Edtech Stocks Decline: Why VCs Are Still Investing

Edtech's Shifting Landscape: Venture Capital vs. Public Markets

For a considerable period, the educational technology (edtech) sector experienced limited attention from venture capitalists. However, 2020 marked a significant turning point, witnessing substantial growth. The sudden shift to remote learning globally created an immediate need for edtech solutions.

Consequently, investors directed considerable funding toward prominent edtech initiatives. This period also saw some successful exits, notably with companies like Coursera becoming publicly traded earlier in the year.

A Divergence in Sentiment

Despite the continued influx of private investment – a trend that has persisted into the current year – edtech stocks have recently experienced considerable declines in value. This creates a contrast.

While venture capitalists and startup investors continue to allocate capital, anticipating substantial future returns, the stock market appears to be indicating a potential shift in trajectory.

Determining which perspective is more accurate remains a challenge. An investor consulted by The Exchange suggested that current market fluctuations are simply that – fluctuations – and that investment strategies remain unchanged for now.

However, the recent volatility warrants close monitoring, as it could foreshadow a broader slowdown within the edtech sector.

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Analyzing the Data

Let's examine the recent changes in edtech stock valuations. We will also analyze preliminary data from PitchBook to understand the current momentum of venture capital investment in edtech.

The goal is to assess whether there is evidence of excessive optimism among private investors. It’s possible to posit that public market investors are exhibiting undue pessimism, while those in the private sector hold a more accurate view.

However, given that public market valuations often influence private market pricing, their signals are particularly important to consider.

Ultimately, understanding the interplay between these two forces – venture capital and public market sentiment – is crucial for navigating the evolving edtech landscape.

Declining Stock Values

Many are eager to explore private-market data, so a concise overview of the recent downturn in public markets is provided. The following details the performance of edtech stocks and their decreases from peak values.

Public Market Performance

A review of publicly traded edtech companies reveals significant declines in share prices.

• Chegg’s stock price has experienced a reduction of more than one-third from its 52-week high.
• Coursera, which peaked at $62.53 per share in April, has seen approximately half of its value erased, currently trading near its initial public offering (IPO) price of $33.
• 2U concluded trading yesterday at $33.92 per share, representing a 50% decrease from its 52-week high.
• Similarly, Stride (K12) finished yesterday’s trading session at $26.77 per share, also a loss of around half its 52-week high.
• The volatility wasn’t limited to companies based in the United States. TAL Education, headquartered in Beijing, is currently valued at $46.25, which is roughly half of its 52-week high.

The remarkably consistent declines across these public edtech companies offer insight into current investor sentiment.

However, the question remains: does this public market hesitation regarding edtech’s future influence investment decisions within the private market?

Venture Capital in Edtech: An Analysis

An examination of fundraising data for U.S.-based, privately held edtech startups, sourced from PitchBook, reveals a rapidly expanding market.

PitchBook’s records indicate 380 funding deals in 2020, totaling $2.06 billion in investment. A significant portion of this activity involved seed funding rounds, yet substantial capital was allocated across numerous ventures.

Data from 2021, analyzed to date, shows 152 deals completed. Maintaining this rate of investment would project approximately 417 edtech deals for the year, representing a slight increase compared to the previous year.

However, the financial aspect of 2021 is considerably more noteworthy for edtech firms. Private investors have already committed $1.86 billion to domestic edtech companies.

Including “Corp/Strategic M&A” as defined by PitchBook, the total investment capital available increases by an additional $1.15 billion.

Based solely on venture capital figures, a continuation of the current fundraising momentum suggests that VCs could invest around $5.1 billion in edtech this year, a substantial rise from the $2.06 billion invested in 2020.

Contrasting Investor Sentiment

This significant increase in funding prompted a comparison between the optimistic outlook of venture capitalists and the more reserved attitude of public market investors.

The disparity in the signals being conveyed by these two investor groups is quite pronounced.

A Shift in the Edtech Landscape

Investors and entrepreneurs in the edtech sector anticipated a market correction—any industry experiencing pandemic-fueled growth was bound to encounter challenges as normalcy returned. For edtech, improved vaccination rates in certain regions signal an impending pullback.

Back in September 2020, Larry Illg, the CEO of Prosus Ventures, expressed concerns about the influx of speculative capital into edtech, characterizing it as a period where accurate company evaluation and responsible investment were difficult.

He cautioned, “The situation is precarious.” Illg drew parallels to past investment trends in emerging markets like India and Brazil, where rapid capital deployment was often followed by disappointing exits.

The investor foresaw potential difficulties within edtech, yet acknowledged the growing acceptance of edtech among both parents and educators as a vital component of future learning—even if adoption rates remain limited to a smaller segment of the population.

Just as telehealth experienced a decline as in-person medical visits resumed, edtech is likely to see a reduction in usage as schools offer a safer learning environment for students and teachers.

Despite this anticipated decrease, the fundamental shift towards digital learning remains. While the total addressable market (TAM) for edtech may have peaked during the pandemic, it is likely to remain larger than pre-pandemic levels, even after accounting for potential value reduction.

The long-term impact suggests that edtech’s TAM, while potentially diminished from its peak, will likely surpass its pre-pandemic size.