Venture capital for U.S. education technology startups ebbed in 2016, dipping roughly 30 percent in deal volume and value from the previous year. Also missing were blockbuster exits, such as LinkedIn’s $1.5 billion purchase of Lynda.com and Instructure’s initial public offering, both of which took place in 2015.
These statistics offer a somber reminder that the edtech industry does not produce quick, home run hits. Enthusiasts will argue that there are startups like Udacity with valuations north of $1 billion. But as some disappointed investors have learned last year, the actual market value and performance behind “unicorns” may be as illusory as their nickname.
Although dealflow has plateaued, the pot of available capital continues to grow. Education rewards patience, and one investor group has re-upped its coffers. Rethink Education, an edtech investment firm based in White Plains, N.Y. has closed on a second fund totalling $107.5 million. The money will support early and growth-stage investments for at least seven years, a longer life period than most funds.
“We’re seeing a shift in the market where the seed stage has elongated, and the threshold for raising a [Series] A round has become steeper,” observes Matt Greenfield, a managing partner at Rethink. “There’s an emerging gap for one- to two-million dollar checks.”
Since launching in 2012, Rethink has invested in 27 companies that serve a broad spectrum of learners and needs, ranging from K-12 grammar (NoRedInk) to college student success platforms (Civitas Learning) and career training for professionals (General Assembly). There are school finance tools for administrators (Allovue) alongside educational hip hop music videos (Flocabulary). Another two companies, McGraw-Hill and Pluralsight, are also in the portfolio through their acquisitions of two Rethink-backed startups, Engrade and Smarterer respectively.
The firm has an eye for smart bets. Prior to launching Rethink, Greenfield and co-founder Rick Segal had invested in SchoolNet and Wireless Generation, acquired by Pearson and News Corporation for an estimated combined $620 million. In addition to the Engrade and Smarter acquisitions, another Rethink portfolio company, 2U, went public in 2014. Returns from these three exits have more than covered Rethink’s first $60 million fund.
Careers, Credentials, Content
Venture capital favors the bold. Yet for Greenfield, that doesn’t mean taking unnecessary risks. His team looks for fresh approaches, rather than copycats of existing products and services. (He’s never been a fan of digital textbooks or MOOCs.) Business models are probed just as much as the ideas they support, which might make Rethink appear more conservative than most Silicon Valley funders.
“Our model isn’t premised on us investing in unicorns,” Greenfield explains. “We strive to lose money on our investments a lot less than other VCs would.” He professes an “enduring obsession” with bootstrapped companies that can generate revenue before relying on outside investments.
A former literature professor at Yale who’s also dipped into finance, Greenfield believes there are gaps in K-12 and higher education where students fail to develop “fundamental capabilities” that prepare them for the future. What particularly excites him today are educational services around careers, credentials and content curation that operate outside of the traditional system. “There’s a lot of creativity around targeted vocational programs that deliver a definite salary uplift and expand people’s life options,” he says. Andela and Guild Education are prime examples of companies he would have liked to invest in.
He also believes the market is also moving towards tools that bundle assessment and content, rather than being offered as separate products. It’s an observation borne, perhaps, out of his experience working with Smarterer, a skills assessment platform that was bought for $75 million in 2014 by Pluralsight, which offers more than 5,000 online courses.
Lessons From K-12
On the other hand, Greenfield says investors are taking a “slight retreat from K-12 companies,” especially those that focus primarily on the U.S. market. The addressable market—55 million students—is “not a size that excites many investors,” he says.
That was not the case in 2015, when investors poured $741 million in U.S. K-12 startups. Some of these deals were “misguided,” from Greenfield’s perspective. “There are VCs who backed teams that included teachers but didn’t understand an administrator’s perspective before trying to sell to school districts,” he contends. Even more ill-advised are “point solutions” designed for a few teachers’ use cases but not for deployment across a school or district. “From a district’s perspective, you don’t want to replace a LMS with 60 different tools,” he adds. “They want to buy platforms, not assemble a bunch of features or small products.”
Particularly disappointing to Greenfield are “adaptive learning” tools that aim to deliver customized content to learners based on data collected from their performance. He acknowledges “there are some algorithms that do it well” but also says there are “lots of smokes and mirrors” about how these tools actually operate. “The phrase has been poisoned...when I hear it I reach for my revolver,” he quips. (No, he doesn’t actually own a gun.) “There’s a genuine need for people to discard that phrase and describe what they are actually doing.”
Yet despite many investors’ aversion to companies that sell to school districts, Greenfield argues “it’s not much more trickier than selling to companies. Once you have product-market fit, it’s possible to have low customer acquisition costs.”
Several K-12 companies may be next in line for healthy exits, he adds. Among them: Achieve3000, a language arts tool, and Frontline Technologies, a provider of administrative software. Smaller companies may find themselves attractive targets for private equity firms such as Vista Equity Partners and Weld North, which have been busy snapping up education companies in recent years.
“K-12 is a space where there haven’t been billion-dollar exits," Greenfield predicts, adding: "I think you’re about to see some.”
