Global Venture Capital Investments in Ed Tech Plummet After Mega Rounds Fall
A global decline in “mega rounds” helped drive a steep, year-over-year drop in venture capital funding into the ed-tech sector in the first quarter, new data shows.
Venture investments in ed tech were $1.1 billion in the first three months of the year, down 80 percent from $4.5 billion invested in the sector in Q1 2022, according to a report from market intelligence firm HolonIQ.
The first quarter’s weak results are in line with falling venture capital funding in the market overall, and likely indicate the “new normal” that’s ahead for the industry, the report says.
One of the major indicators that the trend is likely to stay is the lack of mega rounds in the quarter, meaning funding rounds in excess of $100 million. This was the first quarter since at least 2020 to not record a single deal over $100 million, according to HolonIQ. The industry saw 15 mega rounds in 2019, and double that amount in 2020. In 2021, that number jumped to 53, and came back down to 20 mega rounds in 2022.
These large venture funding rounds are a relatively new phenomena in the ed-tech space, and the drop off this quarter indicates the industry is coming down from its pandemic-driven highs, Patrick Brothers, co-CEO and co-founder of HolonIQ, said in an email.
“In many ways, mega rounds represent the VC market’s climax through the pandemic and collapse with the economic environment we find ourselves in 2023,” he said.
“Some will characterize this period as a one-off exuberant wave of funding, others will see it as a high-water mark that will resume once we fend of inflation and return the global economy to more normal circumstances.”
The ed-tech industry will likely see about $3.5 billion in venture investments in 2023, the report forecasted, which would be a drop of 67 percent from 2022 and 83 percent from 2021.
Tougher for Early-Stage Companies
It’s possible that some larger deals will pop up, as the year continues, but they’ll likely remain outliers, Brothers predicted.
“At this stage confidence remains low in the funding environment for the year ahead,” he said, adding he expects there will be some recovery, possibly through 2024.
It’s likely the constriction in venture funding will lead to fewer seed and Series A rounds, he said. The lack of early-stage funding will mean that fewer new companies will enter the market, especially because schools, universities, and governments are already “overwhelmed with the number of point solutions on the market,” he said, and looking to consolidate tools, not add on new ones.
The companies that did attract investments in the first quarter were ones focused less on the K-12 space and more on the postsecondary, upskilling, and educational financing space. Avanse Financial Services, an education-focused financial company, raised $98 million in growth equity, for example. Mentoring software company MentorcliQ raised $80 million in the quarter, and cybersecurity ed-tech firm Hack the Box snagged $55 million in a Series B round.
It’s important not to equate a drop in venture capital to a lack of faith in the ed-tech market overall, said Jim McVety, managing partner of First Step Advisors, which advises education companies.
I wouldn’t be too spooked by some of the investment community sitting on the sidelines. [Investors] are still out there. They’re still looking for good bets.Jim McVety, First Step Advisors
Venture capital investors, especially those who weren’t active in the education space before the pandemic, may be sitting on the sidelines at the moment, but there are still worthwhile companies to invest in, he said, and industry-focused investors looking for those opportunities.
“I wouldn’t be too spooked by some of the investment community sitting on the sidelines. [Investors] are still out there. They’re still looking for good bets,” he said.
What he does expect is that investors are going to look harder at companies’ fundamentals, including their customer lifecycle metrics, from the cost of acquisition per customer to their customer retention rates.
“It becomes less about the nice, shiny new thing that has the potential to transform education and more about ‘Is this thing demonstrating an impact and maintaining a sense of value for the long-term?’” he said.
Image by Getty
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