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Why I’m Still Bullish About the State of Edtech

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Why I'm Still Bullish About the State of Edtech

In the next few days, thousands of edtech entrepreneurs, investors, educators and policymakers will flood a hotel in San Diego to attend the Mecca of Education Innovation Optimism known as ASU GSV. So now is the perfect time to reflect on the state of edtech.

I was lucky enough to attend the inaugural ASU GSV back in 2010 in Tempe, Arizona. It was a modest two-day affair: maybe 350 attendees in sweaty overcrowded rooms, a few speeches by CEOs and academics. This year’s 13th edition will swamp San Diego’s waterfront for four days and feature 1,000 speakers, including Thomas Friedman and Margaret Atwood, plus the buzziest for-profit companies in our industry. More than $1 billion in headline-grabbing transactions are likely to be announced at the event.

Five years ago I wrote a piece for EdSurge entitled “Why I’m Optimistic About The Next Wave of Education Technology,” and at the time I wanted to counteract the feelings many were expressing that the edtech bubble was about to burst. The prior year, my former chief Bill Gates headlined ASU GSV and received a standing ovation for championing technology’s power to transform teaching and learning. A small but mighty movement was building – and it needed time to grow.

It’s hard to remember now, but many industry colleagues felt edtech was a frothy market in 2017.

Roll forward to today, and our firm New Markets Venture Partners is tracking almost 10,000 U.S. based education and workforce technology companies, together amounting to more than $150 billion in market capitalization. And almost a third of these companies are likely to be represented at next week’s ASU GSV. One of our portfolio companies LearnPlatform publishes a regular “Edtech Top 40” list of the most used edtech products in K12 schools nationwide: perhaps unsurprisingly, Google products take 8 of the top 10 spots. What may surprise you, however, is the average K12 school district uses a whopping 1,447 edtech products per month. Today’s K12 educators are more digitally native than ever before.

When I started my first edtech business in 1998, our competitor Blackboard had less than 10 employees and customers. There were almost no online colleges at that time (but a few “correspondence colleges” were using email and posting assignments on the web). I enrolled in my first online course in 1998—an awful Frankenstein of assignments and web-based textbook chapters—and never finished it. But hints of the future were present, even back then, since there was a way to earn college credit from the course I didn’t finish, supplemental education CD-ROMs were making their way into K12 schools, and Microsoft and Intel were offering certifications that could be earned entirely online.

But as a point of reference: Google did not yet exist.

Since then, the online education, education technology and workforce innovation industry has gone through three increasingly larger “waves” which I described in that previous article, and concerns that our industry was “jumping the shark” in 2017 have been proven premature.

The past two years of COVID-19 have been very difficult for society, and for K12 schools and colleges in particular, but they have also provided strong tailwinds for education and workforce technologies which are becoming increasingly central to our national conversation. We’re evolving from a niche industry to an essential service that’s attracting national media attention and public debate.

Here’s why 2021 was a banner year for U.S. education and workforce technology companies:

  • Six companies went public at valuations above $1 billion: PowerSchool Holdings, Inc. (NYSE: PWSC), Duolingo, Inc. (NASDAQ: DUOL), Instructure Holdings, Inc. (NYSE: INST), Coursera, Inc. (NYSE: COUR), Udemy, Inc. (NASDAQ: UDMY), and Nerdy, Inc. (NYSE: NRDY)
  • At least fourteen private companies achieved or increased their unicorn status (on paper), including Guild Education, Articulate, ApplyBoard, Age of Learning, MasterClass, Kajabi, Handshake, Degreed, Course Hero, Newsela, GoGuardian, Quizlet, and Udacity; another 1,200 global edtech companies are now valued above $500 million according to Morgan Stanley
  • More than $15 billion in venture capital and private equity was invested in education and workforce technology companies globally, and possibly $25 billion. (Final numbers are still being tabulated, and not all investments and acquisitions have been made fully public)
  • Our own venture capital firm, New Markets Venture Partners, rode these tailwinds ourselves, successfully selling four companies in Q4 2021 and Q1 2022 at generous valuations. Credly, for example, was acquired for $200 million in January 2022, which represented a valuation multiple of 15.1x LTM revenue.
  • Altogether, New Markets has now exited 20 edtech investments over the past 14 years

However, we have noticed that public market conditions have changed dramatically in the past six months. Those markets now favor companies with positive cash flow and net income, and they’ve turned somewhat against “growth at all costs” companies. The U.S. Education Public Markets Index that New Markets tracks has declined by more than 20 percent in the past six months. Usually what starts in the public markets works its way to private equity next — and eventually upstream to venture capital.

Next week’s attendees should take note of these market adjustments, and pay close attention to which sectors and sub-sectors are in ascendance or decline. Revenue models and profitability by sector is coming into focus — and not all segments are created equal.

Altogether, 30 public (or recently public) companies make up the Index. The total market capitalization of these 30 companies declined from $79.4 billion in mid-October, 2021, to $62.8 billion as of Wednesday, March 30, 2022.

The biggest decliners over the past six months have been:

  • 2U (NASDAQ: TWOU) is down about 60.7 percent and now trading at 1.06x revenue
  • Udemy (NASDAQ: UDMY) is down 52.4 percent since going public in October 2021 at $29/share
  • Skillsoft (NYSE: SKIL) is down 50.8 percent, the company went public via SPAC in June 2021 at $10/share
  • Nerdy (NYSE: NRDY) is down 47.1 percent, the company went public via SPAC in September 2021 at $10/share
  • Chegg (NYSE: CHGG) is down 43.8 percent due to slowing growth and concerns about profitability
  • Duolingo (NASDAQ: DUOL) is down 42.0 percent since highs in September 2021; went public in July 2021

Of course these recent corrections aren’t unique to the education market. The Wall Street Journal recently noted that profitable public market stocks were up two percent over the past two quarters, while unprofitable public market stocks were down 25 percent. After a booming M&A market in December and January, we are starting to see “valuation reality” trickle down to venture capital where we operate, but there are still many buyers flush with cash looking for “high gross margin growers.”

