Less than a year after we put out an initial temperature check survey, it’s clear that specialist investors are even more bullish on edtech. Bears are hard to find right now: the sector, once undercapitalized, has brought in $10 billion in venture capital funding globally in 2020.
As investors told us last week, the biggest consumer opportunity in 2021 and beyond is lifelong learning (and portfolio companies have the profits to prove it).
But despite edtech’s noise, the second installment of our edtech survey shows that VCs think startups haven’t enjoyed parallel gains from a valuation perspective. The sentiment suggests that despite an apparent revitalization, edtech isn’t at the same level of “value” in investor eyes like sectors such as e-commerce, consumer and fintech.
As Mercedes Bent of Lightspeed Venture Partners said, “edtech didn’t tend to have heady valuations before the pandemic, and through 2020 I’m seeing edtech companies raise at valuations that are reasonable for Silicon Valley; still nothing like what we see in fintech.”
Now, valuations aren’t everything — but they aren’t nothing, either. Where edtech lacks in impressive valuations, investors see it gaining in exit opportunities. Many investors think that the exit environment is set to dramatically change in the next few years.
We’ve already seen Nerdy and Skillsoft, two edtech companies, go public via SPACs in the past few months. Private equity ownership is an interesting dynamic to be aware of here, especially as Vista recently scooped up PluralSight for $3.5 billion.
Here are the investors we spoke to, along with their areas of interest and expertise:
- Deborah Quazzo, managing partner, GSV Ventures (an education fund backing ClassDojo, Degreed, Clever)
- Ashley Bittner, founding partner, Firework Ventures (a future-of-work fund with portfolio companies LearnIn and TransfrVR)
- Jomayra Herrera, principal, Cowboy Ventures (a generalist fund with portfolio companies Hone and Guild Education)
- John Danner, managing partner, Dunce Capital (an edtech and future-of-work fund with portfolio companies Lambda School and Outschool)
- Mercedes Bent and Bradley Twohig, partners, Lightspeed Venture Partners (a multistage generalist fund with investments including Forage, Clever and Outschool)
- Ian Chiu, managing director, Owl Ventures (a large edtech-focused fund backing highly valued companies including BYJU’s, Newsela and Masterclass)
- Jan Lynn-Matern, founder and partner, Emerge Education (a leading edtech seed fund in Europe with portfolio companies like Aula, Unibuddy and BibliU)
- Benoit Wirz, partner, Brighteye Ventures (an active edtech-focused venture capital fund in Europe that backs YouSchool, Lightneer, and Aula)
- Charles Birnbaum, partner, Bessemer Venture Partners (a generalist fund with portfolio companies including Guild Education and Brightwheel)
- Daniel Pianko, co-founder and managing director, University Ventures (a higher-ed and future-of-work fund that is backing Imbellus and Admithub)
- Rebecca Kaden, managing partner, Union Square Ventures (a generalist fund with portfolio companies including TopHat, Quizlet, Duolingo)
- Andreata Muforo, partner, TLCom Capital (a generalist fund backing uLesson)
Deborah Quazzo, managing partner, GSV
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
We met on Zoom with over 800 founding teams in COVID all over the world. We invested in 14 new companies and are just finishing rounds in two more. Valuation pressures are across tech sectors. I’d argue that education still lags average tech. The question for edtech is whether there is potential for a $100 billion company in the sector — will TAMs support it.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
Exit volume is rising already with a wide range of strategic and financial buyers of edtech companies — something that didn’t exist before. You will see numerous high-value exits in the first half of 2021. It’s the public market “exits” that have really lagged and that I hope turns around in 2021 and 2022. There are numerous global companies that could go public and the addition of SPAC IPOs creates another positive dynamic.
Ashley Bittner, founding partner, Firework Ventures
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
The boom has not directly impacted my deal-making. We tend to work with CEOs looking for category expertise and track record in the space. I do worry about overexuberance creating disappointing returns that sour interest in the sector. There are important TAM, business model, pedagogical and regulatory factors to consider in valuation.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
I think that will change shortly … I suspect many of the notable exits will come in future of work/human capital, consumer and in international markets for early education and K-12.
