What Investors Love About EdTech: How the Changing Education Landscape Has Spurred New Platform Technologies and Attracted Private Investment

09.04.14
Features

The education landscape has undergone  significant changes in the past decade, mostly stemming from technological advances and the rapid rise of online learning programs. Education reform and the ever-rising increase in college tuition expenses have also contributed to an increased demand for online educational services. The online learning industry was a fledgling one a little under a decade ago, but now in 2014, several companies have legitimated the industry to the point where traditional educational providers (i.e. colleges and universities) have had to implement and embrace changes of their own and adapt to an increasingly digital world.

Traditional, physical colleges and universities and accredited online universities have had to adapt their business models to combat the influence that online learning companies exhibit on the education industry. Several online education start-ups, such as Coursera, Lynda, Knewton, OpenEnglish, and 2U to name a few, have been very successful in increasing their customer / user base, allowing them to raise significant amounts of capital from private equity and venture capital firms. Other online learning companies have not been so successful, reinforcing the notion that the industry is still in its infancy and has a ways to go in order to totally reshape the way education is provided. Regardless, online learning is gaining traction and substantial opportunities exist for growth investors to profit from capital raisings in this industry.

Rising costs of tuition at colleges and universities is one of the main reasons the online education industry has become more mainstream in the last several years. According to a December 2013 report by the Institute for College Access and Success, the average undergraduate student debt for members of the Class of 2012 was $29,000. Even after attempts by the Obama Administration to curb the rising cost of college attendance, the trend of student debt piling up is unlikely to reverse course anytime in the near future. The prestige and value of certain undergraduate degrees allows private and even public universities to continue increasing the bills they pass along to students and their parents. This is not to say that all colleges are unconcerned with student debt burdens, but online learning companies have taken advantage of the cynicism on behalf of those who question the true value of an education at a traditional, physical college. At the extreme end of the spectrum, MOOCs (Massive Open Online Course) have been defined to date by their business models that provide courses for cheap or even free. An example of a successful company contracting with universities to create MOOCs in addition to offering accessible, free courses of their own is Coursera, whose commitment to providing “learning without limits” has attracted 7.1 million users and counting.

Another reason the online education industry has achieved success is because of its abilities to reach a variety of target markets. Whether it is an elementary school student in need of help with arithmetic or general history, the college student interested in learning computer programming during winter break, or the middle-aged individual recently laid off who is wondering how to improve their human capital for future employment, online learning companies appeal to a wide range of people because of their flexibility, user-friendliness, learn-at-your-own-pace educational style, and even specialized course offerings. Craftsy, with 1.5 million users, is an example of an online education company that has found its success addressing the needs of a very segmented market by specializing in the instruction of craft building skills such as knitting, photography, and quilting. Sympoz, the parent company of Craftsy, has raised over $56 million, including a $35 million raise from private equity firm Adams Street Partners in December 2013.

Other companies have been just as successful in recent years in growing their user bases as well as in the private equity and venture capital realms. For example, online language startups have especially hit their strides. TutorGroup, an online English language learning platform, raised $100 million in venture funding from Alibaba, Temasek, and Qiming Venture Partners in February 2014. The San Francisco-based company intends to use the funding to expand its business in China, where the English language-learning market is expected to reach $21 billion in 2015. OpenEnglish, founded in 2008, provides online English language courses that combine instruction from native English speaking teachers with multi-media tutorials for a cost of $80 per month. OpenEnglish has expanded its target market from Latin America to the United States and elsewhere while amassing a user base of approximately 100,000 and raising over $120 million in venture capital funding, including a $65 million raising from Technology Crossover Ventures in April 2013.  Another success story is Lynda, whose platform helps individual, corporate and academic users learn business, creative, and software skills via online video tutorials produced by industry experts. In January 2013, Lynda closed a $103 million round with later stage VC firms Accel Partners, Spectrum Equity, and Meritech Capital Partners leading the investment.

One of the distinguishing characteristics that has set these and other successful online learning companies apart are their unique business models encompassing monetization and content creation. Specifically, many of these successful online learning companies focus on subscriptions, as opposed to a pay for each lesson, video, or tutorial system. Moreover, these successful companies have been able to hire professors and subject area experts who work in-house generating content for their platform. Private equity and venture capital firms have all invested heavily in these companies attracted largely by their commitment to generating professional-grade content in house and predictable subscription models.

It is also worth mentioning notable non-profit online learning companies within the context of the recent growth of private interest in the space. Companies such as the Saylor Foundation and Khan Academy, both 501(c)(3) organizations committed to expanding the reach of unconventional methods of education, are more concerned with providing access to education to those whom the traditional educational model leaves behind, in addition to those with the intellectual curiosity of learning for learning’s sake. Khan Academy founder Salman Khan aims for Khan Academy to provide “a free, world-class education to anyone, anywhere.” Non-profit firms such as these provide extensive competition with for-profit online learning companies, thus resulting in improved quality and accessibility of online learning services. Khan Academy, for example, has amassed a user base of over 10 million users around the world.

Yet, for all of the success that the above for-profit and non-profit online learning companies have achieved, we have also seen companies in recent years fail to gain significant scale with consumers. Some of these less successful companies employed a crowdsource business model, in which anyone can use the software platform sourced by the company to create, develop, and launch their own courses, leading to lower quality of content on the platform. Others, like Tutorspree, serve as intermediaries for the offline world, facilitating matches between tutors and students. Tutorspree, which was founded in 2011, shut down in September 2013 after having raised $1.8 million from venture capital firms, namely Sequoia.

Why are consumers less likely to use and growth investors more hesitant to invest in these crowdsource model companies? One reason is that these firms tend to require users to pay for every course, lesson, tutorial on its own, thus making them somewhat less user friendly. Also, these companies require no professional background or prior experience in order for an individual to create and host a course. Some users are thus rendered skeptical of the quality of the content they are consuming, but crowdsource model companies aim to mitigate these effects through word-of-mouth, peer-to-peer marketing techniques on behalf of those who had positive online learning experiences. Finally, these companies really only generate revenue when the course / tutorial instructors make money from users and keep coming back creating new courses or expanding the reach of their current educational offerings. This is unlike the firms making use of the subscription-based, in house content model, wherein professors are hired and work directly for the firm to generate user content. Therefore, it appears that the relative lack of direct contact with end users and less tangible way of generating revenue are key factors in leading to the hesitancy on behalf of venture capitalists to invest in the crowdsource model.

Regardless of the varying degrees of success around certain models, the online learning industry is not going away. Traditional, physical colleges and universities are already beginning to adapt and incorporate facets of the online learning industry into their own business models, particularly in the form of MOOCs. Accredited and non-accredited online institutions are also embracing changes of their own in order to more effectively compete with traditional, physical colleges and universities and the influential newcomers of online learning companies.

A 2014 e-Learning survey tracking the online education world estimated the value of the industry to be $56.2 billion. Current forecasts based on recent trends project the online learning industry to grow 20% each year for the next five years. With such significant, sustainable expected growth, tremendous opportunities exist for growth investors in this space. The online learning industry will certainly be attracting the attention of venture capitalists, private equity firms, economists, and policymakers in the years to come.

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