Many classroom doors have closed. But investors’ checkbooks remain open.
While the pandemic has disrupted education much more than any Silicon Valley fad, it has also accelerated the kinds of technology adoption that the industry has long pined for. As people are forced to learn from home, some online educational services are in greater demand than ever. And that has private investors piqued.
“With COVID-19 jeopardizing in-school learning, we expect the widespread adoption of edtech software to continue, and this is not a short-term trend,” says Jeff Lieberman, a managing director at Insight Partners, a private equity firm that has backed nearly two dozen education companies. “Software will reshape learning both in the classroom and out well beyond the pandemic.”
In the first half of 2020, U.S. education technology companies raised more than $803 million in venture capital, according to an EdSurge database of publicly announced funding deals. That amount is a 17 percent dip from the $962 million we tracked for the first six months of 2019 (which ended up being a record year for US edtech venture capital.) But the 2020 tally is still in line with first-half fundraising totals for the previous five years.
U.S. edtech investment trends largely mirror patterns in other sectors. Crunchbase data showed that first-half global venture investments declined by 7 percent, to $129 billion, from the same period in 2019. Pitchbook reported a similar trend, noting that the pandemic’s “impact on aggregate VC activity was hardly apocalyptic,” with healthcare, digital enterprise and consumer-service startups attracting plenty of capital.
In this analysis, EdSurge counts all publicly disclosed investments in private U.S. edtech companies that support educators and learners across preK-12, postsecondary and workforce education. We exclude financial companies whose primary business is to offer loans to consumers and students. Also not counted are publicly traded companies, as well as funding that startup accelerator programs provide to participating companies.
That $803 million was invested across 61 publicly disclosed deals. While that figure that is largely consistent with the number of deals done over the past several years, the number of inbound fundraising pitches to investment firms has surged, according to education investors.
Sarah Lee, a venture partner at Peak State Ventures, says her firm has seen a 30 percent increase in the number of pitches from companies in the education and workforce development sectors. Reach Capital’s general partner and co-founder, Shauntel Garvey, says her colleagues have received double the volume of inbound inquiries.
At the early funding round stages, investment sizes have also kept consistent with previous years. “There has been some pressure to decrease company valuations, but so far we haven’t seen much of that yet,” observes Lee.
What has changed, says Garvey, is that some companies have accelerated their fundraising timelines. Those that saw a spike in user growth or revenue have leveraged that momentum to raise more money, even though they may already have a stable financial runway. Sometimes, she adds, investors will make an unsolicited offer.
Funders who previously barely batted an eye at the education market have also been drawn into the industry. “COVID has been an accelerant to all of the trends—increase in digitization, skills-based training—that were already there,” says Maia Sharpley, a partner at Learn Capital. “It makes investors who were not previously interested in the market come in.”
What’s the Big Deal?
Topping the charts of the biggest U.S. edtech funding rounds are a trio of consumer-oriented businesses. Roblox, an online gaming platform where people create, share and sell games, raised $150 million in February. Though the company operates mostly in the entertainment space, it has an education team of instructional designers that teach kids how to program. It partners with more than 100 coding education camps and programs around the world that offer Roblox in their curriculum.
MasterClass, recipient of a $100 million round, offers courses featuring celebrities who teach how they hone their craft. There are a few academic subjects, but its library mostly consists of lessons related to skills and hobbies (such as basketball and cooking). Udemy, which notched $50 million, offers a marketplace of more than 100,000 courses that cover everything from business to technology skills and personal development.
Of the 10 largest publicly disclosed funding deals, only two have a business model focused on selling to K-12 schools. But the pandemic has led them to different paths. PresenceLearning, which provides online teletherapy sessions to support students with special needs, raised $27 million in May and says demand for its services have grown.
The other, HopSkipDrive, raised $22 million in February but has since pivoted from its school ridesharing service after campus closures forced it to lay off staff.
Other edtech startups whose businesses focused squarely on K-12 sales have been forced to adapt to survive. Swing Education, which normally matches teachers with school job openings, has reoriented its service to capitalize on the emerging “learning pods” trend, where families set up their own informal, private educational communities.
Many K-12 districts are bracing for budget cuts due to decreased revenues from their local communities, which has impacted sales procurement cycles and how much they can afford on services like technology. But not all startups are affected equally. Those that help bridge the communication gap and provide high-quality instructional materials will fare better, says Sharpley.
With fewer public dollars for edtech services, will private funders and consumers fill the void?
A shift in parent spending habits may already be underway. “In the U.S., we’ve historically seen a lower willingness among parents to pay for products as compared to other countries,” notes Garvey. “But with the shift to remote learning, many parents are, whether they want to or not, going to spend more on services.”
The new habit may stick even after the pandemic. “No matter what decisions are made about the return to school, the need and demand for virtual learning solutions will not go away as parents continue to take on the role of teachers in some capacity,” says Lieberman.
Even so, investors like Garvey are wary of the equity implications if only people with means can afford these private services. “How do we make sure that movements like the microschools don’t exacerbate achievement gaps?” she asks.
Education to Employment
On the other end of the age spectrum, adult-training services have been attracting investors’ attention.
Amid growing unemployment during this recession, there is considerable interest among investors in “short-term training options that offer multiple pathways to getting a job in specialized industries beyond just tech,” notes Lee of Peak State Ventures.
Last decade, coding bootcamps were all the rage, driven in part by the allure of high-paying programming jobs. Now, similar alternative educational models have emerged for sales, healthcare and other verticals where there is similar demand for talent.
And while employee benefits are usually on the chopping block when company budgets are tight, that may not be the case for training services that support the transition to a remote workforce. GO1, which offers a library of corporate training content and raised $40 million, has reported increased demand from companies for its platform.
“Training and development is no longer considered a benefit to the employee, but it has become a requirement of today’s workforce,” says Lee.
Companies that sell directly to colleges and universities didn’t make our list of the 10 biggest funding rounds of the first half of 2020, ending June 30. The biggest fundraise in this category went to Noodle Partners, which raised $16 million to help colleges build online programs. Its business competes directly with service providers like 2U, a company that has seen its public stock value rise during the pandemic.
But in the span of one week in July, two higher-ed companies accounted for a quarter-billion in venture capital. On July 15, CampusLogic, a provider of student financial aid software to colleges, secured $120 million. Two days later, Coursera, which provides online courses to higher-ed institutions, businesses and government agencies, raised $130 million.
With the cost value of higher education in perpetual question—and especially as some colleges are charging the same tuition for online instruction as the residential experience—institutions are under increasing pressure to show they can deliver a good return on investment.
“There is an opportunity for companies to partner with higher-ed institutions to create postsecondary experiences that are connected to the industry,” says Garvey. “I think you’ll see more of these partnerships down the line.”