“Winter is coming,” Naguib Sawiri, the founder of online tutoring app, Yup, told us in an interview after his company closed a $4 million round. The “Game of Thrones” reference came in response to a question about whether he planned to expand his team with the money.
Market headlines and funding data alike suggest that startups across all industries—including education—should expect a chilly year. With 36 deals worth a total of $215 million, the volume and value of U.S. edtech investment deals in the first quarter of 2016 has dipped to its lowest levels since the first quarter of 2015.
That means entrepreneurs like Sawiri are hunkering down to conserve cash; to manage the company’s monthly burn rate, he’s decided against going on a hiring spree. Another company, ClassDojo, also says it’s not planning to increase its headcount of 25 by much, even after raising $21 million.
Judging by headlines on the overall state of the global economy, their caution is widespread across business. The ripple effects of market uncertainty—China’s slowdown, political instability from the U.S. presidential election, the UK’s pondering over leaving the European Union, to name just a few—has dampened investors’ appetite for risks. The International Monetary Fund cut its 2016 global growth forecast to 3.2% for 2016—down .2% from its first projection in January.
Analyzing data from research firm PitchBook, Bloomberg found that Q1 2016 saw the fewest number of venture deals in four years. Data collected by CB Insights shows that edtech funding this quarter was “a 7-quarter low and deals were well off their peak levels.” At this rate, the market research group suggests, 2016 is on par for “just 376 deals and $1.3B in funding.”
Was Q1 2016 just a brief thaw or a sign that winter is indeed coming? Concerning the impact on edtech entrepreneurs looking to fundraise, “I haven’t seen any effects yet,” Cameron White, Associate Partner at NewSchools Venture Fund, tells EdSurge. Several companies are in the process of fundraising, but it’s too early to tell whether investors’ enthusiasm is wilting.
Christopher Nyren, founder of Educated Ventures, cautions against reading too much into one quarter’s worth of data. “Edtech venture funding pales in comparison to the amount raised in other industries,” he observes, making it “almost statistically insignificant to make quarter-over-quarter comparisons.” Uber alone raised $1.2 billion in 2015, he notes. (By our count, U.S. edtech startups raised a combined $1.45 billion last year.)
Here at EdSurge, we dug deep into our Ka’ching database and picked our top five takeaways from this quarter’s dip in funding, depicted in the graphs below. The charts below cover only US fundraising for both K-12 and higher education, and exclude M&A activity.
The big takeaway: Nobody panic. Yet.
Chart 1: Funding in Q1 2016 is way down, from $585 million in Q4 2015 to just $215M in Q1. This dip may seen catastrophic, but the value of deals in Q1 2016 is actually a year-over-year increase from Q1 2015. In fact, Q1 2016 brought in the highest total of Q1 funding over the past six years (see Chart 4). The total number of deals held steady at 35 in Q1, from 34 in Q4
Chart 2: That said, the drop from Q4 2015 to Q1 2016 is the largest drop we’ve seen from one quarter to the next since we started tracking in 2010. Only twice has the drop in funding approached this level, in Q4 2010 (-64%) and Q4 2012 (-52%). Over the past 24 quarters, funding has fallen quarter-over-quarter nine times.
Chart 3: Seasonality doesn’t help explain the drop. It’s a tempting explanation but over the past six years, Q1’s place among quarterly funding totals has fluctuated. In both 2012 and 2015, Q1 had the lowest funding total of the year, while Q1 2011 had the highest total that year.
Graph 4: It is not a good time to be building a curriculum or teacher needs tool. In terms of funds raised, companies in these categories have hovered near the bottom of our five Index categories over the past year. Combined, curriculum and teacher needs tools have received a total of $228 million in investment over that time, significantly less than school operations ($365 million) or post-secondary ($792 million) products.
Chart 5: As we said at the outset, nobody panic just yet. Edtech investments is a long-term game, and any serious investor in this sector wisely preaches patience. A moving average of total edtech funding over the past four quarters shows that the industry still healthy, even with the decrease in funding this quarter. (In the graph below, the data for each quarter represents the average funding for that quarter and the previous three.) From this perspective, the moving average of funding increased in Q1 2016, despite the drop in total funding for the quarter.