VCs get smart on edtech: VCJ

Here is a startling statistic. As of mid-August, venture capitalists have invested more than $977 million worldwide in education startups year-to-date.

Startling because it is well above the $842 million for all of last year and likely by year’s end the figure will exceed the $1.05 billion invested in the sector in 2012, based on data from Thomson Reuters and news reports.

Remarkable as well because so far edtech hasn’t proven itself. The space is a bit like cleantech. Only a relatively few companies have scaled to market leaders and fewer still found attractive exits, though the exit pace seems to be improving.

So how can capital climb when returns remain lackluster? It boils down to this: There is a growing belief the landscape is changing. Education has been a fragmented market and schools notoriously are difficult to sell to. Edtech investing means following a long-term strategy. But VCs appear to have a growing conviction disruption is coming quickly and in a big way.

“If you think about the reinvention of learning, be it through the unbundling of the classroom, be it through the creation of new schools, be it through the creation of new disciplines, then this is huge,” said Renata Streit Quintini, a general partner at Felicis Ventures, who is voicing a common belief among investors. “The gap between the old education model and what people are interested in—the skills for the modern world—is a big gap. People are reinventing schools. That is a really big opportunity.”

This expected dislocation plays well into venture’s hands. The tools that will remake education are tools VCs know well: SaaS software, cloud computing, online media, mobile distribution, big data analytics and social networks.

As more computers, iPads and smartphones enter the classroom, software and content distribution becomes easier. As cloud becomes more ubiquitous, old infrastructure is swept away and a consummerization of education is likely to unfold as it is in the enterprise. One can even imagine the Oculus goggles turning into educational tools.

What’s encouraging is that school districts finally appear to be showing greater interest in new technology. Education has been a laggard in its adoption and it has not yet driven down costs. But schools have recovered from the 2008 economic downswing and have dedicated budgets for new purchases with buyers more accepting of the change it will bring.

Entrepreneurs see this and are responding with a greater supply of investment opportunities.

“We’re seeing a general increase in interest in the sector and more fundable opportunities, for sure,” said Mitchell Kapor, a partner at the seed-stage social-impact investor Kapor Capital.

All this is changing the way investors think about edtech. A couple of years ago, excitement over the prospects of massive open online courses, or MOOCs, led firms that once shunned the space to begin putting money to work in search of the iTunes of education.

Now a greater pragmatism is settling in. Investors are looking more thoughtfully at opportunities in professional education, back-office software, analytics and credentialing systems linked to corporate recruiting.

A greater realism is taking shape regarding exit markets, too. Expectations initially were high. They now seem to be recalibrating. Earlier this year, 2U launched a moderately successful IPO. The company’s shares floated at $13 and at press time traded at $15.79.

“We think of 2U as an good example of a company that is paving the way for demonstrating that there can be companies in the space that both achieve scale and start to demonstrate measurable successes,” said Rob Stavis, a partner at Bessemer Venture Partners and a 2U board member.

This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story and an accompanying table of edtech venture investments from 2011 through 2014 by clicking here. To subscribe to VCJ, click here for the Marketplace.

Photo illustration by Janet Yuen for VCJ.