Edtech Sector Outlook: What's Next for Startups?

News surfacing on November 9th regarding the promising effectiveness of a COVID-19 vaccine significantly impacted market behavior. Technology stocks experienced declines in value, while industries previously struggling due to the pandemic began to recover. This resulted in a notable shift, with airline stocks increasing and previously successful companies of 2020, such as Zoom, facing setbacks.

However, alongside these developments, another sector crucial for startups also encountered difficulties: educational technology, or edtech.

Analyzing the trading performance of several edtech companies following the vaccine announcement provides insight into how public investors perceive these businesses and their potential for future expansion.

Essentially, the decrease in edtech stock values in response to the vaccine news – a trend observed among investors – indicated a belief that the sector’s growth would be limited by a return to pre-pandemic conditions, a scenario the vaccine’s success could accelerate. This mirrors a similar dynamic discussed by TechCrunch concerning the software industry’s downturn on November 9th, where investors anticipated that the pandemic-driven growth experienced by those companies, fueled by changes in work environments, would be curtailed by a swift return to normalcy.

The reported vaccine results altered investor perspectives on the future. But to what extent did it modify expectations for the edtech industry? We will first review public market data, and then consult with our edtech specialist, Natasha Mascarenhas, to gain her perspective on the data and gather insights from investors.

Edtech companies in the public markets

The number of publicly traded edtech businesses is relatively small. TechCrunch examined the performance of those it was aware of. Here's a look at how three of these companies fared following the market close on Friday, November 3:

• 2U finished trading at $39.55 per share. Following the vaccine announcement, it closed at $31.46 on Monday, representing a decrease of approximately 20%. The company’s stock price has remained largely unchanged since then.
• Chegg concluded Friday trading at $77.23 per share. On Monday, after the vaccine news was released, it closed at $69.51, a decline of roughly 10%. The company’s equity value has decreased further in the time since.
• Kahoot ended Friday trading at 64.60 Norwegian kroner (kr) per share. It closed at 59.00 kr on Monday, following the vaccine announcement, which was a decrease of around 9%. The company’s equity has continued to fall since that time.

Unfortunately, Instructure was acquired earlier in the year, removing another edtech company from the public market. Despite a thorough review of Microsoft’s financial reports, no information regarding the performance of LinkedIn Learning could be found. Therefore, our data is limited to the companies listed above.

Focusing on the available information, let’s consider Chegg. According to its most recent earnings report, revenue increased to $154 million, up from $94.2 million in Q3 2019. The edtech leader also forecasted Q4 revenue to be between $188 and $190 million, compared to $125.5 million in Q4 2019. Chegg is aiming for total revenue of $775 million in 2021. These figures exceeded market predictions, yet Chegg’s stock price declined after the earnings release and again after the vaccine news.

It’s possible that investors had higher expectations. Alternatively, they may be skeptical of Chegg’s projections. However, Chegg’s situation demonstrates that any startup operating in the online education sector must demonstrate its ability to maintain pandemic-level growth consistently, or risk a significant correction in its valuation.

We are observing a distinct trend of rapid, and in some instances sustained, declines in the value of companies within a sector that generally benefited from the pandemic as that positive influence diminishes. This is characteristic of the public market, where investor sentiment can be notably changeable. What about the more stable and resilient companies backed by private venture capital?

Venture capital

Although recent declines in the public markets might cause concern for some private investors, it ultimately presents a beneficial shift for those genuinely innovating within the edtech space.

It’s important to acknowledge that edtech has experienced considerable exaggeration in its potential lately. This resulted in a surge of individuals seeking opportunities and cyclical trends, requiring venture capitalists to distinguish between those truly addressing critical needs with inventive solutions and those simply following a popular trend.

This heightened attention is largely due to the ease with which remote learning solutions could gain acceptance when it was the primary educational option available.

For venture capital firms specializing in edtech, the evolving market conditions may encourage more in-depth investigation. Malvika Bhagwat, a director of efficacy and outcomes at Owl Ventures, recently explained to us that founders frequently mistake user engagement for measurable results.

She noted that while a product might attract significant attention, that doesn’t automatically equate to positive educational impact. While monthly active users and usage rates are valuable for understanding scale, they don’t necessarily reflect actual outcomes.

Jennifer Carolan of Reach Capital similarly advised startup founders to adopt a more considered approach to their strategies. Despite pursuing substantial growth, Carolan emphasized the need to recruit experts in both development and educational methodology alongside growth specialists.

Despite the current market volatility, investors maintain a positive outlook, anticipating an increase in edtech exits as a result of the sector’s gains in 2020. Ian Chiu of Owl Ventures anticipates that the next three to five years will see numerous edtech companies launching initial public offerings, providing further insight into how the public market values this category. Currently, limited data makes it difficult to draw definitive conclusions, as the sector has historically been underfunded.

From this perspective, the market downturn could signal to founders that opportunities remain to improve upon the services offered by companies like Chegg, Kahoot and 2U.

The fact that these three companies didn’t thrive solely due to the pandemic should clearly indicate that remote learning requires further innovation to evolve beyond a temporary trend linked to unusual circumstances. Startups seeking continued funding should bear this in mind.

Ultimately, a potential market correction could eliminate approximately 90% of opportunistic startups in this field, leaving the remaining 10% of dedicated founders even more focused. Therefore, for those successful companies, the current market challenges could prove to be a positive development, despite being difficult to navigate.