Ed Tech Startups are Hot: Now, How to Make Money
There’s no question that when it comes to ed tech, the market today is about as hot as it gets. According to CB Insights, roughly $600 million was invested in 103 related deals in the first quarter of this year. Compare that to all of 2013, when investors plugged $1.25 billion into ed tech startups, and you start to sense just how brisk the pace of investing has been.
Some questions now are where to pour more dollars, as well as how investors will wring venture returns out of the startups they’ve already backed. Wright Steenrod, a partner at Chrysalis, has a few answers, based on his 10 years of experience in ed tech investing. We chatted by phone yesterday.
I think there will be a public K-12 system and that we’ll still have four-year colleges where people go to school and live in dorms. In North America, which has brand value in post secondary leadership, [education] will still be delivered through the institutions that it’s delivered through now. But international [education] is a completely different story. Because the developing world has fewer robust institutions, it’s much more of a green field opportunity.
There are so many ways to fund education-related startups right now. What are you looking for specifically?
We think there’s opportunity within K-12 and secondary education. When you look at the budget situation in this country, it’s hard to argue that schools will receive more money to spend; instead, they have to create greater value with lesser dollars, much like healthcare. So tech and services that help schools deliver better value at less cost is an area of interest.
What kinds of tech and services?
I think overall, standardized tests will see a lot of innovation. Even more interesting to me are cognitive science tests that tell you quite a bit about how somebody thinks or behaves. These types of tests have been sitting around in desk drawers because you didn’t have the Internet to distribute them, and you didn’t have an artificial intelligence engine to grade them, but [now that we do], I think you’ll see more.
From an early-stage investor’s point of view, it’s diffcult to try and figure out which content and curriculum will succeed. It’s being sourced all over the globe. There are talented people everywhere who’ve developed online ways of helping 4- to 6-year-olds learn how to read, and created math programs for 7-years-olds. But is the literacy program developed in Australia — versus Singapore versus California — better? I think it’s very hard to determine from an investors’ perspective, yet a lot of money is going into [related startups].
It’s hard to see how many of these companies exit. Who are the acquirers here for companies that don’t go public?
There are a number of non-traditional buyers that are interested in education. Google’s deal with Renaissance Learning comes to mind. I think private equity firms or new strategics will be buyers, including because you can build stable cash-flow businesses around education. Traditional institutions like Pearson will be buyers as well, though with all the money coming into the space, they aren’t going to buy enough to allow many investors to find a successful exit.
We should all be excited as citizens for what tech is doing for education. But I do think how you make money off those innovations remains the biggest challenge for investors.