Education Insider

December 2015

Special Edition: Investor Perspectives

SURVEY INSIDERS ANALYZE RESULTS REPORT INSIGHTS DRIVE ACTION

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Launched in 2009, Education Insider is a monthly report that uses a proprietary survey model to cut through the noise and provide real-time insights on education policy trends from a small group of 50-75 Congressional staff, federal officials and other Insiders close to the policymaking process. Our goal is to predict outcomes and demystify the policy and political environment that surrounds Pre-K-12 and post-secondary education. The views expressed by Insiders do not necessarily represent the viewpoints of Whiteboard Advisors or any of its employees.

Special Edition: Investor PerspectivesAlthough the numbers vary, nearly all accounts point to an acceleration in edtech deal-flow over the last year. According to EdSurge, there were 107 edtech deals for U.S. companies during the first half of 2015 ($1.1 billion in investment).1 GSV Advisors reports $1.2 billion in investment in U.S. edtech deals for the same period ($1.7 billion as of October 2015), compared with $1.8 billion total for all of 2014.2

For this Special Edition of Education Insider, we surveyed approximately 50 of the most knowledgeable education technology investors, strategic buyers, and bankers in the business (October 23 - November 6). Our “EdTech Insiders” represent a cross-section of investment stages and approaches, including seed, venture and private equity. Their views matter because they are among the most connected and active education industry players today – and are driving millions of dollars in economic activity as a result. The decisions they make and their perceptions will help determine whether education technology advances equity and social impact or reinforces today's problematic status quo.

The goal of our first edtech survey is not precision or depth, but rather an overall understanding of trends, priorities, and concerns animating edtech investment today. In some cases, W/A clients were mentioned in this survey. We indicate where that is the case.

Ben Wallerstein, Co-Founder, Whiteboard Advisors Jeff Selingo, Co-Publisher Andy Rotherham, Co-Publisher

1See Wan, Tony and Tyler McNally. (2015, Jul 29). Education Technology Deals Reach $1.6 Billion in First Half of 2015. EdSurge. 2GSV Advisors. "Boom - Bust - Boom: Deal Velocity." October 8, 2015.

Why Education Insider?An Insider look at education policy from leaders across the country

About Education Insider

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The Education Insider Team

Ben Wallerstein is the Co-founder of Whiteboard Advisors, a national education consulting firm, and publisher of Education Insider. For more than a decade, Wallerstein has worked with the most transformative companies in education, and advised parties in dozens of Pre-K-12 and postsecondary transactions. Ben is a frequent commentator about policy and educational innovation, and his writing has appeared in the Huffington Post, Venture Beat and EdSurge among other publications.

Andy Rotherham is a Senior Advisor at Whiteboard Advisors and co-publisher of Education Insider. Rotherham is the Co-founder of Bellwether Education, a national non-profit dedicated to improving outcomes for high-need students. He serves as the executive editor of Real Clear Education, part of the Real Clear Politics family of news and analysis websites, and as a contributing editor to U.S. News & World Report. Andy also writes Eduwonk.com. A former White House aide and state board of education member, Washingtonian Magazine describes him as being "at the forefront of U.S. education policy.”

Jeff Selingo is a Senior Advisor at Whiteboard Advisors and co-publisher of Education Insider. Selingo is the former Editor in Chief of The Chronicle of Higher Education and is currently a special advisor and professor of practice at Arizona State University and a visiting scholar at Georgia Tech’s Center for 21st Century Universities. His work has appeared in The Washington Post, The New York Times, The Wall Street Journal, and Slate. His book College (Un)Bound was a New York Times bestseller in 2013. He has also written MOOC U and There Is Life After College (release scheduled for April 2016).

Deirdre Dlugoleski serves as a Research Associate for Whiteboard Advisors. Prior to joining Whiteboard, Deirdre taught English in India as a Fulbright scholar. A graduate of Yale University, Deirdre served as a President’s Public Service Fellow in New Haven and taught with Breakthrough Collaborative.

