Fewer Deals, More Money: U.S. Edtech Funding Rebounds With $1.2 Billion in 2017

Is education technology investing back on track? Are investors still eager to put their money in education startups? The answers depend on who you ask.

After a lull in 2016, venture activity for U.S.-based edtech startups in 2017 saw a resurgence of investment capital. So far this year, these companies raised over $1.2 billion across 126 deals. By contrast, in 2016, investors put $1 billion into 138 deals.

At $1.2 billion, this year’s funding total is the second-highest tally, following 2015 (which saw $1.4 billion invested), since EdSurge began tracking U.S. edtech investments in 2011. Yet at 126 deals, the number of fundraises in 2017 is also at its lowest since 2011. In fact, the number of deals has been on a steady downward slope since 2013.

These diverging patterns are reflected in the graph below, with the upward trend in funding total (green bars) and downward slope in dealflow (red lines).

U.S. edtech funding, 2011-2017 — Source: EdSurge

In this annual year-end analysis, EdSurge counts all venture investments in U.S. educational technology companies whose primary purpose is to improve outcomes for teachers and learners across K-12 and higher education. This year, startups that focus on the K-12 market raised $753 million; those targeting the postsecondary sector raised $470 million.

Our tally—$1.2 billion—does not account for companies whose primary product and service focus on student loan refinancing. Those players have raised big funding rounds, notably SoFi ($500 million) and College Ave ($30 million). We counted five such deals, and if we took their funding into account, the 2017 total would be close to $1.8 billion.

Breaking Down the Numbers

Each year, a handful of outsized rounds account for a substantial percentage of the total funding raised by U.S. edtech companies. In 2017, three companies—EverFi ($190 million), Hero K12 ($150 million) and Grammarly ($110 million)—accounted for 37.5 percent of the $1.2 billion figure.

Here’s a breakdown of the 126 deals by funding stages. (Note: Some deals did not follow a conventional venture round series, including the fundraises by Hero K12 and Grammarly. In these cases their deals are placed in the “All other” category.)

2017 U.S. edtech funding by stage — Source: EdSurge

When we break down the deals by product category, we see that “Curriculum Products” top the list this time—thanks in large to EverFi’s big Series D raise. MOOC companies typically account for the bump in the “Post-Secondary” category, but aside from Coursera’s $64 million Series D round, few other companies focused in higher education scored a large deal.

2011-2017 U.S. edtech funding by product category — Source: EdSurge

Fewer, but Bigger Seed Rounds

Last month, TechCrunch wrote of an “ implosion of early-stage VC funding,” citing Pitchbook data that showed that the number of early-stage rounds have plummeted from more than 13,000 in 2014 to nearly 6,000 this year.

Education technology investments appear to be on a similar trajectory. From a high of 133 angel- and seed-stage deals in 2013, totaling $93.5 million, this year saw 56 such deals worth $47.9 million in 2017.

Seed funding for U.S. edtech startups, 2011-2017 — Source: EdSurge

“Dollar by dollar, seed stage investing is still robust, but there are fewer deals getting done and seed round sizes have been trending upward for years now,” Jennifer Carolan, general partner at Reach Capital, wrote via email. Carolan, who previously co-founded and managed the New Schools Seed Fund in 2012, noted that the average seed round used to be around $700,000. “It’s now double that,” she added.

Discounting the funding that startups get from joining accelerator programs, the average seed round in for U.S. edtech startups hit almost $1.7 million in 2017, according to EdSurge’s count.

Seed rounds are growing, in part, because “companies need more capital to get to Series A targets,” added Chian Gong, a principal at Reach Capital.

For edtech startups, seed money hasn’t disappeared; it’s just harder to get. New sources of seed capital cropped up earlier this year. Rethink Education, a White Plains, N.Y.- education investment fund, partnered with Southern New Hampshire University on a seed fund, and also put money behind the NYU Steinhardt Edtech Accelerator this year.

