EdTech investing The time is now

Education is the first principle in building a sustainable economy. Ray Dalio’s online series “The Changing World” makes this point with an impressively well researched and articulated piece on the ‘rise and decline of past leading empires that puts today’s economic, political, and policy situation into perspective of the big picture.’ Dalio establishes that investment in education is a precursor to the ascent of every empire in the last millennium and declines in education investment presages their decay. Dalio shows that the average empire lasts about 200 years and starts with outsized investment in education, leading to innovation which makes them competitive. When investments in education fall and innovation falters, the empire begins to decline.

Despite the importance of education, teaching has not transformed much since the late 18th century (for an entertaining look at the ‘history of education’ link here to see Sal Kahn and Michael Noer’s take). However, technology — especially the internet — is changing this paradigm. The current crisis caused a cataclysmic shock that will transform education as we know it. In a matter of weeks, students have had to shift from physical classrooms to virtual ones, rapidly accelerating the digitization of education.

I spent 20 years in education as sales manager, then CEO, and, after a management buyout, owner of CDI (now Trox). Trox sells technology solutions to the North American education market and achieved scale by delivering the building blocks for the technological revolution in Education. Leading the company provided me with a front row seat to the sector’s struggle to innovate. I have since moved on and joined OMERS Growth Equity as an EdTech investor, looking for companies that will shape the future of education.

I believe investors are vastly undercapitalizing technological solutions for education (EdTech).

Consider that the size of the global market is nearly even to the market capitalization of publicly traded companies at $80 trillion to $90 trillion. Many industries have similar ratios, but for education this ratio stands at nearly 40 to 1 (a $6 trillion market with only $150 billion of market capitalization (Holon, IQ)). The main driver for these numbers is that most education is government sponsored, or at least heavily subsidized. Still, the proportion is outrageously low and begs the question as to whether governments can drive innovation in education and how private companies can play a role in driving modernization.

Overall spend on education worldwide increased from $2.8 trillion in 2000 to over $6 trillion in 2020 and is projected to top $10 trillion by 2030, and accelerating from there. Within that spend, the EdTech share will reach $341 billion by 2025, a two-fold increase since 2019 (Holon IQ). Venture capital investments in EdTech touched $8 billion in 2018 and are expected to grow by 11% yearly for the next ten years.

As some of these venture bets progress into their growth phase, astute growth capital investors will find opportunities to invest in future champions. Investors that take the plunge will find expansive white space for investment and in the process will realize outsized returns. All of this was true prior to the current crisis but will be more so as we emerge from it.

While the numbers above get investors’ attention, it is the disparity between overall spend and spend on EdTech that really stands out: in 2018, 2.6% of expenditures in education were on digital and online solutions. This is less than any other significant industry — only healthcare digital spend comes close at 5% (Flexera). Further, society is getting limited returns from education spend. Over the last 50 years, K12 and higher education (HE) spend increased dramatically while academic outcomes stagnated. Simultaneously, the world grew more digitally complex and students and employers alike increasingly complain that today’s education is not preparing graduates for the workforce of today or tomorrow.

Education is an unusual marketplace that muddies the basics: What is the product? Who is the vendor? Who are the customers, the employees or the owner? These questions are difficult to answer, and the opaque and political nature of some of the underlying forces can sour good investments. Further, not-for-profit (NFP) and ‘for free’ organizations are persistent competition to for-profit companies, since anything that benefits educational outcomes is socially desirable and attracts many NFPs. Finally, should we consider students as the ‘clients,’ (some consider students to be the clients whereas some consider them the product, and others potentially view teachers as clients in K12), many of today’s technology giants are willing and able to supply them with free products in the hope of creating customers for life, a somewhat unique aspect of education.

Many of these forces play similar roles in healthcare. There, however, the market succeeded in creating $5 trillion of market cap from healthcare opportunities, while creating only $150 billion in education. If equal, education should have reached around $3 trillion.

For years, people expected education to change “gradually then suddenly” (both Tim O’Reilly talking about online learning and Maria Spies, MD Holon IQ ). Spies further estimated that “the speed of digitization in education [would] overtake healthcare, due primarily to the build-up in capability over the past ten years.” Spies and O’Reilly independently made these predictions in January 2019, well before 1.5 billion students were locked out of their schools. In an unrehearsed and unprecedented fell swoop, practically every student in the world was directed home and students, teachers and institutions were suddenly rushed to adopt online solutions.

At a certain point, students and teachers will return to semi — and eventually normal physical settings, but education will remain altered. The current crisis didn’t just introduce changes, it accelerated them; changes occurred in days that would otherwise have taken years.

The need for better outcomes that keep pace with the changing world should drive innovation and will be strengthened by changing demographics. In India and China, the sheer growth in the numbers of K12 and HE students is unprecedented (WENR) and demand for education is far outstripping supply. The ubiquity of mobile devices and the increasing percentage of students connected to the internet could see Asia, and potentially Africa, leapfrog traditional education systems, skipping a blended environment and adopting fully digital platforms; not unlike the region’s widespread leap to cell phones without adopting widespread use of landlines first.