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EXECUTIVE SUMMARY 5 BUBBLE, OR NO BUBBLE? 6 FUNDING GAPS? 7 WHAT’S HOT? 8 NON-TRADITIONAL BUYERS 9 INVESTOR PRIORITIES 10 SMART MONEY? 11 POST-SECONDARY DATA & ANALYTICS 12 K-12 EDTECH COMPANIES 13 CAN FREEMIUM LAST IN EDUCATION? 14 THE ROLE OF STATES & DISTRICTS 15 K-12 DIRECT TO CONSUMER 16 MICRO-SCHOOLS 17

Table of ContentsA look at what’s ahead

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Market Conditions

Most Insiders believe edtech companies are overvalued. They point to irrationally high initial valuations and asset values—with little appreciation for how slowly the market moves.

Executive Summary

Strategic Buyers

Insiders predict the emergence of new non-traditional buyers in the post-secondary data/analytics market, but continue to see large publishers as the dominant strategic buyers in K-12.

What’s Hot?

Over seventy percent of Insiders identify the post-secondary and corporate training/lifelong learning segments of edtech as the most attractive to investors.

66% 54%44% 31%

Two-thirds of Insiders (66%) believe edtech companies are overvalued.

44% of Insiders see corporate training/lifelong learning as the most attractive segment of the market for investment.

Despite the explosion of freemium offerings, 31% of Insiders express skepticism about the model’s sustainability. The traditional K-12 distribution model, according to Insiders, is here to stay.

More than half (54%) of Insiders believe that the direct to consumer market for K-12 education will expand.

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Q: Many say that the education technology industry is experiencing a bubble - do you think that companies are, in general, overvalued?

Bubble, or No Bubble?Perspectives and comments on valuation

Insiders express skepticism over high valuations for companies with unproven monetization strategies, and concern about startups’ ability to meet growth projections. Others are more bullish. Non-education analogs justify relatively high valuations, they argue – pointing out accelerating revenue growth for edtech companies, strong demand and favorable mega trends across both K-12 and post-secondary education.

Insiders Weigh In

7%

28%

66%

YesNoUnsure

By The Numbers

Bubble Beware

“Companies without revenue, a track record, or evidence of efficacy are receiving valuations >$1m simply by incorporating and building a website.”

“Most companies I see – even very good ones – are receiving valuations that at a minimum they will need to grow into.”

“Valuations in edtech versus other industries very low on absolute and relative basis.”

“Revenue growth is amazingly strong and accelerating. Valuations are not out of whack versus other categories (enterprise saas/consumer web).”

“Few will become great companies, but those that have real potential are not terribly overvalued today.”

“Series B companies are seeing strong values that are untethered to fundamentals. However, market size and growth trajectories have demonstrated that eventual ‘unicorns’ are real, and unicorns create all the value for funds.”

Not Necessarily Overvalued

Mixed Bag

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Q: We often hear that there are gaps at key stages, e.g., not enough capital available for mature businesses. Do you believe that entrepreneurs face gaps in availability of capital at any of the following stages?

Funding Gaps?How hard is it for edtech companies to raise money?

In general, Insiders do not express concern about access to capital for edtech companies—particularly at the seed stage. Some Insiders point out that while there are a handful of education-only funds at the Series A level, edtech companies face more of a challenge in later stage venture rounds. Not surprisingly, private equity is seen as the least challenging, but investors point to the lack of edtech companies with sufficient scale and EBITDA* to attract private equity investments.

Insiders Weigh In

By The Numbers

In Their Own Words

“There are a few education-only funds, but they are all at the Series A level. After that, there is nothing. Startups have a harder time raising a B.”

“It still strikes me as [fairly] difficult for education businesses to raise money, as compared to other sectors. Not as many people follow/pursue opportunities in the space, and there are unique challenges that tend to scare people off. Once a company gets to ‘private equity stage’ or even Series B and C, this seems like less of an issue. Series A and Seed seem to be the most challenging.”

“I don’t see capital gaps. I think there is too much funding available although the B/C round is notoriously hard if you raised capital at inflated valuations and didn’t deliver on projected growth.”

