Ed-tech venture funding in the U.S. is settling back into to pre-pandemic levels, as the rush of capital recedes and industry investors return to business as usual, according to a new analysis from Reach Capital.

Investments in the sector totaled $2.8 billion in 2023, representing a 46 percent drop from the $5.2 billion invested in 2022 and a nearly 66 percent decrease from the record high of $8.2 billion in 2021, according to Reach Capital, an education-focused venture capital firm.

The report surveyed 218 deals in the U.S. ed-tech space, with information sourced from Pitchbook, Crunchbase, ETCH, and Reach Capital’s internal data.

While the drop from 2021 and 2022’s heights seems precipitous, investment totals in 2023 came in slightly higher than 2020, when $2.2 billion was invested in the space, and well above the sub-$2 billion figures seen before the pandemic, such as when $1.7 billion was invested in U.S. ed-tech across 2019.

The reduction in overall ed-tech investments also reflects a larger pullback on venture capital investments globally, as Pitchbook’s data show $345.7 billion in venture funds were invested across all sectors last year, down roughly 35 percent from from $531.4 billion in 2022 and $744.8 billion in 2021.

Much of the slowdown in investing can be tied to increased interest rates — compared to the low rates seen during the pandemic — and the timing of future cuts from the Federal Reserve remains unclear.

The largest ed-tech deal in Reach Capital’s analysis was Amplify’s $350 million Series C funding round — the amount was undisclosed when the round was first announced — that was led by Cox Enterprises and joined by Learn Capital, A Street and Emerson Collective. Amplify’s round was followed by development platform Replit’s $97 million Series B, payments platform ClassWallet’s $95 million growth round, and digital learning program HOMER’s $95 million Series D.

Ed-tech companies focused on the K-12 market largely led the list of the year’s top investments. That’s likely because investors have been more focused on organizations that sell to enterprise buyers, including school districts and schools, and they’ve been less interested in direct-to-consumer companies, said Tony Wan, Reach Capital’s head of platform.

“[School districts’] budgets are still more predictable, at least relative to selling directly to parents or families,” he said, as consumer savings levels have dropped, personal spending is slowing, and fewer people are educating kids at home than they were during the pandemic.

Companies that focus on helping school systems address some of their most pressing operational needs also stood out, he said, citing the example of substitute staffing company Swing Education’s raising $38 million in a Series C round. Another example from the current calendar year is Zum’s $140 million Series E, which is aimed at helping build out the company’s transportation platform and network of electric buses.

Larger Deals Less Common

Across all ed-tech deals, most fell into the seed or Series A stage category, including 87 seed and 55 Series A rounds. The sector saw just 14 Series B funding rounds and 12 in the Series C stage or beyond.

The breakdown is similar to the previous two years, as smaller deals tend to be more numerous than the larger mega deals. But Wan believes the industry is seeing an increase in activity at the earlier stages now due to the rise of tools powered by generative artificial intelligence technology and the ability to help startups get off the ground with minimal resources.

“Generative AI makes it easier to build a prototype, ship it out, and test your product,” he said. “That’s been a really big factor in a lot of the optimism [behind] early-stage deals.”

At the same time, fundraising efforts have stalled for many larger companies in the ed-tech space that would normally be on a path to raise a larger Series B or higher round, Wan said. Those startups are often treading water because they previously raised capital at high valuations, and they are now struggling to bring in enough customers and revenue to justify the high price tag for investors.

Generative AI makes it easier to build a prototype, ship it out, and test your product. That’s been a really big factor in a lot of the optimism [behind] early-stage deals.Tony Wan, Head of Platform, Reach Capital

“Because it’s been a struggle for many of them to grow into their pandemic-era valuations, we’ve seen a lot of later, growth-stage investors that are higher up the food chain just take a pause and wait it out, at least for time being,” Wan said.

In the Reach Capital analysis, Wan found that ed-tech companies that are largely seen as AI-driven ed-tech companies — such as those that offer language learning tutors, course-authoring assistance or auto graders — raised slightly higher amounts of funding compared to overall average funding rounds.

AI companies raised those funds at significantly higher pre-money valuations, however. The average Series A ed-tech deal size was $10 million in 2023, the same average deal size that AI ed-tech companies saw when looked at separately in their own category. When raising the funds, the AI companies had an average value of $79.8 million, compared to $46.8 million across all ed-tech companies in the analysis.

As AI becomes an increasing part of many ed-tech organizations’ products and services, Wan said, it’s likely the delineation between AI and non-AI companies will be hard to maintain in the years ahead.

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Image by Getty.

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