Alex Lykken April 16, 2014
It’s good to be an education startup these days.
PitchBook data show steep increases in deal activity and capital invested in U.S.-based education startups. 2013 was a watershed year in terms of VC capital raised, totaling $739 million. That mountain of money was almost 38% higher than 2012 levels ($538 million), which was a strong year itself. In fact, since 2006, when $69 million was invested across 20 financings, capital invested in the education industry has increased every single year.
Can the party keep going? Our newly released 2Q 2014 U.S. Venture Industry Report hints that it might. Investors funneled $295 million into education startups in 1Q 2014, which already puts this year ahead of the $287 million raised in all of 2010, as the graph above indicates. If the pace were to continue, a record $1.2 billion would end up in U.S.-based education startups by year-end.
It would take a few outsized financings to get there, but investors are getting more comfortable writing large checks to the industry these days, suggesting a maturing relationship between education startups and VC firms convinced of the disruption opportunities in the sector. Coursera, which offers courses from top-ranked universities online for free, raised a $63 million Series B round in late 2013 at a $304 million pre-money valuation, a sizable jump from its $22 million Series A in 2012, which was raised at a $25.4 million pre-money valuation. Lynda.com, an online video tutorial platform, scored big with its $103 million Series A round in January 2013, its first institutional financing, at a $353.4 million pre-money valuation. Seven other education startups raised VC money in 2013 or 2014 at valuations north of $100 million.
The higher education industry is ripe for disruption over the next several years. One clear trend that has emerged recently is a push toward making the college experience more valuable for students once they graduate.
“College hasn’t changed since the time of Aristotle, but over the next decade our idea of college is going to go away,” said Jason Stoffer, partner at Maveron, in a recent interview with PitchBook. The importance of the bachelor’s degree degree hasn’t been eliminated, but today “the academic world is decoupled from the employer world … I think what we’re going to see is this work backwards, where what’s going to win are colleges or alternative investments … where the education or training leads to a tangible job outcome.”
More bluntly, higher education isn’t always worth it these days. Bolstering Stoffer’s point, a recent report from theNational Student Clearinghouse showed a second consecutive yearly decline in overall college enrollment in 2013. Part of that decline may be due to the recession, not to mention nauseatingly high tuition rates, prompting more and more prospective students to delay or forego college altogether. It may also reflect some disillusionment with the current model, particularly if you ask Millennials who have had to crash in their parents’ basements.
Higher education is ripe for change in the technology realm, as well, and VC investors are betting that education technology will have a profitable impact on the industry. “The investing community believes that the Internet is hitting education, that education is having its Internet moment,” Jose Ferreira, founder of the interactive-learning company Knewton, told The Chronicle of Higher Education (CHE) last year.
Knewton, which personalizes digital courses to make studying more effective, scored a $33 million Series D financing in 2011 at a healthy $147 million valuation, as well as a subsequent $51 million round in December last year.
It’s also worth noting that the 2009 recession didn’t hurt VC investment in the education industry; firms completed more financings (53) and committed more capital ($251 million) in the industry in 2009 than in 2008, which recorded 48 financings totaling $234 million. What’s surprising, though, is the sense that the increased focus on education technology these days doesn’t really resemble the last time it happened during the dot-com bubble. Rob Go, a partner at Nextview Ventures, noted in the CHE piece that colleges are much more connected and cloud-based these days, making it easier for education startups to get a foothold in the market.
Implementing all those promising ed-tech startups into the system “was way more challenging” 10 years ago.
Featured image courtesy of Wikimedia Commons user Tom Murphy VII.