrate — edtech stocks have taken a hammering in recent weeks. So while venture capitalists and other startup investors are pumping more capital into the space in hopes of future outsize returns, the stock market is signaling that things might be heading in the other direction.
Who’s right? One investor that The Exchange spoke to noted that market turbulence is just that, and that he’s tuning into activity but not yet changing his investment strategy. At the same time, the recent volatility is worth tracking in case it’s a preview of edtech’s slowdown.
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Let’s look at the changing value of edtech stocks in recent months, parse some preliminary data via PitchBook that provides a good feel for the directional momentum of edtech venture capital, and try to see if there’s irrational exuberance among private investors.
You could argue that it’s public investors who are suffering from irrational pessimism and that private-market investors have the right of it. But since public markets price private markets, we tend to listen to them. Let’s go!
Falling shares
We’re sure that you want to get into the private-market data, so we’ll be brief in describing the public-market carnage. What follows is a digest of edtech stocks and their declines from recent highs:
- Compared to its 52-week high, Chegg stock has lost over a third of its value.
- After reaching $62.53 per share in April, Coursera has shed about half of its value and is trading close to its $33 IPO price.
- 2U closed at $33.92 per share yesterday, its shares also losing half of their value compared to their 52-week high.
- Staying on that theme, Stride (K12) closed at $26.77 per share yesterday, which is about half of its 52-week high.
- It wasn’t just U.S.-based companies facing some volatility. TAL Education, based in Beijing, is trading at $46.25, which is, you guessed it, about half of its 52-week high.
Public edtech companies getting nearly identical cuts in values is noteworthy because it gives us a peek into how retail investors are thinking at the moment. But does the general public pause on the future of edtech impact private market investors?
What about venture capital?
A dig into PitchBook data for private, U.S.-based, privately backed edtech startups’ fundraising activity paints the picture of a market on fire.
For 2020, PitchBook has 380 deals in its database worth $2.06 billion in total value. Quite a lot of the round activity came from seed deals, but with billions invested, quite a few bets were placed. Turning to 2021, the same data query yields 152 deals thus far. If that pace held up, we should expect to see around 417 edtech deals this year, a modest bump over last year’s pace.
However, in dollar terms, 2021 is far more exciting for edtech companies: $1.86 billion has been deployed into domestic edtech companies by private investors already. If we include what PitchBook describes as “Corp/Strategic M&A,” the total funds in play rise by $1.15 billion.
Just sticking with the venture capital numbers, we can forecast that if the current pace of edtech fundraising keeps up for the rest of 2021, VCs will deploy around $5.1 billion this year, up from $2.06 billion last year.
Edtech valuations aren’t skyrocketing, but investors see more exit opportunities
That huge figure is why we wanted to contrast bullish VCs and more blasé public investors. The difference between the sentiment they are Bat-Signaling into the air is stark.
When destiny is a drop
Edtech investors and founders have been waiting for a slowdown in their sector— any industry completely lit up by the pandemic was going to face some sort of difficult change as the world reopened. For edtech, thanks to the promising results of vaccinations in at least some parts of the world, that means there will be some pullback.
In September 2020, Larry Illg, CEO of Prosus Ventures, told us that edtech was filled with “tourists” and “faddish money,” making it a hard time to assess companies and find accountable bets.
“It’s quite dangerous,” he said. “We’ve seen over the years in geographic context at different points in time that people are attracted to India or are attracted to Brazil and they start pumping money in and then two or three years later, they exit with their tail between their legs.”
The investor then predicted that there would be carnage in edtech but noted, like many in the space, that the mindset shift among parents and educators alike was that edtech is the future — even if only a relatively small handful of consumers wind up paying for its products and services.
Similar to how telehealth faced declines as patients returned to in-person care, edtech will face similar drops as schools become a safer option for students and teachers.
However, even if telehealth doesn’t look like it did during pandemic highs, that model of care is more popular than it was before COVID-19. We argue that the same holds true for edtech: The near-term TAM peaked when tech-powered education was the only option, and while we might shed millions of dollars of value, its TAM might still be higher than it was before the pandemic.
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