I am a big fan of Anand Sanwal and CB Insights. And so it was with particular interest that I flipped through their latest venture capital data set released with KPMG (aka, the Venture Pulse), particularly with their estimates that venture investment in education technology had trebled from $295 million in Q3 to over $1 billion in Q4 (compare this to the 30% decline in overall venture flows for the quarter). Of course, regular readers of Educelerate know that such seemingly rosy headlines are always ripe for further analysis.
EdTech Venture Investment is Not Diverse
I will not bother commenting on the report’s breathless excitement over the promise of MOOCs and parent-oriented technology, as is so typical in outsider analysis of education, but another quotation provides a nice opportunity to unpack just what’s wrong with this chart and reports like this:
One needs only to look at the top VC investments in Ed Tech during Q4 to see the diversity. Companies such as: HotChalk; TutorGroup; Udacity (Venture Pulse, Q4 2015)
These three companies are anything but diverse. In fact, they illustrate just how small an investment class edtech really is — and just how sensitive it remains to one or two big moves.
- TutorGroup is a massive language learning platform based in China (and the latest member of the EdTech Unicorn club — see our own post on EdTech Unicorns here) and is representative of China’s outsized 40% share of edtech venture totals for Q4 (though overall China venture activity fell 29%). I have written on this previously, particularly after Techcrunch trumpeted a $2 billion total for 2014 edtech venture investment when over one-third of the activity was either directed toward or from China. Many of these Chinese business models receiving funding are not technology leveraged (i.e., for-profit schools) and none of them are indicative of the underlying health of the US edtech market (though Tutor Group has designs on international expansion).
- The investments in HotChalk and Udacity were both led by the German media conglomerate Bertelsmann and represent fully half as much in Q4 capital commitments as the entire edtech sector received over the prior quarter. Compare this to Bertelsmann’s massive purchase price for Relias Learning and follow-on investment in Synergis Education last year and you see the outsized impact when an 800 lb gorilla dances with edtech chimps (let’s just hope it doesn’t end like News Corp’s dalliance with K-12). 1)What are they pumping into the Rhein? Note, fellow Teutonic publisher Axel Springer’s Q4 2015 investments in NowThis, Thrillist Media and Jaunt probably accounted for some measurable percentage of all digital media venture activity last quarter as well.
While not neatly captured in the above quotation, I should also highlight this past quarter also saw massive raises from the barely relevant student loan plays like Earnest ($75 million raised in November 2015) or (perhaps registered in September), Credible ($10 million Series A), Common Bond ($35 million Series B) and SoFi (a massive $1 billion Series E) – though, it’s not clear whether Venture Pulse included such FinTech plays under “EdTech” anyway. (For a handy summary of all the innovative new student finance start-ups, check out our TwitterList here.)
EdTech Receives its Full Share of Institutional Investment
And so, for all the excitement over Silicon Valley’s (or German media conglomerate’s) rediscovery of education, and the hundreds of millions of dollars of new edtech investment they are bringing with them, it’s important to level set (as we did last summer in our post “Why Education Does Not Need Marc Andreessen“):
- Investment into education has lagged that of “newer” sectors like Clean Tech, the Internet of Things, Social Networking, Food Tech or even Uber since 2011
- Over two-thirds of edtech venture investment still comes from seed and A rounds with later stage capital largely left on the sidelines
- Education investment is not massively under-represented relative to its share of the economy nor is it about to be dramatically privatized
While early stage represents over two-thirds of venture capital flow into edtech, it’s less than 10% in CleanTech. This may speak to the strong early investor interest in education, but it also highlights these start-ups relative lack of scaling and monetization and with it, later stage investment opportunity. EdTech has attracted at least $1 billion of annual venture investment since 2011 and nearly $500 million since 2007, so this is not an issue of a young industry that just needs time to grow up. Indeed 2011 also marked the first use of Internet of Things in the Gartner HypeCycle and the approximate founding of social apps Instagram and SnapChat — yet, growth rounds represent the majority of the capital into social networking today (as sen in the chart to the right).
One popular trope launched by the leading champion of edtech investment Michael Moe contrasts the negligible share of edtech investment as compared to other asset classes with the outsized share of education as a percentage of GDP. And yet, there is a logical fallacy in this convenient little pie chart: there are no drugs to make your kids smarter (and as long-time education industry investor Chris Hoehn-Saric has said, even if there were, there would be no budget to pay for them). But even if we adjusted for pharma and biotech data, health tech still does not provide a directly comparable case study of another heavily regulated industry transformed through private market activity. Once you subtract 70% for intractable union compensation, 15% for operating costs consumed by transportation, food and facilities, there is 10% in curriculum spend for start-ups to disrupt digitally and about 5% for everything else. That more fungible spend, out of which every edtech start-up must compete for revenue, totals a few hundred billion dollars (a very large addressable market to be sure, but its still not health care) 2)Please don’t respond with your thesis around the consumer opportunity for education without reading our post on “The Fallacy of Consumer Education Models“. Moreover, instead of comparing education technology spend and investment to all of oil and gas exploration (as is captured in that pie chart), we should really be looking at oil and gas technology — which our friends at CB Insights estimate totals just a couple hundred million dollars of venture investment annually.
Indeed, the agriculture investment marketplace AgFunder’s annual review of AgTech venture investment flows seems to be lifted directly from one of Michael Moe’s reports:
Moreover, total agtech investment is <3.5% of the $128.5 billion invested in venture backed companies in 2015 – which seems small for a sector responsible for 10% of GDP. By comparison, health care represents about 12% of global GDP and received nearly 12% of total venture funding last year; that’s over three times the total investment in agtech. (“AgTech Funding Market2015: Year in Review” AgFunder, February 2016)
When Technology catches a cold — and you can discern a few sneezes in the Venture Pulse report and broader venture press this month — emerging markets like “EdTech” come down with pneumonia. Indeed, it is telling to note that the number of edtech venture investments (and the dollar total, excluding Q4) actually saw a steady decline over the course of 2015. Ultimately, in such a shallow capital pool, any analysis of the sector or ability to extrapolate will always be skewed by the occasional $50 million raise out of Silicon Valley, China or even Germany. In the end, edtech is a market of minnows, rife with overlapping start-ups competing for scale.
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|1.||↑||What are they pumping into the Rhein? Note, fellow Teutonic publisher Axel Springer’s Q4 2015 investments in NowThis, Thrillist Media and Jaunt probably accounted for some measurable percentage of all digital media venture activity last quarter as well.|
|2.||↑||Please don’t respond with your thesis around the consumer opportunity for education without reading our post on “The Fallacy of Consumer Education Models“|