Like tech stocks in general, edtech has taken a nosedive over the past six months or so. There have been stunning valuation declines, with brand name failures like Roblox—once acclaimed as the “future of education”—seeing half its stock value vanish in the past year and with investors predicting more tough times ahead for the company’s shareholders.
The news might lead you to think edtech’s future is marked by doom and gloom.
Responding to some of EdSurge’s coverage in the Biz newsletter, Atin Batra, founder and general partner at 27V, an early investor in companies like the livestream tutoring platform Fiveable, wanted to offer an alternative perspective. He reached out and agreed to answer some questions over a phone call and email. As he sees it, the valuation declines aren’t an ill-omen for the sector.
To Batra, the lesson of the pandemic was too optimistic to be darkened by the end of the “pandemic bump.” It showed the industry, Batra says, that consumers have become agreeable to purchasing edtech. And with universities and schools being given extra funds by the federal government, they'll likely invest in more edtech resources, he says.
EdSurge: You responded to a Biz newsletter covering the stark valuation declines in edtech by saying that you don’t think edtech will take as big a hit as it seems. Why is the doom and gloom attached to the valuation declines overhyped?
Atin Batra: Let me start by saying that the current public market meltdown has affected all industries, including education. Companies are down an average 30-50 percent from their 52-week highs. However, the cliche of “public markets are not the economy” holds just as true today as it did in the heady days of the 2020 V-shaped recovery, only in reverse this time around. While it may seem like the world is crashing around us, I see huge opportunities ahead.
There are two main reasons for optimism in the education technology sector specifically: the sustainability and evolution of business models and an abundance of talent.
The pandemic forced a reckoning for governments all over the world, who have been underspending on education for decades. Just in the U.S., the government set aside [about] $190 billion under the Elementary and Secondary School Emergency Relief (ESSER) aid package. This is a huge opportunity for companies focused on selling to districts and schools, as it will provide resources for trials leading into full-scale deployments once value has been proven.
Further, business models in edtech have evolved over the last couple of years.
Companies are increasingly selling directly to consumers—parents and students—and there is a growing body of best practices for founders to learn from as they build.
The tight labor market seems to be easing up. Every single day in May has been accompanied by an announcement from a tech company that’s laying off [about] 10 percent of their workforce to extend their runway. For operators, the opportunity cost of joining a startup vs. Big Tech is no longer as large as it used to be, thanks to shrinking public-market valuations.
While this is indeed a scary situation for those losing their jobs, it is perhaps the best opportunity in a decade for startups (across sectors) to hire exceptional talent at reasonable compensation levels.
How much of the edtech spending by parents is motivated by their concern over learning loss from COVID-19, causing them to shell out money to get at home what they don’t feel like they’re getting at school? And how does this factor into your optimism for the edtech sector?
A lot of edtech spending today stems from parents’ fear of learning loss.
Virtual schooling allowed parents an intimate glimpse into the state of our current education system. The realization that the system is inadequate and hasn’t changed since their own time in school forced many parents to take matters into their own hands, and supplement traditional schooling with external resources.
Selling educational products directly to consumers had already been gradually increasing, but exploded as a viable business model in the last two years. So while VCs previously saw only one path to success in education technology—selling directly to schools and universities—we’re now seeing an entirely new opportunity. And there are sufficient success stories to learn from. Founders are looking at Outschool, Duolingo, Quizlet and Byju’s and picking apart the pieces that apply to their own businesses.
The federal government is putting some money towards upgrading infrastructure in schools across the U.S. How much of that do VCs expect to find its way to edtech? And what sort of edtech companies is that most likely to help?
Frankly, nobody knows how much of that money will flow towards edtech.
However, here is what’s happening: district supervisors and school principals who refused to take calls from service providers three years ago are now actively calling to say, “We've got capital to deploy. We want to upgrade our systems. What products and solutions are there in the market?”
As much as $2,800 has been set aside per student in the United States.
There are two main types of companies that should thrive in this environment: those providing services for the administrators and those interfacing directly with the students to improve end-user experience.
Teachers are demoralized, burnt out and scraping to get by. Increasingly, they’re also quitting, creating opportunities for edtech companies to snap them up. In a way, is teacher flight actually good for edtech companies?
First off, I really wish we didn’t have such a thing as teacher flight. It’s detrimental to the cause of educating our next generation. I don’t blame our teachers, though. They’re being repeatedly thrust into situations akin to being on the frontlines, whether that be dealing with COVID-19 or school shootings like last week’s horrific tragedy.
For edtech companies, on the other hand, this situation is a huge boon.
They’re getting privileged access to a uniquely qualified talent pool. Frankly, I love backing teachers; they're the best at building edtech companies because they understand the gaps and issues firsthand, and have a true passion for supporting students.
Five of our portfolio companies are founded by ex-teachers, and I believe that their unique—yet relatable—experiences have led to their continued success. Just look at Fiveable, who’s helping students across the world create communities with virtual study rooms, or Aktiv Learning, who’s improving outcomes in STEM courses for university students.
What’s the ultimate outlook for edtech in the next year-plus? In other words, how should edtech be thinking about this period in the sector as they move forward?
When I think about this time period, I don't think it's doom and gloom at all. I actually think this will be an incredibly exciting time to build all kinds of businesses, especially education.
I've been telling all of my portfolio companies that they should be concerned if they are running low on cash since it’s going to be difficult to raise right now. But if they are smart enough and can cut down costs to be more frugal, they’ll come out of this in a much stronger position.
Essentially, they need to be able to get through the next 15 months. And once they do, they'll have all of these tailwinds—whether that's the business model or the availability of talent—that will sail them towards success.
For founders who are trying to weather the storm, my recommendation is they abide by the following three guidelines: (1) unit economics are crucial (2) cut early and cut deep, and (3) use the time to reset/build.
Lastly, you describe your edtech investing strategy as solution-focused. You find a question that needs answering, you’ve said, and then try to seek out solutions. What’s a problem that you’re looking to solve at the moment?
Exactly. The unique advantage of being a sector-focused investor, investing only in edtech and “future of work,” is that I’m constantly thinking about what those industries need. It enables me to create multiple micro-theses that I can then go looking through the market for solutions to.
Right now, actually, I’m thinking about how we can improve completion rates for MOOCs and online courses. As the economy goes through the impending downturn, our current workforce will look to upskill/reskill themselves so as to find better jobs. Most people will turn to online courses that are just not engaging enough by themselves.
The most common solution I’ve seen recently is either building cohort-based courses from scratch, or at the very least recreating a cohort for a MOOC. I personally don't think that’s the best solution, which is why I’m looking for another. I may have found one, and we’re digging into it right now.