But the new seed capital comes with higher expectations. Daniel Pianko, a partner at University Ventures, a New York-based education investment firm, says companies will be judged mostly on their ability to drive revenue. Funders are less likely to be swayed by “freemium” models that focus solely on growing user numbers. “Just having eyeballs does not translate to revenue,” reminds Pianko.

“Rationality has settled in,” says Jason Palmer, a general partner at New Markets Venture Partners. “There’s a hangover effect from people who, a few years ago, thought education companies would grow faster.” Many early-stage companies, he notes, are struggling to reach $2 million in revenue. “When you’re smaller than that, it’s hard to find more investors.

When few investors are interested, it’s time to look for an exit. A handful of small startups, which had plateaued in their growth, were bought by more established companies this year: Globaloria was acquired by Carnegie Learning; Motion Math got snapped up by Curriculum Associates. Others simply shut down—most notably coding schools Dev Bootcamp and The Iron Yard, which announced their closures within a week of each other.

Also on investor’s radars this year: high-profile flops from hyped companies that had raised more than $100 million in venture funding. “There’s a realization with a number of high-profile implosions or corrections, whether it’s AltSchool or Knewton, that have cooled a lot of folk’s appetite,” says Pianko.

Dealflow for active U.S. edtech investors, 2017 — Source: EdSurge

Private Equity’s Presence

Investors often bank on having portfolio companies acquired in order to make returns on their investments. In the past, publishers such as Pearson and McGraw-Hill were counted on to be the exit strategy. Yet recent years have been rough for traditional publishers like Pearson, which is in a turnaround phase. The big publishers seem to be more focused on refining internal operations and less on hunting for acquisitions.

Enter private equity firms, which see the education sector as “a place that is highly fragmented and ripe for consolidation,” says Peter Yoon, a managing director at Berkery Noyes, which advises on financial transactions.

Unsurprisingly, the two biggest U.S. edtech deals this year—EverFi and Hero K12—were led, respectively, by private equity players The Rise Fund and BV Investment Partners, respectively.

“We’ve seen significant interest from private equity, typically with a roll-up strategy where they look for platform plays and bundling opportunities,” says Reach Capital’s Gong. “We’ve seen the most interest in SaaS (software-as-a-service) models where the product is complementary to an existing platform.”

That’s the strategy for Hero K12, which raised its money for the sole purpose of acquiring other companies. It’s already snapped up SchoolMint, a startup that helps schools manage the enrollment process. “We want to take the capital and deploy it on a platform that creates integrated administrative solutions, one that can help better connect student data and processes to create safer, more connected school environments,” Oliver Wreford, Hero’s chief product and strategy officer, told EdSurge at the time of the deal.

Slowly but steadily, private equity firms are piecing together assets to create educational data platforms. PowerSchool, owned by Vista Equity Partners, has spent nearly $1 billion on eight companies since 2015. Frontline Education, under its previous owner Insight Venture Partners, has bought 10 companies since 2014 to build a suite of school administrative software.

Generally, most private equity firms typically would not entertain buying companies with less than $10 million in annual revenue. That may be changing. Private equity firms are starting to reach “downstream” to earlier-stage companies, says Yoon. “You’re now seeing larger private equity firms interested in smaller companies in terms of revenues.”

Yet private equity firms aren’t known for offering the best deal for assets. “By definition, private equity firms are much more financially sensitive than strategic acquirers” (such as Pearson in the past), says Pianko, “and they usually offer less money than traditional publishers would.”

“I’m not sure if it will ‘delight’ investors, although a private equity firm can help some companies who struggle with distribution to expand their footprint,” adds Reach’s Carolan. This year, she adds, three of the Reach’s portfolio companies—including Nearpod and SchoolMint—have either been acquired or raised money from private equity firms.

While private equity’s activities continue, “the big question looking forward,” says Palmer, “is Google, which has had tremendous success with Chromebooks and Google for Education.” Of the nearly 200 companies that the search giant has acquired, only one is edtech: Launchpad Toys.

“Will Google make a strong acquisition in the next year or two to solidify its position,” asks Palmer, “or will it mainly be an infrastructure player?”