“I have found investors at all stages, so I would not agree with the statement. I can understand how someone might perceive gaps, but it is likely because they don’t know where to look or lack experience at that stage.”

“I don’t think there is a shortage of capital. The lack of funding might correlate to the financial potential of edtech strartups relative to other startups.”

*EBITDA, or earnings before interest, taxes, depreciation, and amortization, indicates a company’s net income with these elements added back.

0%

25%

50%

Seed Series A B, C, Venture

Private Equity Stage

30%

50% 50%

10%

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Q: What has been the hottest deal of 2015 (e.g., a deal you were in and happy about, or a deal you weren’t in but wish you had been)?

What’s Hot?Open-ended question: Insiders' perspectives on the most attractive deals this year

No single deal received more than one-sixth of Insiders’ mentions.

Top Picks Include: Newsela,* Civitas,* Lynda.com, Andela, Quizlet, and 2U.

Insiders Also Mentioned: General Assembly,* ClassDojo,* Coursera, Shorelight, Udemy, Retention, Galvanize, Revolution Foods, Pluralsight, BrightBytes,* and Duolingo.

Insiders Weigh In By The Numbers

14%

10%

7%

7%

7%

7%Disclosure: Companies with an asterisk (*) following their name are clients of Whiteboard Advisors.

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Q: Will we see non-traditional buyers enter the market?

Non-Traditional BuyersWill we see new strategic buyers in edtech?

For decades, education publishers made big edtech investments, sometimes characterized as R&D by acquisition and often credited with driving up valuations and boxing out financial buyers. More recently, we’ve seen tech firms and media companies (e.g., Amazon, Bertelsmann) make moves in the education space.

Background

21%

7%

72%

YesNoUnsure

By The Numbers

Of Course

“We already have.”

“As the market becomes more mainstream, as real exits happen, all types of capital will flow in.”

“A lot of capital needs to be deployed and education has become a ‘hot’ area…”

“Education data will become as important as consumer data for the big players like Amazon, Facebook and Google.”

“Bertelsmann, Advance, Conde Nast, tip of the iceberg.”

“Hearst, Advance, Microsoft, NetDragon, Times of India are all posturing for acquisitions.”

“Media companies are all extremely interested in the sector, without exception. Tech companies are starting to make bigger purchases in edtech.”

Some More Than OthersMost Insiders point to increasing diversification among edtech buyers. They point to education as a cornerstone strategy for tech giants like Google and Amazon and an increased focus among big media conglomerates.

Insiders Weigh In

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Q: Do you see more enthusiasm among investors for edtech solutions at the: __________________?

Investor PrioritiesWhich areas of edtech are seeing the most enthusiasm?

K-12 education’s fragmented market and long sales cycles continue to dissuade investor interest, according to Insiders. High school and Pre-K appear to generate the most appeal, while Insiders suggest that middle school draws little or no enthusiasm from investors. Post-secondary edtech generates twice the enthusiasm of K-12 according to Insiders. Corporate training and lifelong learning—arguably the least regulated segment covered in our survey—appear to generate the most enthusiasm.

Background

By The Numbers

In Their Own Words

“Pre-K to 12 (excluding [direct to] consumer) is a battlefield. Sales cycles are too long and standards/decision makers change too often.”

“The disruption of education will happen at the post-secondary level before K-12.”

“Can achieve quicker rates of growth in corporate learning.”

“There is more enthusiasm this year for the corporate training area despite long being the poor step-child of edtech. I think the market likes the business orientation … along with a lack of government funding and low concentration and sophistication among existing solutions.”

43% of Insiders see the most enthusiasm among investors for corporate training and lifelong learning. 32%, however, find the most excitement at the post-secondary level.

4%

43%

32%

11%4%

7%

0-5, Pre-K levelK-5 levelMiddle School level (0%)High School levelPost-secondary levelCorporate training/lifelong learningUnsure

“None of these jump out individually, but I would tend to say K-12 as a group seems to garner the most interest.”

“Early learning will continue to be hot for a while. It’s where smart brain research/neuroscience is actually being applied to learning products and services. I remain bullish on this sub-sector.”