Jomayra Herrera, principal, Cowboy Ventures
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
Edtech has a history of going in booms (when investors find new excitement for the sector) and busts (when investors realize the difficulties in scaling companies in the space). We happen to be going through a boom right now, which I think is an overall good thing for market innovation. While valuations across all sectors are expensive right now, I think more capital going toward innovating a sector that has an impact on everyone’s life will result in a net positive. We have a history of investing in the sector and will continue to do so as we see new, category-defining companies arise.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
Edtech has had plenty of exits, but they are usually smaller and typically to PE firms or companies that have large distribution channels. There are very few large IPOs. I think we will start to see larger exits for three primary reasons: (I) accelerated consumer adoption of online and hybrid learning will increase market sizes, (II) as educators and institutions get more comfortable with leveraging technology in their practice we may see shorter sales cycle and more budget available, (III) many larger exits tend to be platforms as opposed to content providers (e.g., Canvas, 2U, Instructure) and with a higher standard for infrastructure there is a space for new competitors.
I expect even more consolidation in the bootcamp space. We’re already seeing it with Flatiron, Thinkful, General Assembly, Bloc and many others having already been acquired.
John Danner, managing partner, Dunce Capital
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
I invest pre-seed, so more generalists = more options for up-round funding. I do generally want to have an education-focused firm in seed or Series A to make sure the board has someone that understands the sector, but I think especially in consumer where I invest, many generalists have a lot to add.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
Wish I had a crystal ball :) The fundamentals are good, so I’m sure we will see great exits. Education is 5% of the world economy and we are just starting the transition to technology. My feeling is that the transformation to an education system that matches people’s actual needs will create some of the most valuable companies in Silicon Valley.
Mercedes Bent, partner, Lightspeed Venture Partners
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
Edtech didn’t tend to have heady valuations before the pandemic and through 2020 I’m seeing edtech companies raise at valuations that are reasonable for Silicon Valley; still nothing like what we see in fintech.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
For there to be more edtech exits in the USA, there has to be either (1) a large increase in consumer purchasing behavior — which we saw begin to take shape during the pandemic or (2) educational institutional buyers, especially K-12 — who make up the majority of the edtech TAM — need to become year-round buyers. We also saw schools shift to doing this during the pandemic. I think the consumer shift in spend is more likely to stay than the institutional buying behavior post-pandemic.
Ian Chiu, managing director, Owl Ventures
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
Owl Ventures has always been 100% focused on edtech since our founding in 2014 and has invested in more than 40 companies in the sector to date. We’ve seen the impact of edtech’s boom across our fund, portfolio and pipeline. Strong interest from investors in the edtech category led to us successfully raising two new funds totaling $585 million. These funds support our ongoing deal-making in the market into new portfolio companies such as MasterClass, Workera and uLesson while also enabling us to continue supporting existing companies like Degreed, Quizlet and Newsela to name a few.
Many of our companies experienced rapid growth over the past year across users, engagement and revenue, and attracted investments from generalist investors. As one example, Quizlet raised a round led by General Atlantic valuing the business at $1 billion. We believe the new capital coming into the market is a strong positive trend, as it will fuel more innovation and growth across the sector as well as attract more talent to the category that will ultimately elevate the category. The strong interest is a sign that investors are waking up to the fact that edtech will have a profound effect on the billions of learners worldwide as well as the emergence of very high gross margin, hypergrowth businesses with an enormous TAM now that historical market challenges (such as infrastructure, capital and talent) are increasingly behind us. Looking ahead, analysts are forecasting there to be over 100 edtech unicorns by 2025, 10x the number in 2015.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
While edtech has historically had fewer exits compared to other verticals such as fintech and healthcare, we believe this will change dramatically as many edtech companies have been rapidly scaling, with many now eclipsing $100 million in revenue. As a result, the pipeline for potential IPO candidates coming from the edtech sector continues to grow larger. This change is already happening with 19 edtech unicorns around the world who are now collectively valued at $64 billion (as of January 2021). In addition, with strong stock performance of public edtech companies like TAL and Chegg, public investor appetite remains strong for IPOs in this sector.
