VCJ Analysis: VCs are Headed Back to School

Summer is just around the corner, but chances are good that VCs will remain interested in school even when the weather warms up. At least as far as the education investment sector is concerned.

Although few education startups have swayed the masses, VCs are backing tech companies focused on the sector, especially those that incorporate social and digital media, game dynamics and performance tracking.

Investors in the past few years have logged respectable returns—and even some stellar multiples—from the acquisitions of online education service providers, as well as the IPOs of China-based school operators. They’ve also made a lot of losing bets, including some big busts from the dot-com era and, more recently, smaller-scale startups that failed to gain traction.

Meanwhile, some of their largest wagers—such as textbook retailer Chegg, which has raised $215 million to date—are still sitting in venture portfolios.

As Venture Capital Journal recently reported, over the past few quarters, investors have been writing frequent and often large checks for education-focused startups, with an eye for businesses that incorporate social and digital media, game dynamics and technology-enabled performance tracking. While in the past, education entrepreneurs fretted about rolling out technologies too early for mass adoption, investors say there are reasons to think this time is different.

“For the first time we really have students from pre-K through college who have grown up around the Internet their whole lives,” Rob Stavis, a partner at Bessemer Venture Partners, tells VCJ.

Bessemer has invested in four education technology companies, including Knewton, Piazza and Tutor.com 2tor Inc.

“[Today's students] don’t turn their noses up at online education like previous generations,” Stavis says. “They understand that it can deliver better engagement and higher quality.”

VCJ Senior Editor Joanna Glasner and contributor Tom Stein reported that in the past year, dozens of startups have raised funding. Edmodo, a kind of social network for education, landed $15 million from Greylock Partners and Benchmark Capital. Piazza, an online hub for sharing questions and answers between classmates, secured $6 million in Series A funding from Bessemer. Coursekit, a tool that lets teachers build quasi social networks around individual courses, scored $5 million in a funding round led by Social+Capital Partnership. And Knewton, an adaptive learning startup, closed a $33 million round led by The Founders Fund.

It’s not hard to see what has attracted them to the market. Total annual U.S. education expenditure has been estimated at about $1.3 trillion, with K-12 education accounting for close to half of the spending, according to a September report from the White House’s Council of Economic Advisors.

VCJ subscribers can read more about how VCs are interested in education by clicking here. The story also includes tables on education-related deals, investments in textbook companies and notable exits.

In addition, Andrew D’Souza, chief revenue officer of Top Hat Monocle, wrote a perspective called “The Consumerization of Education.”

If you’re not a VCJ subscriber, contact my sales colleague Greg Winterton at greg.winterton@thomsonreuters.com.

If you want to talk more about education or other hot VC investment trends, send me an email at alastair.goldfisher@thomsonreuters.com or contact me on Twitter at @agoldfisher.

Photo of smiling child in graduate suit from Shuitterstock.

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1 Comment

  • But of the startups you mentioned, who is actually going to make money for their investors?

    Chegg – still TBD. They need to exit soon.
    Knewton – got beaten to the punch by other companies in their space. They have raised far too much capital.
    Piazza – what is their revenue model?

    The fact of the matter is that US K-12 consumers are not willing to pay very much if at all. The real education investments that make money are all still enterprise focused. The realities of the market are that “free” is not a sustainable model in education because advertising is loathed by the education community who is on the other hand unwilling to pay for anything that isn’t (a) hardware or (b) a textbook.

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