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Q: Which segment is more attractive to you as an investor?

Smart Money?Which market segments are most attractive to our Insiders?

After asking where they saw the most enthusiasm, in general, we asked which edtech segment was most attractive to our panel of Insiders.

Background By The Numbers

44% of Insiders are most attracted to corporate training/lifelong learning, while 30% say that post-secondary holds the most promise.

7%

44%30%

7%4%

7%

0-5, Pre-K levelK-5 level (0%)Middle School levelHigh School levelPost-secondary levelCorporate training/lifelong learningUnsure

Most Insiders see corporate training/lifelong learning and post-secondary as most attractive. They point out both the size and openness of corporate and post-secondary markets. Unlike K-12, where government sales dominate, Insiders remind us that in adult-oriented markets, buyers are more likely to be end users.

Insiders Weigh In

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Q: Post-secondary data/analytics businesses have received high valuations from venture and private equity investors. Who are the most likely strategic buyers for these companies?

Post-Secondary Data & AnalyticsOpen-ended question: Insider perspectives on strategic buyers

Thirty-two states have now passed performance funding mechanisms for higher ed. With an increasing emphasis on accountability, colleges and universities are tapping “big data” analytics to improve outcomes.

Background

By The Numbers

In Their Own Words

“Unclear. Depends on financial performance and ultimately business model characteristics. Still early in development.”

“Large enterprise centric software companies (IBM, Microsoft, Salesforce, etc.).”

“Who knows? That's why the valuations just don't make sense.”

“Depends on what the data is. Civitas has data that is different from an enrollment services business, for example, and likely attracts different strategics.”

14% of Insiders see IBM as a likely strategic buyer, and 10% Google. Other options are LinkedIn (7%), Microsoft (7%), and Oracle (7%).

“Private equity.”

Insiders see publishers and software companies as the most likely contenders; Insiders also call out IBM, Google, Microsoft, LinkedIn, and Oracle as possibilities.

Insiders Weigh In

14%

10%

7%

7%

7%

“Advisory Board, Ruffalo Noel Levitz, maybe CEB.”

“Publishing companies and affiliates.”

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Q: Who will be the most likely strategic buyers of K-12 education technology companies over the next 5 years?

K-12 EdTech CompaniesOpen-ended question: Who are the most likely strategic buyers?

No individual company has more than 14% of Insiders’ mentions, but 40% of Insiders believe that large publishers will continue to be the most likely buyers.

Insiders Weigh In

By The Numbers

In Their Own Words

“The big tech players: Google, Microsoft - and LinkedIn/Facebook once they have matured to the point when they can focus on sector verticals.”

“[Chinese companies]….NetDragon, Tal, Baidu, Alibaba.”

“The publishers are the most likely strategics, but only after valuations have become more in line with their own valuations."

“Major internet and media companies.”14% of Insiders say Google will be a buyer, and another 14% say Pearson. Other likely contenders include McGraw Hill (10%), Amazon (7%), and LinkedIn (7%). “The large educational content companies and the large SAAS software

companies.”

14%

14%

10%

7%

7%

“EdTech companies focused on higher ed.”

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Q: Is the freemium model in edtech sustainable?

Can Freemium Last in Education?Insiders share thoughts on the business model’s viability

31%

31%

38%YesNoUnsure

By The Numbers

Good Companies Can Figure It Out

“For companies that deliver the right value proposition, I see no reason why it is not viable. There will of course be winners and losers, likely not a high hit rate for startups overall.”

“It is working for Newsela and NoRedInk.”

“It’s sustainable if you have something people like and need. Sustainable in other industries – why wouldn’t [it] be here?”

“I see early stage companies in general deciding that it is better to establish the revenue model from the beginning than to start free and grow revenue opportunity through freemium upsell – the dollars from that strategy are proving to be relatively small in edtech.”

“It gives students/teachers a way to test a product before buying, making edtech more trustable.”

“I’m unsure. On the one hand, it is very difficult to monetize when a product started out as free. On the other, free seems to be the best way to get significant distribution.”

