EdTech Startups Surge: Pandemic Growth & SPACs Fuel Success

The Resurgence of SPACs and Their Appeal to Edtech Companies

In 2020, special purpose acquisition vehicles (SPACs) experienced a revival as an alternative method for startups to become publicly listed. Currently, these vehicles are increasingly focused on companies within the edtech sector.

Recent Edtech SPAC Transactions

Skillsoft has already become a public entity through its merger with Churchill Capital. Similarly, Nerdy, the parent organization of Varsity Tutors, completed a reverse merger with TPG Pace Tech Opportunities. Furthermore, Edify and Adit EdTech Acquisition represent distinct $200 million SPACs specifically dedicated to investments in education-focused businesses.

Is a SPAC the Optimal Path for Edtech Firms?

A key question arises: do SPACs offer a superior route to public listing for edtech companies compared to traditional initial public offerings (IPOs) or direct listings? To gain insight, discussions were held with Chuck Cohn, CEO of Nerdy, currently undergoing a SPAC transaction with TPG, and Susan Wolford, chairperson of Edify Acquisition, a $200 million edtech-focused SPAC.

Nerdy’s Growth Strategy and the Appeal of a SPAC

Nerdy is demonstrating growth, but anticipates achieving profitability by 2023. The company aims to increase revenues by 31% and 43% compared to projections for 2020 and 2021, respectively. Cohn explained that their current financial position reflects substantial investments in product development and engineering, alongside a strategic focus on maintaining strong capitalization.

He stated that utilizing a SPAC presents an opportunity to accelerate Nerdy’s core business initiatives. The transaction is viewed as a means to proactively capitalize on significant market opportunities, rather than simply accessing public markets.

Timing and Growth Expectations

Cohn emphasized that a SPAC provides a faster pathway to becoming a public company. With the rollout of vaccines potentially slowing growth in remote learning, ambitious growth expectations could be impacted. Consequently, some edtech companies are motivated to enter public markets as quickly as possible.

Despite some skepticism, Cohn refuted the notion that SPACs are solely utilized by companies unable to pursue traditional public offerings. He noted a shift in perception, citing recent successful SPAC transactions involving companies like OpenDoor, which he described as being of high quality.

PIPE Instruments and De-Risking SPACs

From an investor perspective, Wolford highlighted the role of PIPE (private investments in public entities) instruments in mitigating risks associated with SPACs. While these instruments have existed for decades, they have recently gained prominence in SPAC transactions.

How PIPE Instruments Function

A PIPE instrument involves a financial commitment from another entity to fund the blank-check company. For example, if ExtraCrunch Acquisitions raises a $200 million SPAC to support media companies, investors interested in the media sector or believing in Extra Crunch might participate. However, a commitment from a reputable Silicon Valley fund to fund a portion of the purchase price provides external validation and establishes a benchmark for share pricing.

Nerdy’s announced acquisition serves as a practical example, featuring a fully committed PIPE of $150 million based on a market valuation of $1.7 billion.

The Advantages of a SPAC Exit

Wolford asserted that the combination of reduced risk, faster timelines, and lower costs makes a SPAC an attractive exit strategy for companies.

The Underlying Driver: Increased Edtech Scale

However, Wolford clarified that the resurgence of SPACs isn’t the primary catalyst for change within the edtech landscape. The fundamental driver is the increasing number of companies that are now positioned to consider public market liquidity.

Pandemic-Driven Growth and Market Expansion

The pandemic has enabled some edtech startups to achieve the scale necessary to qualify for public markets, driven by expanded total addressable market sizes. Companies like Course Hero, Quizlet, Outschool, and Labster have experienced both profit and user growth in the realm of digital content delivery.

Assessing the Sustainability of Growth

A counterpoint to this growth is the possibility that it represents a temporary pandemic-related surge. Wolford’s team is actively evaluating which effects are attributable to COVID-19 and which represent lasting changes, a critical question for investors.

“We can’t calibrate with certainty how much sticks there, how much rolls back,” she said. However, categories like virtual courseware and digital learning are well-suited for a hybrid learning environment, leading Edify to consider both consumer and enterprise businesses.

A Hot Public Market and a Significant Signal

The current public markets are exceptionally active, making edtech companies pursuing public listings less surprising. However, for those familiar with the edtech space prior to the pandemic, this opportunity represents a significant development.

The Evolution of Edtech Exits

Historically, major edtech exits included LinkedIn’s acquisition of Lynda for $1.5 billion and TPG’s purchase of Ellucian for $3.5 billion. Chip Paucek, CEO of 2u, previously noted that startups often had to be acquired by larger entities like Pearson or remain private due to insufficient scale for independent public offerings.

A Growing Number of Billion-Dollar Edtech Companies

Currently, analysts estimate that over 100 companies in the edtech sector have a market capitalization exceeding $1 billion.

SPACs as a Facilitator, Not a Fundamental Shift

Edtech investors generally agree that public market liquidity is either available now or imminent. SPACs, therefore, serve as a mechanism to expedite the process. There isn’t anything inherently about education that makes this route more sensible, beyond perhaps timing and pandemic-related growth figures.

“Once you are public, you are public, and you’re either a good public company or you’re a crappy public company,” Wolford concluded. “And that has nothing to do with the fact that you went public as a SPAC and everything to do with, well, that you’re a crappy company and you probably shouldn’t be public.”