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Venture Capital investment in Education

By
Ben Armstrong
January 31, 2022

I spent a lot of time thinking about education in 2021 and not just because my oldest child completed high school and is contemplating studying at University, but also because when I started in venture, a decade ago, the education market was my first focus. 

Education is a market where everyone has an opinion. We’ve all sampled what the formal education system has to offer, and have been formed by it over many years. 

It’s also a very significant market locally and internationally with steady growth (~4% yr/yr) to approximately ~US$6T in 2021. Governments spend ~5% of their budgets on education according to UNESCO amounting to over $114B a year in Australia alone. Digital expenditure (including software and hardware as well as digital services) currently represents ~3.6% of all education expenditure but is predicted to grow to 5.2% (or USD$404B) by 2025. 

There is so much room for digital transformation of the sector!


The delivery of education has been impacted by Covid, however overall spending in the sector has held up well. 

Opportunities

Solving any of the problems in the education market (see Addendum: Understanding Education Markets, below) will result in a large addressable market.

I see some obvious specific short to medium term opportunities in the education market:

  • Financing for education and degrees (eg like SoFi, Lambda school, TradeUp in the US, EdStart in Australia). 
  • Better forms of traditional vocational education that leverage online delivery to provide high quality outcomes and help build connections with future employers (eg A Cloud Guru).
  • The ordering and representation of knowledge that enables object reuse, interaction, building and experimentation particularly in a digital world (eg JigSpace).
  • Using digital simulation and virtual training to improve practical and on the job training so students learn from best practice (eg Oscer.ai for medical education or JigSpace for training with medical equipment or complex machinery).
  • Further digitising traditional low tech / in person educational based activities including using automation to provide continuous assessment, marking, anti-cheating and proctoring (eg Cadmus and Turnitin).

Education Unicorns

I remember being asked whether there were any venture backed unicorns in Education and at the time there was one. Now there are 32, mostly out of large domestic markets like the US, China and India,. Some predict there will be over 100 by 2025. Australia has its own educational unicorn in Go1, while A Cloud Guru achieved a $2B+ exit, with $110m revenue, in only 6 years. We have proved we can succeed from Australia - now it is up to us to consolidate that success.

Unlike most venture capital markets, EdTech is unusual in that investment dollars in China and India are disproportionately larger than in other VC backed sectors (note in 2021 investment into China collapsed due to policy changes). Clearly education plays an important role in the aspirations of developing countries that are rapidly attempting to develop their economies and capabilities. 

What is perhaps not surprising, is that most of the current unicorns operate as supplementary services to the formal education system rather than seek to replace existing educational institutions or norms. They either assist with additional “step up” learning (eg tutoring, exam preparation or language learning eg ByJu’s, Yuanfudao, Zuoyebang, VIPKid, Unacademy) or directly seek to teach vocational skills (eg Go1, BetterUp, Articulate, Andela). 

There are attempts to challenge existing educational norms like The Thiel Fellowship which has had some success in diverting students from traditional classrooms. Most however rely on Government funding and so follow the standard curriculum. 

I suspect there are bigger opportunities for those that are prepared to take on a long term game, are well funded and can prove a better ROI for parents than the traditional educational path. Such a path will have significant challenges including societal acceptance, securing funding and proving they don’t cause unintended side effects for learners.

Investments

Personally I have made several investments in these themes where venture backed startups are experimenting with new models of teaching young learners and supporting pre-school education (eg Wonderschool), financial inclusion for learning to code in South America (Henry) and cohort based learning (eg Kurios) which are showing some pleasing results.

Closer to home, I have a handful of investments touching on the education sector (including Oscer.ai (through Archangel) and Jigspace mentioned above). I’ve also missed a large number that have unfortunately been impacted by Covid, and the regulations of Government both here and overseas. 

Education might not have the same explosive growth as crypto, fintech and general SaaS markets but the direct to consumer model gives me some hope of short term disruption and growth opportunities. Edtech is, in itself, a worthy pursuit but I’m also hoping it can make an excellent investment in the right company.

Further actions and reading

If you’ve found this article useful perhaps think about how you can contribute to the success of the Australian EdTech ecosystem. Perhaps you can become an early adopter of a new solution, perhaps you want to support the sector directly through investment or perhaps you even want to create one of these new EdTech businesses or just work at one and attempt to create a better system. I’ve included below some further resources which you might find useful to increase your knowledge of the sector.

