State of Edtech: How Money Shapes Tools and Schools

Since 2010, the U.S. K-12 edtech industry has seen a boom of venture investing in education technology. EdSurge has been “following the money” behind venture investments in U.S. K-12 edtech companies to understand the dollars--and their implications. Those investments are redefining the tools and curriculum available to schools, and will have an effect on teaching and learning -- eventually. Measurable “exits” and demonstrated outcomes for schools have been scarce so far. But here’s what we’re seeing:

Billions--with a but
$2.3 billion: Since 2010, more dollars have gone into venture-backed companies building tools for the U.S. education market in grades K-12 than ever before. But that’s only a portion of the dollars going into education worldwide. Adult learning, higher education (including startups that help students pay for school) and international investments (notably in China) are commanding even more of investors’ attention.

Seed companies dominate
Investing in seed companies has been a dominant theme of the first five years of this investment wave. “Seed” companies accounted for about half of the deals in the segment of the market aimed at K-12 U.S. education in 2015, compared to less than 30% across all venture capital.

“Ramen-style” startups  
Edtech companies win leaner support from their backers than other tech companies. Data from analyst firm CB Insights put the median seed deal for technology companies in 2015 at around $1.4 million, while EdSurge’s data suggests edtech seed rounds were closer to $900,000. This trend holds in the Series A round, where the median size in 2015 was around $5.4 million, compared to just $4 million in the K-12 education companies we track.

Investors watch dollars--and sense
Many of edtech’s early stage investments have been supported by angels, incubators and mission-aligned investors. But the education technology sector has also launched a notable second tier of investment organizations that focus on “social mission,” even as they watch the bottom line. These organizations typically either specialize in education or have verticals devoted to education. That makes them more demanding than other investors--they want both financial strength and evidence of social impact.  

There's money in schools
In a pivot from the 2011 era of investments that emphasized “free,” investors are hungry for companies that generate revenue. We saw the most investments in the “School operations” category, which includes data systems and other tools that help keep a school humming. This outpaces “teacher needs” and more than doubles “curriculum product” investments. More than 50 “school operations” companies received almost $740 million in investments from 2010 to 2015, including many of the larger funding rounds in edtech.

Tighter fundraising environment  
It’s getting harder to raise funding. K-12 edtech companies who raised Series A rounds in 2015 took a median of 540 days to move from seed/angel funding to that early stage round, which is at least 150 days (or five months) slower than in past years. With investors tightening their belts, edtech companies will need to cut costs and boost revenues to avoid failure.

Outcomes and myths
So far, significant financial outcomes have been scarce. Investors point to notable “exits” among higher ed companies--but few “wins” in K-12, even among acquisitions. Investors steeped in education say they are myth averse: They don’t believe in “silver bullets”; they’re not stalking “unicorns.” Historical data suggests that education technology companies may need more time to reach exits. But investors are betting that their frugal investing style paired with patience will produce valuable returns for them and for students.

State of Edtech: How Money Shapes Tools and Schools is available here.

This research is the second chapter in a series on the State of Edtech and is supported by AT&T through their signature education initiative AT&T Aspire.

Note: In this analysis EdSurge counts investments in 2010-2015 in U.S.-based technology companies (for-profit or non-profit) that improve education outcomes for K-12 learners. Other industry data comes from CB Insights.