The COVID-19 crisis has taken various forms across the world and presented remarkable differences in performance within different industries. Some sectors that are dependent on human interaction, such as the cultural and creative industries have experienced substantial hits and were expected to take longer to recover. Enabling industries like chemicals, construction, and the food and drinks sector were expected to experience a V-shaped recovery, and healthcare and large part of digital industry were expected to perform well.
But the pandemic was an unknown phenomenon and its impact unfolded differently than anticipated for some of these industries.
For EdTech, the global talent crisis, the mobility restrictions, and the impact of the COVID-19 on the education ecosystems have positioned the sector as one of the fastest growing, most promising markets.
How has the market evolved over the past year?
Judging by stock value evolution, alarmingly! Publicly traded EdTech stocks have fallen drastically since the spring of 2021. A brief graph by Phil Hill (an education technology writer and commentator) points to a drop of 17-83% in market value for almost all analyzed companies, except Pearson. A 178-year-old traditional education company, Pearson has started tapping into the technology sector only recently – less than two years ago.
There is no denying that the market fall is in line with the overall tech valuation plummet (Meta: -53%, Zoom: -44%, Alphabet and Amazon: -20%, Tesla: -16%). However, we can also safely conclude that the general expectations of the pandemic cementing the EdTech sector are yet to materialize – at least from the perspective of shareholder returns.
Why did the EdTech market fall?
The signs of an impending decline were there for years, some would argue. Whether we choose to look at the dropping numbers as a ‘return to normal’ after the hype at the start of the pandemic, or we give them a more dramatic meaning, such valuation decreases call for at least a closer analysis.
Here are some key challenges in the current round of EdTech market evolution:
- “Disruption is not innovation,” says Dahn Shaulis, an EdTech industry expert. Disruption occurs when an innovation fundamentally reshapes its industry. And so far, even though the EdTech marketplace has consistently been offering revolutionary ideas, products, and solutions to match changing consumer needs, can we really give strong examples of how such innovations truly became disruptors? The learning ecosystem is complex, and it has a lot of social, cultural, economic, and political factors affecting its course. Although technology is expected to have such transformative power, there is yet little proof that its catalyst role has defeated the complexity of the education ecosystem.
- The balance between education and business itself is being challenged. Historically, educators and EdTech leaders have each been focusing on their own outcome, often leading to companies not focusing enough on the learning outcome and education institutions not meeting their business goals. Even successful, big EdTech companies heard their fair share of criticism from teachers for providing students tools that defeat the education goal itself. While EdTech executives have become more aware of this gap and have started to include educators’ perspectives into their business plans, the reverse is still a major challenge.
- If you were the ordinary, middle-class, or poor income family, EdTech failed you. This was the disappointing conclusion of a McKinsey study one year into the pandemic. Even if venture investment has remained steady at an average of about USD723 million in the first half of every year since 2015, the end-beneficiary lens shows the great imparity that persists in the way it is split. A bigger chunk of U.S. venture funding has gone to companies aimed at adults, not children, leaving remote learning at the stage of ‘futuristic ideas’ more than ‘hopeful realism.’
- High Customer Acquisition Cost (CAC) remains a concern. As described in one of our previous Evalueserve EdTech blogs (where we deep-dived into the monetization of education and future of learning), while a large number of startups are able to solve the product / market challenge, many still fail to either find ways to acquire customers at a low cost or to increase the lifetime value of a customer. In the beginning of 2020, the CAC shot up by 70-80% of revenue of the EdTech platforms from 20-25%, making it extremely difficult to justify the majority of the existing business models in the market. Take the example of Coursera, whose business model allows the company to spend less than competitors to attract paying users (50% of the company’s degree students were previously registered on the site and more than 30% of the enterprise leads came from the consumer platform) and which has dramatically increased its number of total users (approx. 30.6 million new users registered in 2020, up from 9.2 million new users in 2019). The company still is not profitable, and it lost 41% of its market value in the past year.
What could the near future bring?
The short answer: less stability in the EdTech market. The past year has failed to show solid signs to investors of return on investment value. Unsurprisingly, the investment community has a very critical view on the industry’s forecasts. And it is its right to be more cautious!
EdTech has seen a variety of associations between companies, including mergers, acquisitions, and joint ventures. Looking at how the market has evolved in recent months, increased M&A activity is expected soon, driven by numerous private equity firms looking to invest and from healthier companies buying others at bargain prices, and major technology companies are still not present in the EdTech sector and might be looking for a way in. The situation has created pressure to limit losses for companies not looking to be acquired; for smaller companies or those not performing well, there may also be some difficulty in attracting investments or exiting the market on suitable terms.
Where do opportunities lie?
Somewhere between being ‘the future of education’ to seeing its stock values diminish considerably in the past year, there are still many industry experts who choose to look at EdTech’s challenges with optimistic lens, such as those of the ‘pandemic lessons.’ Here are some of the main reasons for seeing opportunities where others see threats:
- Firms with real money can acquire financially weaker EdTech players at below-the-market prices. For strong, well-established companies who are looking to expand, the emergent EdTech companies might be an easier target. Many of these have a weaker position in the market and need a cash infusion, which is where the big companies can step in and acquire them for bargain basement prices (such as Anthology buying Blackboard last year or Byju’s being likely to bid for either Chegg Inc. or 2U Inc).
- There is more capital to deploy. During the COVID-19 pandemic, not only did consumers become more agreeable to using EdTech products and services, but schools have been given extra funds by the federal government. After decades of underspending on education, as much as USD2,800 has been set aside per student in the United States only to upgrade the schools’ infrastructure. There are at least two types of companies that should benefit from this capital infusion: those providing services for the administrators and those interfacing directly with the students to improve end-user experiences.
- The evolution and sustainability of the business models require attention. EdTech companies are progressively selling directly to consumers (parents and students) and there is a growing number of best practices for founders to learn from as they build. Deciding on what business model could best fit one’s vision is something that factors in the experiences of previous companies: identifying the correct targeted customer base; finding cost-effective ways to increase, retain, and monetize users; identify the right focus for their business as well as growth plans; deciding which revenue models have worked best in different regions; etc. A wider range of business models has already shown their viability or proven their weaknesses: freemium, free trial + paid subscription, EdTech marketplace, advertising + free subscription / ad-free paid subscription, and the enterprise / B2B model.
- Big players have privileged access to a uniquely qualified talent pool. Either funneled by the growing number of education, technology, or EdTech layoffs, or by teachers who became either too disappointed with the evolution of the traditional playfield or simply attracted by the dynamics and offerings of the EdTech market, talented workers will become increasingly available. This becomes a great opportunity for big players and startups to hire exceptional talent at reasonable compensation levels.
Looking ahead to the future of EdTech, it is no easy task to predict who would come out of the next 15 months in a stronger position. What should hold companies in good stead is: cut early and cut deep; use the time to rebuild and / or reset; watch out for unit economics; and be mindful of not missing out on important tailwinds (such as business model or talent availability).
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