By Jon Thomas and Spencer Wu
With more than 4 billion people now online—roughly half the global population, according to Forbes (December 2018)—it is unsurprising that education has rapidly adopted devices and software to engage students and improve learning outcomes. The subscription-based SaaS revenue model that supports many online learning products, combined with the vast addressable market for digital education, has attracted venture capital and private equity for decades. What has changed in recent years is that funding has concentrated into larger rounds for a smaller number of EdTech companies. For the fortunate few, this means well-funded growth plans, the ability to expand market share, and the patience to weather long customer adoption cycles. For those unable or unwilling to raise large sums, competing with heavily capitalized rivals risks eroding early advantages and delaying cash-flow breakeven.
In the EdTech sector alone, startups raised $1.45 billion in 2018, matching the previous high set in 2015. Yet deal count fell sharply, from 165 deals to 112—a 32% decline. One reason for fewer but larger deals is that many late-stage private financings today resemble what would previously have been IPO-bound transactions. Because private capital remains abundant and the costs and scrutiny of public markets have grown, companies often stay private longer and take sizable private placements that in prior cycles would have been recorded as public market activity. That shift inflates private placement totals while reducing the number of distinct deal participants.
Unicorns—EdTech companies reaching valuations of $1 billion or more before going public—are prominent in both the United States and China. Of the ten most-highly funded EdTech firms that achieved this status, six are based in China. Companies such as VIPKid, iTutorGroup, and Youdao have gained traction as online education and personalized tutoring platforms. Zuoyebang, a web and mobile service that helps K–12 students with homework, completed two rounds totaling $500 million in August 2017 and July 2018, and additional capital from SoftBank has been reported. In the U.S., Udemy and Udacity reached $1 billion valuations with backing from firms like ICONIQ Capital and Bertelsmann Digital Media. Age of Learning also attained unicorn status by building a robust curriculum for K–12 learners.
Beyond the unicorns, mid-size and smaller EdTech companies have seen bigger checks as well. Concentrated, larger early bets from a handful of venture firms can accelerate a particular startup’s path to market dominance while limiting opportunities for competitors. Notable large equity rounds in 2018 included Omidyar Network’s $40 million Series C in Handshake, a platform that connects students with recruiters; JMI Equity’s $55 million investment in CampusLogic, which provides student financial services; and New Enterprise Associates’ $85 million into MasterClass, an online platform offering video-based courses and professional instruction.
This pattern—fewer but larger deals—is not unique to EdTech. Across all sectors, venture capital reached a record $99.5 billion in 2018, up from $76.4 billion in 2017 (PWC Money Tree Report, January 2019). Average check sizes increased: later-stage venture rounds averaged about $37.5 million and early-stage rounds averaged roughly $8.0 million in Q4 2018, up 50% and 14% year-over-year, respectively. Meanwhile, total deal volume dropped to just over 5,500 private placements, the lowest level since 2013. The broader implication is clear: investors are concentrating capital into a smaller number of companies while cutting larger checks to those they believe can scale.
We expect these trends to persist in the near term for EdTech and the wider private placement market. Private valuations can move with public markets at times, though limited liquidity and opaque secondary trading in private securities can blur the immediate impact of public market swings on private round pricing. The long-term effect on education is uncertain: we may see fewer truly experimental products reach scale, but increased standardization and consolidation across segments of the industry as well-funded firms expand their footprints.
Jon Thomas, Managing Director, leads private placements and financial sponsor coverage at Woodside Capital Partners, an investment bank focused on middle-market and emerging growth technology companies. This article provides an overview and analysis of industry trends and is not intended as investment advice. Information in this report is for informational purposes only and should not be considered an offer to buy or sell securities, investment guidance, or an endorsement by Woodside Capital Partners International, LLC, or its affiliate Woodside Capital Securities, LLC.
This article was originally published by The Learning Counsel, a research institute and news media organization that provides context on the shift to digital curriculum in education.