Investors See Promise in Ed-Tech Sector Despite Challenges

Associate Editor

New York, N.Y.

The ed-tech sector continues to attract investor interest despite questions about where it’s headed, how much its products are being used, and how effective they are.

Those themes resonated Thursday as about 200 company leaders gathered at The Princeton Club here to talk about opportunities in the U.S. and abroad at the Education Business Forum, a gathering sponsored by the Software & Information Industry Association’s ed-tech practice.

Over the past two years, about $6 billion in venture and growth investments—an unprecedented figure—have been made in education technologies, which represents 10 times what was invested through the first decade of the millennium, said Victor Hu, a managing director of Goldman Sachs who is the global head of education technology and knowledge services.

“Are we in a new renaissance of education technology investment and company formation, or is this—as many suspect and fear—just a flash in the pan?” he asked.

To explore that question, Hu shared observations about the dramatic growth in both the number and types of investors interested in this ed-tech, which attracted almost $3.5 billion last year at a time when generally tighter conditions prevailed in the venture capital market around the world.

Strategic investors are no longer just publishers or content companies. Ed-tech is of interest to media companies in the U.S. and Europe and internet companies in Asia, Hu said.

Launching an ed-tech company costs one-tenth of 1 percent less than it did 15 years ago, which is a factor in the dramatic growth of the number of ed-tech companies on the landscape, he pointed out.

But Mike Fisher, an associate director at London-based Futuresource Consulting, said the positive stories about investment, innovation, and the creation of startups must be weighed against studies that are “pretty scathing” in terms of its efficacy for students’ academic outcomes.

Another issue is fragmentation of the industry, as many school districts have student information and learning management systems, as well as data systems focused on human resources and finance, he said.

“We feel a divide is developing between the pace the industry is moving at, and the pace end users are moving at,” said Fisher, noting that implementation and usage of ed-tech are occurring at a lower rate than the acquisition rate.

Data Analytics, Strong Demand, Big Promise

To Fisher, fragmentation in the U.S. market is expected to be around for some time, “with a battle for scalability and market leadership” over the next three years.

While K-12 companies comprise only one segment of the expanding industry—which also serves the preschool set, higher education and adult learners—it’s one of the most challenging areas. The sales cycle for K-12 is “long and torturous,” Hu said, but the opportunity to serve what he called “the golden triangle”—parents, educators and students—with one platform is appealing to investors.

“We know schools are adopting learning platforms at a higher rate, and teachers are using digital and learning apps at a higher rate,” Hu said. Investors are seeing “enormous potential in mapping out the networks of various stakeholders,” by creating the next generation K-12 platform that connects them all, he added.

Combining data analytics with teacher tools, homework, messaging, collaboration and social learning, while allowing other vendors to connect to teachers, parents and the school will be key, he said.

A few companies selling leading learning management systems are making inroads in the U.S. and abroad with their products, gains that show investors that K-12 offers opportunities despite the regulation and fragmentation in the market in general.

“I, for one, am long-term optimistic that the application of AI [artificial intelligence] in the education space, and real personalized learning at scale” will continue to propel ed tech, Hu said, and that capital markets will recognize, “you can still do well by doing good.”

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