Part III – How EdTech Companies Have Performed

2 Mar 2016
Blog
Part III – How EdTech Companies Have Performed

How Education Technology Companies Have Performed

It’s possible that the EdTech sector has arrived at the much vaunted inflection point. Every year it seems that there are more and more companies with revenue and sustainable business models. This is different than in years past. This is happening for a variety of reasons; according to EdSurge the three biggest ones are:

More accountability: There is more scrutiny of K-12 and postsecondary institutions to improve performance.

Infrastructure: Mary Meeker’s 2015 State of the Internet report identifies education as a market in which the impact of the Internet is “just beginning.” A recent Houghton Mifflin Harcourt survey of educators reveals that only 23% of students are using a laptop or desktop daily to do class work (and only 9% on tablets). This is changing as one-to-one adoption gathers steam.

Streamlined distribution models are emerging that enable smaller entrants to elbow their way into domain historically dominated by larger companies that rely on “feet on the street” distribution models.

But how does this translate into quantifiable performance for investors? Let’s examine some of the recent successes (or failures) of both private and public EdTech and education companies.

Private EdTech Companies

In order to assess the strength of private companies, we used CB Insights’ Company Mosaic score, which uses public data and predictive algorithms to analyze the global education technology startups.

First on their list is Duolingo, a US-based language-learning website. It raised a total of $83.3M and is backed by investors such as New Enterprise Associates and Kleiner Perkins. Second is another US-based startup, Udemy, which offers online courses. It has received $113M in financing and is backed by Insight Venture Partners and Norwest Venture Partners, among others. But two of the companies, Descomplica and Toppr, are focused on Brazil and India, respectively. And news reports state that China is Coursera’s second-biggest market.

Below are the top 10 EdTech companies ranked by Mosaic, along with news headlines about their products, financings, or partnerships:

There have been plenty of predictions lately that all this investment would result in exits – that is, IPOs, mergers, and acquisitions – that woulddefy historical trendsand all of the recent deal flow has certainly been indicative of that. 

Public Education Companies

If you’ve read our second installment in this series – Who Is Investing In Education Technology? – then you’d know that 2015 was actually a record-setting year for EdTech investment if you look at the total dollar figures. CB Insights noted, “the period from 2010 to 2014 saw more than a 503% growth in investment dollars.” So how does this translate to the capital markets? Included below are a bunch of snapshots of the stock performance from various for-profit education companies(they are NOT necessarily EdTech companies because there weren’t really any pure plays that we could find):

NASDAQ: TWOU (2U INC.)

2u inc

 

NYSE: CHGG (CHEGG INC.)

chgg


NYSE: EDU (NEW ORIENTAL EDUCATION & TECH GROUP)

edu

NASDAQ: APOL (APOLLO EDUCATION GROUP INC.)

apollo

NYSE: BPI (BRIDGEPOINT EDUCATION INC.)

bpi


NASDAQ: CPLA (CAPELLA EDUCATION COMPANY)      

cpla         


NYSE: DV (DEVRY EDUCATION GROUP INC.)

dv


NASDAQ: STRA (STRAYER EDUCATION INC.)

stra

NYSE: LRN (K12 INC.)

k12

 

NYSE: PSO (PEARSON PLC)

pso

Honestly, it is quite underwhelming over a five-year period when examining the group as a whole. That said, this is largely a group of public education companies, not distinctly EdTech companies. I’d like to believe that this poor performance can largely be attributed to new EdTech startups entering the space displacing the incumbents’ respective market share promulgated by recent industry developments, namely: more accountability; infrastructure; and streamlined distribution models.

Robb Doub, general partner with New Markets Venture Partners in Fulton, told The Baltimore Sun his firm has focused on EdTech for the past eight years with steady successes. Its local portfolio has included Calvert Education Services, a distance-learning venture sold to a private equity-led investment group in 2013, and Moodlerooms, an open-source education software company sold to Blackboard Inc. in 2012. He said he sees more successes ahead for EdTech investors. “We think there’s a lot of opportunity and the education space is ripe for change and innovation,” Doub said. “We continue to look aggressively at EdTech both in the region and across the country.”

While education companies may not experience Uber’s hockey stick growth, an argument could be made that they are less volatile and have more predictable and proven business models and customers. Furthermore, EdTech companies offer investors self-gratification knowing that they are impressing a large social impact with their dollars. So, when evaluating making an investment in an EdTech company please consider some of the following:

  • Comparable technology/valuations
  • Capital efficiency
  • How they balance cost-effective growth with monetization to build a sustainable business
  • Look for those that have gotten rid of the same old top-down, boots on the ground monetization strategy (it is slow, expensive and sales cycles can be infamously bureaucratic)
  • Look for those whom have identified the potential of the “consumerization of IT” movement by recognizing that the voice of the end user (in this case, teachers) has become more and more influential when determining where budgets get allocated
  • Ability to scale their revenues without having to build massive sales teams and/or deploy “boots on the ground”
  • Consider a diversified portfolio that takes into account the rapidly growing U.S. market, as well as in China where EdTech is booming and other emerging markets

Not all education companies are created equal. Through our analysis we have found that private EdTech companies greatly outperformed the for-profit public education companies. That said, there are exceptions to the rule. Lingo Media achieved the greatest appreciation in both share price, gaining 745%, and in market capitalization, gaining 992%, amongst all 2016 TSX Venture companies. With ideal market conditions now coalescing, knowing how to execute is the really difficult part and also where Lingo Media prides itself.

Please visit us on our website at www.lingomedia.com to learn even more about investing in EdTech. Lingo Media is Changing the Way the World Learns English. There’s a market, a real problem and a real solution – be part of that solution today.