Four Things that EdTech Investors and Entrepreneurs Need to Know Now
Education Technology (“EdTech”) is an area of great interest to me. I believe in the transformative power of a great education, and I’m lucky to live in Boston with its great education community and its top notch EdTech ecosystem, led by LearnLaunch. Recently LearnLaunch held a conference for EdTech investors, and as usual I learned a lot. Here are my key takeaways on what’s new.
One: Profits are the key for valuations
Remember when the number of users mattered? Those were the days. Actually, those days are long gone (if they ever existed) for EdTech. This industry has been more driven by financial performance than most others. A couple of years ago, I remember seeing a chart of EdTech exits (most startups were bought by another company) and it was obvious that revenue was the driver behind the value of the companies. Now, the market is has shifted and EBITDA is the basis. EBITDA is an accounting-specific term for operating profits (founders, if you don’t know what your EBITDA is, you’d better figure it out). This is one area where EdTech is different from other startup industries – they often have profits. In education, you can get a lot of folks to test your product, but it’s getting them to pay that counts. For EdTech startups, figuring out how to conquer the sales cycle is more crucial than ever before.
Two: Who buys edtech startups now? Not the big education companies any more.
In the current environment, EdTech companies are less likely to get acquired by Pearson, Houghton Mifflin Harcourt or Scholastic than in the past. Education is still dominated by only these few large companies, and they have been quite acquisitive historically. On the other hand, typical tech acquirers like Google, Amazon and Microsoft have stayed away from EdTech, particularly in the K-12 area. Now private equity companies are buying EdTech startups, and they are driven by metrics, primarily profits. It changes the landscape when the main buyers aren’t subject matter experts. This will favor those startups that get to profitability faster, and that is problematic for some innovations that need longer to prove out their business model.
Three: Geography matters, but not in the way you might think
Most discussion around entrepreneurship and geography focuses on the ecosystem: which market is the best place for my startup? Where’s the talent? Where are the investors? Well on that score, for EdTech the answers are Boston/NY and Silicon Valley. No surprise, but it might surprise you how polarized the EdTech market is, though. There is little activity outside of those main markets. That’s unfortunate, for many reasons. But this is not the geographic issue to consider. In the past couple of years, the biggest EdTech companies and almost the only IPOs (when companies become public stocks and are no longer private companies) were connected to Asia – specifically China. China-founded and funded companies went public while no US-based companies did. Chinese investors are investing in US companies because they find the cost of capital lower (particularly considering the market risks) and education is an appealing market. Interestingly, though, Asia’s population is aging; therefore, the growth opportunity from a market perspective is not necessarily in Asia, but rather Africa where the population of children is growing fast and the demand for education is strong. Chinese investors see this. Entrepreneurs (and US investors) need to consider the global market for both products and investment to be successful.
Four: “Edployment” is the big opportunity
The gap between what higher education offers and the needs of employers continues to widen. It’s a fundamental gap that is seeing lots of disruption and opportunity. Employers need specific skills at all levels, and higher education is not adapting. So, we’re seeing innovation happening outside of higher ed. The companies that are winning at this strategy are making connections to employers and matching them with the right talent with the right skills. Startups are creating a new supply chain in education. This is happing in top skills like medicine and programming. The notion of a four-year college experience right out of college as the best pathway forward hasn’t been the dominant mode of learning for a while.