Internationally there are over 21 listed education companies with $1B market cap (including DuoLingo, Coursera, Udemy and Kahoot) and in Australia over 15 listed education companies (including IDP which is valued at over $9B).

HolonIQ recently published its 2021 EdTech wrap and also publishes a great round up of their top 1000 EdTech companies and separate reports on geographies eg their top 200 North American EdTech companies and their top 50 Australian and New Zealand edtech companies (ie the top 10% they are aware of) which is worth reading to understand more and if you want to learn more about the space. 

If you want to learn more, feel free to start a conversation below, follow along on twitter or LinkedIn, or for the adventurous (and sophisticated investors) consider joining our Archangel 2022 fund.

Addendum: Understanding Education Markets

The formal education system applies a mass production education framework with periodic assessment and measurement to assess progress and measure readiness to attain higher levels of education or vocational study.

This all sounds well and good but how should we rate the effectiveness of education? Should it be measured by the satisfaction of parents? Of students? Is it the number of PhD students studying hard sciences? Is it the number of students that get above a certain standard in a particular subject? Is it how well our students perform vs their international peers? Is it measured post education in the number of cutting edge research pieces written or Nobel prizes won? Is it measured in the number of discoveries, inventions or even successful businesses created? Should we focus more on how education prepares people for the workforce or to learn life-long learning skills to navigate a more rapidly changing economy?

Part of why I think we have endless arguments about education, research and value for money is we aren’t clear what we are optimising for in education. Maybe that is even a good thing. The world requires a range of skills, talents and experiences and not cookie cutter thinkers.

Educational Market Problems

There are a number of obvious limitations to the education market, and like when I completed my education decades ago, they still remain. The barriers to change must therefore be significant.

So what is wrong with the education system? Let me flip the question and instead ask how can the education system be improved? Can we create the same effect more cheaply - today a “top” private school education can cost ~$30K a year and with inflation may soon cost $500K for the education of a child? Can we train people more quickly eg reduce the time to get a degree or allow learners to learn at their own pace rather than some arbitrary definition of what people should know in a particular subject at a particular age? Can we provide a better experience for learners that is less stressful and better directs them towards pursuits they will enjoy and excel at? Can we improve access to education and perhaps increase social mobility and our local talent pool? Why is the standard of education we receive dictated by where we live (or even which country we live in) in this globalised world? In these questions are the seeds of future education unicorns.

In addition to being a large market, what is fascinating about the education market is: its mix of public and private funding; it is compulsory to some degree; it has generally low levels of technology adoption and automation; and it is overlaid with societal norms which tie in to status and friendship groups. In the tertiary market, education edges into job training. Vocational education fills a gap for bridging the skills required to perform a certain role including retraining. All these characteristics can make it challenging for a venture capital backed business to cut through and attain a sizable piece of education expenditure.

Digging a little bit further there are a few interesting problems:

  • A lot of money in traditional education goes into infrastructure (buildings and land)
  • It is hard to measure outputs vs inputs - are “good” schools just good at attracting top students or are they good at developing talent?
  • Most language learning at school doesn’t result in a student achieving conversational level language skills. 
  • Most students have little idea of what they want to do when they enter the workforce but need to choose subjects required for that study. Also, in the workforce there is less requirement to undertake a particular area of study to be considered for a senior (or junior) role in that organisation.
  • Teachers spend a lot of time on repetitive tasks (eg marking) and are not selected primarily on their ability to impart knowledge or inspire.
  • The concept of more education leading to higher overall income is breaking down; in areas of high demand (and low supply) bachelor graduate student incomes can exceed that of PhDs and others in more structured (and traditional) career paths. Further there is a movement that entrepreneurship is the new MBA, teaching practical skills and gaining experience to the detriment of formal and more theoretical learning modalities.
  • A lot of corporate education is uninspiring, consisting of tick the box activities and leads nowhere.
  • The boundaries between career paths are breaking down and the rate at which people change careers is increasing, as innovation continues the disruption of various industries.
  • The cost of education keeps going up (and used to comfortably exceed inflation before Covid). In Australia it isn’t quite as bad as an issue in the US where student loans amount to US$1.6T (or AUD$2,210B) with 43 million federal Government borrowers.


Disclosure: I’m a founder of Archangel VC (an early stage Australian VC fund) and also have personal investments in some of the companies mentioned in this article, or exposure through investing and mentoring through Startmate. The observations and thoughts above are my own but feel free to call me out if you think I have something wrong.

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