Global edtech started the last decade with $50 million of VC invested in 2010 and finished 32x higher at $16.1 billion in 2020, according to Holon IQ. We are optimistic about this incredible boom in funding as it shows the market now recognizes the significant 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 will continue to be an incredibly attractive investment sector in the years ahead.
In terms of consolidation, it has already been happening for some time in the more mature segments of the edtech market. Companies like Frontline Education and PowerSchool have all been incredibly acquisitive over the years under private equity ownership. In addition, edtech companies that are emerging as category leaders are starting to consolidate and acquire younger high-growth startups, like Chegg’s acquisition of Thinkful and BYJU’s acquisition of WhiteHat Jr.
Jan Lynn-Matern, founder and partner, Emerge Education
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
As a sector-specific fund focused on writing the first check to our companies, this year has been advantageous for us. While there has been a marked increase in interest for edtech companies from generalist tech funds over the last year, this has mainly led to price inflation at Series A and above.
Our experience has borne out that founders at the earliest stages have a strong preference for sector specialists with a deep understanding of business models, strategies and markets and relevant networks of operators in the space. As a result, we have largely benefited from continuing to lead competitive rounds in pre-seed and seed, while up rounds in our portfolio at Series A and B have become more expensive.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
Looking at the last 20 years, edtech has produced large companies in roughly three waves:
- Wave 1: workflow optimization software sold to institutions (most edtech unicorns in this category were founded pre-2010).
- Wave 2: consumer-oriented content platforms (asynchronous content) (most edtech unicorns in this category were founded between 2010 and 2015).
- Wave 3: innovation in core education provision (largely synchronous online).
The vast majority of global education spend is focused on core provision — educators, buildings, services, student acquisition. Yet most edtech exits so far have been focused on much smaller supplemental areas — content, software, learning support — with limited market size/difficulty of selling into public institutions.
We believe the current wave of edtech innovations, and those most benefiting from the pandemic, are Wave 3 innovations. These companies are addressing huge opportunities in core provision by creating pedagogical, operational, retention and acquisitions efficiencies. We are therefore bullish on seeing much bigger exits in edtech over the next decade.
Benoit Wirz, partner, Brighteye Ventures
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
At the seed stage, valuations have increased marginally but not dramatically as the recognition that edtech companies can achieve the same kinds of outsize returns as in other verticals has grown. At later stages what we’ve seen is that while valuations have increased significantly, revenue multiples have remained relatively stable, so higher valuations are primarily a function of increased performance versus inflated investor expectations. This may change as more edtech companies go public in the coming year, but we haven’t seen it yet.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
Exits have been the traditional knock on the industry, but actually the volume, amount and breadth of exits have all increased significantly in recent years with a much wider array of private equity and strategic investors providing liquidity to founders and investors in the space. What has been relatively rare outside of China has been public listings, but given that significant investing in edtech really only started about 10 years ago and that it takes roughly a decade to IPO this is not all that surprising. Indeed momentum for public listings already started to shift in 2019 with Pluralsight (U.S.) and Kahoot (EU) both listing. As Coursera and Duoingo have indicated that they will look to go public in 2021, a growing stable of edtech unicorns and revenues continuing to increase across the sector, we expect that the pace of public listings to accelerate as well.
In the meantime, higher valuations for outperforming edtech companies has enabled edtech companies to begin acquiring each other providing a relatively new avenue of liquidity and creating an increasing amount of consolidation across geographies, e.g., in just the first 12 months: RaiseMe acquired by Campus Logic (U.S.), PrepLadder acquired by Unacademy (IN), WhiteHat Jr acquired. by BYJU’s (IN), Drops acquired by Kahoot (EU).
Charles Birnbaum, partner, Bessemer Venture Partners
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
There has been a lot more entrepreneurial activity in the education space over the past year and valuations are certainly up, but we haven’t seen them impacted as dramatically in this market as in others over the past year, likely due to the still-limited sample size of successful exits for investors to point to over the past decade.
