Why 2U Decided to Buy a Little-Known South-African Company for $103M

Digital Learning in Higher Ed

Why 2U Decided to Buy a Little-Known South-African Company for $103M

By Jeffrey R. Young     May 4, 2017

Why 2U Decided to Buy a Little-Known South-African Company for $103M

This week 2U surprised many education-watchers when it made its very first acquisition, dropping $103-million on a 9-year-old South-African company called GetSmarter. If that name wasn’t on your radar, you can be forgiven—apparently even 2U’s leaders hadn’t heard of it until about a year ago.

So what does the purchase mean for 2U, and for the unusual business approach it helped pioneer?

First, a quick refresher: The 2U model is to help elite colleges put graduate programs online. It does so through a mix of technology, marketing practices, and capital investment, essentially loaning colleges its services in exchange for a share of tuition revenue over long-term contract periods. The Chronicle of Higher Education called it part of an “embedded for-profit” model of higher education, where colleges outsource aspects of their operations to corporations, like some recruiting functions, that it once considered essential to run in house.

Since the company started in 2008, it has stayed focused on that one idea, and on serving only highly-selective colleges in the U.S. and only on graduate degree programs. The formula has reaped rewards: in 2014 2U became a rare edtech company to go public.

The market didn’t celebrate this acquisition, however: shares fell about six percent immediately after the announcement.

The way the company tells it, 2U wasn’t looking to start buying up companies. Susan Cates, the company’s Chief Operating Officer, says 2U doesn’t even have anyone tasked with exploring mergers and acquisitions.

“Chip noticed info about a program that MIT was doing, and he said ‘GetSmarter, who are they?’” explains Cates, referring to Chip Paucek, 2U’s CEO and co-founder. The MIT course he saw was for a finance and technology course called Future Commerce. The course is not part of a larger graduate program—it’s a standalone. But it does bear a certificate from MIT. And it’s not cheap (and certainly not free, like the original MOOCs). It costs $2,600 for the 12-week offering. A small logo on the course notes that the technology is provided by GetSmarter.

Soon 2U officials flew to GetSmarter’s headquarters in South Africa to do their own just-in-time learning. And they found that the two companies have many similarities. GetSmarter also started back in 2008, and developed essentially the same model as 2U, except that it only deals with short, certificate-bearing courses (rather than complete graduate programs).

“We’re a full-service partner to our universities,” says Robert Paddock, GetSmart’s co-founder and chief academic officer. Its selling point is that it can help big-name universities start such online courses with no financial investment, in return for a share of the tuition revenue. Many of the company’s partner colleges are outside of the U.S.—it works with the top three colleges in Africa, for instance, as well as the University of Cambridge, in the U.K.

So the pairing means 2U instantly expands internationally, something it had hopes to do over time, says Cates of 2U. And she says that the colleges it works with in the U.S. have long asked for support in offering shorter certificate-bearing programs. “Within first 20 minutes after we announced it, two of our deans from partners reached out to us and said we’re really interested in doing this,” she says.

The core business of 2U will remain helping colleges start full graduate program, Cates adds. “Frankly, that’s a reason why we pursued this partnership with GetSmarter, as opposed to saying, ‘let’s take our team and try to build a division to support our partners that are asking to do” shorter course programs.’”

For GetSmarter, the arrangement brings new resources, and also a chance to learn from 2U’s marketing and course development practices, says Paddock. “A lot of the value is in the shared learning,” he adds. “We do the same work, but we don’t compete whatsoever.”

GetSmarter will remain a separate, wholly owned subsidiary of 2U, and it will continue to be based in Cape Town. “We’re scaling up big-time at the moment,” says Paddock, noting they will have new partnerships to announce soon.

Richard Garrett, chief research officer of Eduventures who watches the edtech sector closely, says that the move was “unexpected,” since investors expected the company to maintain its focus.

But he says that GetSmarter, which is a mature company with a proven track record of its own, seems like a solid bet. “It’s 2U hedging their bets around degree and non-degree [offerings],” he says. “They’ve always been a complementary space, so why not?”

Does 2U plan to buy up more companies in the near future?

“We are not out actively looking to acquire as part of any change to our strategy,” says Cates. But “this was too good to pass up in this particular situation.”

Jeffrey R. Young (@jryoung) is a Senior Editor at EdSurge.

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