Money in Edtech 2016 – Where is the Edtech Funding Going?6 min read

It wasn’t too long ago that it was difficult for education technology start-ups globally to ‘make it.’ These days though, it has become a very different playing field, with edtech companies raking in some very interesting investment deals, with quite a few start-ups founded after 2010 already being valued at $250 million and up. These are indeed good times for edtech funding.

Edtech Funding
In light of this, EdSurge recently released their report on funding and capital in the US K-12 edtech market. This entire year, EdSurge is researching current trends in edtech, and this report is their second in a line of four. If you haven’t yet read their excellent first installment on technology trends in education, you can find it here.

Let me re-cap their most important findings before I add some information on higher ed investment and funding in the European education market.

Investments in the US K-12 EdTech Market

The first remarkable thing is the sheer amount of investment: a whopping $2.13 billion was invested in the US K-12 EdTech market over the past 6 years. And it’s only been getting better, with a record $741 million invested in 2015 alone. This shows how hot and happening edtech is right now.

“We want to see change, we want to see students and teachers have a level playing field to learn.’’

More interestingly though, even though investment firms have raised more than $300 million and were involved in the top 10 deals of 2015, it was actually the angel investors who have proven to be of immense importance for edtech start-ups; 40% percent of businesses report that at least 70% of their funds come from individuals. This is a lot more than the 2% wealthy individuals on average invest in more general sectors.

Brian Dixon, partner at Kapor Capital, explains why this is: “We want to see change, we want to see students and teachers have a level playing field to learn.’’ Even in my own personal experience I have met angel investors whose passion for education and their wish to make the world a better place brought them into impact investment. I am sure many of us in edtech can sympathize with this sentiment. We can see this phenomenon in the rise of education technology specific incubators as well; more than 14 have popped up in the US since 2011.

As edtech is a very young industry, we were able to see a lot of funding going to seed and early stage companies. $887 million has been invested in 377 seed and early stage companies, compared with $1.4 billion across 71 late-stage companies since 2010. However, the market is evolving and growing up, which leads to higher expectations on the side of investors. Consequently, expansion stage funding is increasingly becoming more prevalent.Edtech funding by stage

There’s also a difference in what investors have been prioritizing in their search for promising start-ups. In the early days of the edtech space, investors were looking for products based on user growth, but as the market matures and expectations rise, the focus has shifted favoring companies that show they can generate revenue. And as many of you might know, the edtech industry is still looking for that one stellar business model which guarantee big bucks. I would say one of the ways to really innovate would be on the economic side of entrepreneurship.

Even though a lot is changing, it is still not easy for small companies to procure big investments. The big players in the industry are still dominating the investment space. To illustrate, across the last six years, about 15 percent of companies have raised 75% of all investment dollars. Compared with all the other industries, this is definitely unique and peculiar.

And last not but least, it’s interesting to note that the category which saw the most investment was “school operations,” which includes administrator and school tools. This was followed by “teacher needs” and a large segment called “other.”

Decreasing Investments in Higher Education

The above is specific to the US K-12 market, but what about higher education (a category SOWISO belongs to)?
Ed-tech companies serving general higher education had a great year as well, attracting a total of $658.3 million in investments. Generalist VC firms and funds seem to focus on higher education, corporate training, or international education when they incorporate education companies in their portfolios. This also means that a large number of companies who received a large sum in funding draw their revenue from higher education in addition to a K-12 customer segment.

However, the numbers do show that start-ups primarily serving colleges and universities, for example, do not appear to be attracting investors’ interest. These companies received nearly $100 million less in funding during the first half of 2015 compared to the previous year — $152.3 million versus $251.7 million.


European Investments are Lacking

Interestingly, the European edtech market is home to some very innovative start-ups and Europe accounts for a quarter of the global $4.1 trillion spent on education in general. However, even though the demand is present, the advantages of e-learning are widely recognized, and there are more students in western Europe (100 million) than in the US (80 million), European start-ups have trouble scaling their business. This might be a distribution problem, since entrepreneurs need to serve a large number of widely different domestic markets in Europe, but a lot of it has to do with a huge lack of investment.

“Of global fundraising 60% went to the United States, but only 8% went to Europe.’’

Funding levels in the United States are 10 times Edtech Funding: Funding Volume by Regionmore than those in Europe. For example, only $45 million was raised by European edtech companies in 2013, where their counterparts in the US raised $430 million. In other words, of global fundraising 60% went to the United States, but only 8% went to Europe. According to Charles McIntyre, CEO of IBIS Capital, this is because European investment firms are conservative. In addition, as we mentioned above, many of the deals come from private angel investors, not VCs.

Benjamin Vedrenne-Cloquet, co-Founder & CEO of the Edxus Group and EdTech Europe, explains the type of companies that make it in this harsh ecosystem: ‘’the companies currently showing greatest potential in Europe are those with an astute understanding of the direction of the market, providing a service that meets the needs of users, which can be delivered in the way they want it.’’

Edtech Investment in Asia

Asia is overtaking Europe when it comes to investments. Particularly China is becoming a big player in the market. In 2015, their investors funded over $1.3 billion into just 20 domestic edtech companies. Many say the reason for this recent spike in investments is a growing middle class resulting in a demand for an ever-improving educational system.

This is a lot more money than the amount invested in companies operating in India ($137 million), but even there there’s been a huge increase in investing over the last years.

Max Woolf, a senior analyst with the research firm Eduventures, noted that China is mostly responsible for the rise in edtech investments overall.

An interesting detail is that Chinese startups seem to develop completely new products, while universities are emulating Western MOOC platforms.

In Conclusion

So what are your perceptions of money in edtech? Where do you see investments go in the years to come? Are you in Europe and do you feel it’s hard to raise investments, or are you witness to the huge investments happening in China?

We’d love to hear from you and discuss the trends (for example on Facebook, LinkedIn or Twitter)!

Let’s talk again soon,

Jeroen

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