Bradley Twohig, partner, Lightspeed Venture Partners
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone.
COVID pushed the educational system to be creative and adapt rapidly. The educational system had to “pivot” to a fully remote world overnight. This created more opportunities for startups to serve the needs around this “pivot.” And the resulting growth in demand created more companies with greater promise/opportunity, so generally speaking it has been a positive for edtech. We are very encouraged by the interest from generalist investors in the category, as the increased diversity of thought coupled with greater access to capital will help generate the next generation of companies.
Most founders who enter the edtech sector are very mission-driven and long-term focused. Because of this, we think most will select investors based on many attributes, as opposed to just valuation. The key to long-term success in education is to focus on the outcomes of students and educators as a critical “North Star.” This often means companies should decide to forgo short-term revenue and profits in the search of nonfinancial results for all stakeholders related to educational outcomes. Educational outcomes have very long “feedback loops” so the best teams and investors need to be patient and thoughtful in order to build generational businesses. We believe the best entrepreneurs look for this mindset and track record in an investor.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
The scale and reach of edtech businesses have grown orders of magnitude since I first started investing in them 12+ years ago. Kahoot’s current market cap of $6 billion today is a good indication of the public market’s interest in the next generation of edtech companies.
Daniel Pianko, co-founder and managing director, University Ventures
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
No one has made money in edtech betting against the pace of change in traditional education. While valuations are bubbling, the underlying economics of edtech are not changing. It’s instructive that the vast majority of the edtech success stories are really adjacent to, if not outside of, the core educational systems.
Many question if the market growth is a COVID bump or a structural shift. It’s both — just depends on the market you are focused on.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
The unicorn exits in edtech in the U.S. can be counted on your hand — and there are no deca-unicorns. While there is a promising crop of up-and-coming startups like Guild Education, venture capital returns are driven primarily by the massive exits of companies like Snowflake and Zoom. These are nonexistent in edtech and are unlikely to develop.
The irrational exuberance in edtech funding goes in waves — inevitably returning to the mean. There will be a large number of edtech firms that attract venture capital but do not achieve escape velocity, which will drive a massive consolidation wave.
Rebecca Kaden, managing partner, Union Square Ventures
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
We are excited to see increased attention on a category that’s in strong need of innovation and new options. USV has been long-time investors in learning — portfolio companies like Duolingo, Skillshare, Quizlet, Codecademy have taught us about the value creation possible with direct-to-learner models that make new kind of learning behavior more accessible, both in convenience and price point, from childhood to lifelong. This is one of those categories where more attention and focus is a good thing — but it’s also nuanced so, like in others, we focus on having a clear thesis on what we are looking for and very specifically looking for just that.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
I think we are likely to see some significant education exits coming up — the earlier winners in the market are not maturing and have fundamentals that rival strong consumer internet businesses. The market is starting to pay attention. There are more options than ever before for what exits might look like. It all lines up to, I would guess, some likely moves in the next 24 months.
Andreata Muforo, partner, TLCom Capital
How has edtech’s boom impacted your deal-making? Has the new interest from generalist investors made valuations too bubbly, or is the market growth helping everyone?
We have not seen an edtech boom in Africa yet (quite the opposite …). Access to high-quality and affordable education remains a big challenge, requiring world-class founders and teams, and we are extremely proud to have been backing one such team (uLesson). We believe that we are far from saturation, and there is a lot of room for more investors (and more great companies) in the years to come.
Edtech has traditionally had few exits. When do you expect to see that change? Are you optimistic about the boom in funding lately? On the other hand, what consolidation do you expect to see?
While there were a few notable exits in the U.S., we also identify several large exits (IPOs and M&A) in China, India and Brazil. Looking at the landscape in these markets there are already a few multibillion dollar companies. We believe that we will start seeing a much more active M&A market and more consolidation, and a few winners emerging as the “global digital operating systems” for education. There are of course different needs and focuses in different markets, but we see this being a global opportunity and believe some of these big winners can come from Africa. As a data point for a past sizable Africa edtech exit, there was the acquisition of GetSmarter by 2U in 2017 for $103 million.
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