A Tale of Different Deals: Diving into Early Stage Edtech Investments

A Tale of Different Deals: Diving into Early Stage Edtech Investments


With over $500 million worth of VC funding going to edtech companies in the first three months of 2014 alone, there's no denying that this space is as hot as ever.

CB Insights' latest look at the edtech industry found that "44% [of Q1 2014 deals] came at either the seed or Series A stage," totaling almost $103M. During this time, the average deal was $5.7M (up from $5.3M in Q1 2013 and $3.3M in Q1 2012).

It adds: "Over the past four years in aggregate, average seed deals have come in at $691K while Series A deal sizes, on average, weigh in at just under $5M."

What the CB Insights analysis masks, however, is the fact that "edtech" encompasses a broad range of tools for very different audiences, from toddlers to teachers to working professionals. No Series A deals are alike. TutorGroup's $100 million round for language learning, AltSchool's $33 million bonanza for a next-gen school, and Bloomboard's $5 million raise for teacher development, touch on very different markets and customers. As Michael Feldstein reminds us, "for the most part, education is not a product category. 'Education' is the term we apply to a loosely defined and poorly differentiated set of public and private goods."

According a report from the Gates Foundation, the funding story is different when it comes to "student-facing digital products" (defined as "those used directly by students for learning"). The average investment size for the 267 deals in this category dropped from $11M in 2010 to $2.3M in 2013.

Over this period, 61% of these deals happened at the angel, grant or seed stages. Deals at the Series A stage dips to 15%, and B rounds accounted for just 7%. (It is worth noting that 14% of the deals are “unspecified.”) As the report summarizes, "Series A capital has remained relatively flat for companies that target K-12 schools in the United States as their primary customers."

Beware of averages! (Click to see full size.)
Check out our Edtech Index to see category definitions and products.

Your Way and the Highway

The contrast between the findings from CB Insights and the Gates Foundation seem to reaffirm the common notion that VCs are less likely to invest in edtech companies that work through institutions (districts and classrooms).

Jennifer Carolan, Managing Director of NewSchools Venture Fund Seed Fund, explains in a blog post: "Silicon Valley investors tend to favor direct to consumer models because that is where natural market mechanisms are at work, creating an environment more likely to surface the best products."

Even in education, where the "consumer" (teachers, students) are not the buyers, big fish VCs, such as Kleiner Perkins Caufield & Byers, are stepping in. Startups like ClassDojo, Remind101 and Edmodo have raised tens of millions of dollars with tens of millions of users--but no revenue. For those taking this direct-to-consumer approach, Carolan sees “some very early signs to be optimistic about with subscription models (NearPod), marketplaces (TeachersPayTeachers) and freemium (Wikispaces, Quizlet).”

But investors are not shying away from edtech startups that deal with the institutional beast, either. Carolan says half of the companies in her Seed Fund portfolio work directly with schools and districts. Matt Greenfield, Managing Partner at Rethink Education, believes companies that sell to districts "often reach profitably much sooner than companies that sell similar products to corporations."

The Gates report also offers an optimistic forecast for those selling to schools. Investments made by districts in hardware and infrastructure, along with their increased willingness to experiment with new tools, have them “positioned to make significant new purchases over the next three years.”

Carolan believes "there is a critical role for both [institutional sales and direct to consumer] models…even within the same company." Districts and the upper echelons in school administration will continue to purchase tools that help them make data-driven decisions. At the same time, technology and social media have changed traditional distribution channels so that teachers and students can choose what is best for them.

“If a direct-to-consumer approach can yield better products for our educators then we are willing to try--after all, one thing Silicon Valley investors have never been short on is optimism,” she writes.

True, Silicon Valley has never been short on taking risks. Whether Valley investors are short on patience when it comes to seeing returns on their investments, however, may be a different matter.

Disclosure: NewSchools Venture Fund is an investor in EdSurge. The Gates Foundation also supports our work.

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