They Won’t Make Money

Pros And Cons

Valuations for consumer tech companies like Dropbox and Spotify continue to surge. The explosive growth of K-12 apps like ClassDojo and Coursera, a provider of free online college courses, begs the question: Can freemium business models succeed in education?

Background

Insiders are almost evenly split on whether freemium is sustainable. They see opportunities for freemium due to the bureaucratic nature of education funding and historic disintermediation of buyers and users. Insiders also see opportunities for freemium products to rapidly test run new products, pointing out several examples where the model is working.

Insiders Weigh In

15Q: Do you agree with the following statement: Over the next decade, the most successful K-12 education businesses will not pursue a traditional model of direct sales to states or school districts.

The Role of States & DistrictsHere to stay, or fade away?

Edtech companies have long complained about long sales cycles, shifting standards, and a bias against for-profit companies. We asked Insiders whether successful edtech businesses might eventually ditch the traditional distribution model altogether.

Background By The Numbers

Insiders believe the traditional sales model is durable. Almost six in ten Insiders disagree with the idea that over the next decade successful K-12 education businesses would move way from a model of direct sales to states and school districts. Insiders note that a change would require a major disruption of the procurement process in K-12 and changes to who controls education funding.

Insiders Weigh In

10%

59%

31%

AgreeDisagreeUnsure

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Q: The K-12 direct to consumer market has historically been weak - do you expect that the direct to consumer education market will expand?

K-12 Direct to ConsumerMarket or myth?

7%

39% 54%

YesNoUnsure

By The Numbers

Products Are Better And More Relevant

“The solutions will get better and more appealing, and they will become more integrated with what is going on in institutional education.”

“Education will likely become increasingly a do-it-yourself, lifelong, venture...gaps will be more apparent, and buyers - parents and students - will increasingly take matters into their own hands, particularly as they see clear models of success and become more fluent using technology.”

“I don't see a change in the market drivers that would require parents to pay for something they don't value or can otherwise get for free.”

“In the U.S., parents do not invest enough in supplemental education. But in Asia, they do.”

“It will expand but it will expand slowly. The value of an education is increasing (i.e., the better jobs favor those with the better education). It will increasingly make sense for parents to invest in their children's education outside of school.”

But It’s Not A Top Priority…

Although Maybe It Should Be.

The K-12 direct to consumer market has historically been weak; we asked Insiders to give their thoughts on whether that will continue to be the case.

Background

A slim majority of Insiders believe the direct to consumer market will expand. They note the improving quality of products and increasing relevance to trends in institutional education, but also point out that competition, brand confusion, and comparable free offerings may prevent growth.

Insiders Weigh In

“Too much competition = brand confusion and consumer hesitation.”

“Perhaps in the longer term and certainly internationally, but I see a slower evolution of this market in the U.S. It'll happen but not in 10 years in a meaningful way.”

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Q: Micro-schools (most famously AltSchool) are receiving an increasing amount of media attention. Do you believe that micro schools, i.e., for-profit, small private schools are: _____________?

Micro-SchoolsPassing trends or here to stay?

10%

21%

69%

Here to stayPassing trendUnsure

By The Numbers

Demand Is Sufficient And Growing

“While they will take a while to optimize and ‘prove out’ I believe this model makes a tremendous amount of sense and will succeed (although possibly over the very long term).”

“Yes, smaller schools that can show clearly better outcomes will be in demand, particularly if they are able to do so at tuition levels that can be supported by the middle class.”

“It’s a very exciting trend but not clear to me that these schools can be both innovative and profitable.”

Skeptical About Profits

Micro-schools (most famously AltSchool) are receiving an increasing amount of attention from both the media and investors. We asked Insiders to share their predictions.

Background

Insiders believe micro-schools are here to stay, but don’t anticipate massive scale for emerging models. Some caution that the price and micro-schools’ ability to scale may slow the trend.

Insiders Weigh In

“Business model at small level is highly problematic.”

“Here to stay - but not at any meaningful scale vs. traditional schools.”

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