We wouldn’t be surprised if 2U or Chegg were taken private in the next year, since both companies have strong fundamentals and exceptional human capital.

Looking deeper into long-term market trends, we pay close attention to which segments are demonstrating consistent revenue growth, high gross margins, and competitive advantages — especially around return on investment (ROI) for customers and efficacy for students and schools.

The overarching theme of this year’s ASU GSV event is “ED on the EDGE” seizing on the excitement and potential around Web3, the Metaverse, AR/VR, AI and other emerging tech, not to mention civilization on the edge. Multiple technology unicorns are being built in these spaces in Silicon Valley, but how and when will they generate meaningful value — both in impact and financial gains — in education?

This is the toughest part of investing in innovation. Which new ideas will work? Which new ideas will be purchased — at what unit price and what gross margin? Which new ideas will scale and deliver consistent and increasing revenue, ROI and profitability? And, perhaps most importantly, when is the right time to invest?

When I worked at Microsoft back in 2002, our team basically invented the idea of Google Classroom (it was called Microsoft Class Server), but we were twelve years too early and the product disappeared by 2006. In 2009, our team at Kaplan Ventures invested in a virtual reality corporate training startup that was ten years too early. Even more embarrassingly, I was a co-founder of a company in 1998 called Mascot Network that raised $22 million to build online Facebook-style portals for colleges, which was seven years too early. As a result, I am very conscious (perhaps too much so) of market timing.

At ASU GSV this year you’ll see and hear lots about Web3, the Metaverse, Blockchain and the like, which are hot new technologies that deserve to be on the main stage. But keep in mind that it’ll likely take 5 to 10 years before the first of these companies achieves $100M in revenue. Almost all companies pursuing these innovation domains in education are still less than $5M in revenue, and many are still sub $1M. The three “hyped” areas we’re watching most closely are AI, AR/VR, and Education/Workforce Collaborations, all three of which are finding use cases and financial models that are scaling, albeit sometimes taking longer to achieve profitability than earlier investors wished.

ASU GSV’s main stage is a near perfect embodiment of the Gartner Hype Cycle:

To be clear, our version of the Hype Cycle doesn’t mean we think Web3, the Metaverse, AI, or VR/AR are necessarily bad investment areas. LMS and Digital Learning topped the hype cycle in 2001 (a few years before Blackboard went public). MOOCs topped the cycle in 2012. OPMs topped the cycle in 2015. Employer/Tuition Platforms have been around for decades, until Guild Education re-invented the model, expanded an older category by 10X, and achieved unicorn status in just four years. Most categories on the Hype Cycle eventually make it through the trough of disillusionment to the plateau of productivity, but in education technology the process can take a decade.

Beyond the Hype Cycle, New Markets remains bullish about trends towards:

· High quality digital learning, especially that which connects education-to-workforce

· Alternative pathways, especially those involving credentials with labor market value

· Skills-based hiring into “quality jobs” that pay $50K+ and combine technical and EQ skills

· The creator economy, especially as it connects to STEM, design, video and data science

Since the start of the pandemic, traditional colleges and universities have seen enrollment decline from 19.6 million in 2019 to 18.6 million students in 2021, a 5.1 percent drop that’s the largest decline higher education has seen in five decades. Universities are rapidly adapting to improve their online and sub-degree credential offerings as Sean Gallagher and I documented in Harvard Business Review.

Filling the gap, high-quality bootcamps and online credential programs which lead to salaried jobs continue to grow at about 40 percent annually. Our portfolio company Climb Credit serves almost 250 of these bootcamps and online programs nationwide, which range from coding schools like AppAcademy to digital certification programs like Pathstream. The U.S. economy has more than 10.9 million open jobs, and 6.5 million of these jobs require a combination of technical and interpersonal (EQ) skills. The “Great Resignation” saw 4.5 million Americans quit their jobs in the last two years, and employers are increasingly looking at skills training and skills based hiring to help fill these open positions.

But it’s still early days for the bootcamp and online course/credential market, despite some feeling like these programs may have peaked a few years ago. Last year, only 25,000 Americans graduated from bootcamps, in comparison to two million bachelors degrees awarded. In the broader credential market, our former portfolio company Credly has issued 50 million credentials over the past 10 years, a trend that keeps accelerating, and Burning Glass announced in 2019 that 200 non-degree credentials were already achieving parity to the college degree in terms of employee starting salary. That number may be closer to 400 this year.

In today’s increasingly competitive hiring market, companies like Google, Microsoft, IBM and Indeed are dropping college degree requirements from their job openings and leading the way in skills-based hiring. More employers who are hungry for talent are likely to follow, giving additional credibility to skills-based training, alternative pathways programs, apprenticeships, and digital credentials. Our firm is committed to be a leading investor driving this trend, which we believe will improve workplace diversity, reduce discrimination, and address the skills, achievement and income gaps in a meaningful way.

And this is ultimately why I remain bullish about being an education-to-workforce investor, with a discerning eye for education-to-employment use cases with demonstrated revenue growth, gross margins, total addressable market and most importantly efficacy and ROI.

2022 is likely to be a year of rebalancing towards profitable growth, but our growing industry is likely to see an acceleration of innovation this year and next. Onwards and upwards!

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