A Land Without Unicorns

Before you read this article, place the following words into your favorite search engine: “EdTech Unicorn.”  Here’s a spoiler: You won’t be overwhelmed by the results.

In 2016 no EdTech companies filed initial public offerings in major U.S. stock markets. According to CB Insights, in the past five years, only five venture capital-backed EdTech companies have gone public. You may argue that the study’s definition of EdTech is too narrow. You can as well point to a few notable exits-via-acquisition, like Lynda.com or Achieve 3000. These notable examples are, however, the exceptions that prove the rule. When one examines the readily available market data, EdTech lags far behind its sister industries when it comes to investor returns, by any measure.

Putting aside exits for a moment, privately held EdTech company valuations are as well placed far behind those of other industries. Even the casual observer can’t help hearing about the myriad of tech companies whose valuations exceed the once-elusive billion-dollar mark. For the uninitiated, those companies are commonly referred to as unicorns. Uber, Airbnb, Snapchat, Pinterest, WeWork and Palantir constitute a few well-known examples. While edtech has a short list of potential home runs, including Pluralsight and Udacity, one would be hard pressed to call this small group of almost-unicorns a herd. Indeed, the regularly updated CB Insights Unicorn Companies Research list includes but a single edtech entry, Age of Learning, the purveyors of ABC Mouse, a popular early childhood learning platform.

Achieving Scale Is the Hardest Thing

Why has the EdTech industry failed to produce its fair share of unicorns? A not insubstantial amount of digital ink has been spilled in trying to answer this question. One argument that’s hard to advance is that edtech hasn’t enjoyed its fair share of funding. Since 2010, according to EdSurge, private investors have plowed $2.3 billion into K12 startups in the U.S. This figure doesn’t include international investment, nor does it include dollars dedicated to higher education or corporate learning. The capital is available, but to date it has seldom been used toward achieving the results desired by those who dole it out.

Academics, financial analysts and tech bloggers have advanced varied rationales as to why the EdTech industry has failed to produce more billion-dollar companies. Here are three popular theories:

1)      Product Performance – In education the cost of failure is high. Kids don’t get a second chance at second grade. And companies that don’t provide improved learning outcomes (as a low barrier) in their first time round in the market often don’t get a second chance to improve their offering and compete with incumbents.

2)      Bureaucracy – Education has regulation. Lots of regulation. In the U.S. and Europe there are privacy laws tied to student information and educational records. There are also complicated decision-making processes across the industry, with government purchasers and complicated RFP processes to navigate. Often, just finding the purchaser is a chore.

3)      Education Buyers Cycles – Most institutions in K12 and Higher Ed only pay their distributors once or twice per year. While the content market is $6 billion just in the U.S., it’s hard to break in. If you miss your shot, the next cycle of buying can be a long way off.

Each of these three challenges, germane to EdTech companies, has a consistent thread. They create additional barriers to a company’s ability to scale sales. Indeed, when EdSurge polled investors for their Special Report: The State of Edtech 2016 as to the most important performance indicators, the top two responses were revenue and revenue growth. In order to create a product or service that can generate the revenue needed to substantiate a billion-dollar valuation, scaled growth is critical.

Of Baby Unicorns and Untapped Wellsprings

It’s been hard to build and scale an EdTech unicorn over the past five years. That said, our education systems, and more broadly our learning industries as currently constituted, remain ripe for disruption. Allow me to present two alternative theories as to where we might soon see the dawn of EdTech’s unicorn age. First, there exists a still untapped market subsector or two. Second, rather than a small amount of singular magical beasts, we might sooner see multiple baby-unicorns driving investor returns and change in learning outcomes.

Let’s begin with the second idea, the baby-unicorn theory. In the past decade, we have seen an increase in EdTech companies that boast significant revenues. In 2007, Larry Berger, founder and former CEO of Wireless Generation, penned an impactful white paper titled K12 Entry: Slow Entry, Distant Exit. Berger opened the paper with the following description: “We operate in a $500 billion market, but the dollars are scattered among 15,000 school districts, few of which are large enough to see from mid-air. We also play this game to distract ourselves from the thought that, while we are flying over these districts, the vast sales forces of the big publishers are already on the ground in them, meeting the Deputy Superintendent at the Rotary Club, luring away the last few discretionary dollars she has.” Berger’s experience running an EdTech startup (Wireless Generation was a software company aimed at providing teachers with diagnostic tools to track student progress; following its sale to NewsCorp, its name was changed to Amplify) was not uncommon ten years ago.

In the same paper, Berger notes that 85% of the K12 content market is dominated by a hard-to-crack oligarchy of publishers. That reality is now a relic of the past. Edtech can boast multiple companies generating over $100 million in revenue that have grown up over the past ten years. While the publishing companies still dominate the K12 market, the percentages have been severely diminished. Much of what has been chipped away has come at the hands of upstarts in the market, who have either crossed the $100 million revenue barrier or are poised to in the coming years. Exhaustive research on the topic was completed by Christopher Nyren, founder of Educated Ventures. Tackling the subject from the standpoint of valuation, he moves the definition of an EdTech unicorn down to $500 million. Despite the challenges noted above, a swath of companies has emerged with economics more in line with these two lines of demarcation; no less than 30 have exited with such profiles since 2008.

The second theory posits that there remain untapped subsectors of EdTech, that present entrepreneurs and investors with new opportunity for massively valuable companies. Once again, no small amount of ink has been spilled in an attempt to identify these prospects. I can point to two which I’ve tracked for a number of years, and which I believe can produce scaled revenues. Each one warrants its own treatment, with a more sincere substantiation based on macroeconomic data and market trends. But in the interest of space (and the reader’s by now tried attention span), allow me to just note a single subsector from which I believe the next crop of EdTech unicorns may emerge.

This subsector is alternative forms of professional skills training. We have seen many code academies and boot camps pop up over the past few years, most aimed at teaching software skills. This concept extends to many additional forms of job-specific learning, provided that the host institutions can offer strong job prospects for their students. The overwhelming majority of money that passes through the education industry is tied to registration dollars. I anticipate that there will be entrepreneurs who find a way to tap into this opportunity, with novel approaches to accreditation and vocational prep.

Professional skills is a single subsector I believe to be rife with opportunity. That said, others have argued that student information systems, personalized learning platforms, even new approaches to STEM content, all have the economic factors necessary to produce a few unicorns. Time will tell.