The implications for EdTech companies are significant, with hundreds of millions of students entering the ‘market’ every year without satisfactory resources. It is not surprising to find Indian and Chinese companies topping EdTech’s most valuable list with ByJu’s from India (online tutoring), Yuanfudao (online tutoring and live courses) and VIPKid (online English language classes) of China valued at more than $20 billion combined.

There are 1.5 billion students in the world today — by 2035, that number will nearly double. Even the massive Chinese economy cannot keep up with this growth and the increased demand for education and workplace training. Shifting students from high demographic growth countries (mostly India and China) into demographically depressed higher education cohorts in Western countries satiates some of this demand, but not nearly enough to satisfy it (ApplyBoard, a Canadian Unicorn is enabling these movements, while MPower is helping finance foreign students. Both are technology companies).

Providing education to growing populations is best achieved with technology. Established brands need technology to meet demand and to expand their offering to vast and quickly growing markets. New brands and certifications will emerge in the next 15 years, especially if they incorporate technology at the core of their value proposition. The ubiquity of English in higher education and business makes it easier for EdTech enabled solutions to span across geographies and cultures. The Western world has the most respected educational institutions but the growth in demand is coming from the East. The movement of students between geographies will therefore continue to be an interesting theme in education.

Unlike other sectors, EdTech is dominated by educators and technologists, more than entrepreneurs and operators. The scarcity of professional and scalable sales and marketing organizations to support even the best innovations and products is pronounced. Therefore investors who can advise and support go-to-market strategies including into government sponsored education (still by far the largest part of the market) will likely do well, while doing good.

Where are innovations most likely to succeed in education? Some categories are obvious, such as digitized curriculums and overall education platforms, which are essential in today’s crisis and will continue to be a ‘great to have’ in the future. Interestingly, there is a rare case where the cheaper solution is also the better solution. Why deploy dozens of different textbooks teaching kids sixth grade math when ‘best of’, adaptable, digitized multimedia content and assessment can be developed once and deployed forever to accomplish a better educational outcome? Companies like Newsela are proving, at scale, what could be and should be when we think about rich content in K-12, while Teachers pay teachers found a way to unleash the creativity and drive of individual teachers to create and share course materials.

Teachers and students are getting younger and are more likely to be digitally native each passing year thereby removing barriers to technology adoption while flooding schools with clients and employees (who is who when we think about education?) who expect, indeed demand, these solutions. (Over 40% of teachers in the US entered the work force after the year 2000 — NCES.)

Gamification, AR and VR, robotics, AI (especially as it relates to assessment and delivery of individualized content), eSports in K-12 and HE, professional development and online testing and assessment are other obvious categories. AR/VR, robotic, and AI spending in education is expected to triple or more in the next five years.

The days when students were taught at a scheduled time and at a specific location are over. One-size fits all school start times, the September through June school year and having to sit at a desk, might all disappear. Students of the future will be taught, assessed and tested where and when they live (with all the security issues that emanate from that).

Knowledge is becoming common and attention is becoming scarce. Education is moving from being supply and institution-centric to being demand and student-centric. The student’s path to becoming educated is no longer only focused on the classroom, and educators and guardians have new tools to help guide this journey. Already, companies like Securly are helping stakeholders and institutions direct and manage a student’s online education journey.

Knowledge used to be a tightly guarded and rarely shared currency that bestowed influence and riches on its owners. In the past, you had to belong to the church or the gentry to access books and knowledge. The growth in the sheer number of people, academic and economic advances, individuals’ ability to share knowledge freely and the ubiquitous presence of the internet devalued this currency.

Nowadays, people share most knowledge freely and being heard above the noise is difficult. Where knowledge was once valued, attention spans are now valued more, and one is willing to exchange knowledge for eyeballs and ears. In this new world, the medium becomes as important — if not more so — than the content: You pay for the delivery method when you buy a bottle of water, but the water is free. The same might be the case with future education platforms and content, especially flat analog content. Learning management systems (LMS), especially in corporate education where clients are looking to spruce up tedious information for employees, are showing how this can be done (Axonify, a leading corporate learning platform, is using micro leaning and gamification to achieve exactly that with impressive results).

Unique challenges still exist in education: The pervasive presence of government presents political risk and fast-shifting directions. Teachers and professors are the strongest voice for good, but at times can be an impediment to innovation and adoption of new technologies, especially if it hazards pay or tenure and/or requires a departure from customs.

Given all the above, we conclude that EdTech will grow quickly and significantly in the next 15+ years. National and international champions will be created and multi-billion market leaders in a variety of sub-sectors will emerge especially as it relates to content, delivery, professional development and certification, VR/AR, testing and assessment, AI, gamification, and eSports. Security and identification will be required for all of these, but this is an area where specialization for education might not be as necessary and mainstream commercial solutions might be viable.

“Learning is like rowing upstream: Not to advance is to drop back” — Chinese Proverb.