Drivers for EdTech Market Valuation Changes
My post two days ago sharing the radically changing world of public EdTech company valuations got more attention than expected – when I mostly wanted an updated pretty picture and an excuse to share AI audio options for the blog. One small update to that post: I was reminded that I should have Keypath added to the mix, which led me to update the image accordingly. What I didn’t address in that post but will below the image are the major drivers for why so many EdTech stocks have dropped so far. [full-page audio link]
Investors in technology-related stocks have changed their perspective in fundamental ways since late 2021, with the macroeconomic trends of persistent inflation, war, and the looming (or emerging) recession. These trends are driving most capital markets (angel funding, VC funding, public equities) to no longer reward growth at all costs, and instead to reward profitability and the ability to weather the storm. Of course growth is desired, but it is most often secondary to profitability. The Transcend newsletter described this change for EdTech startups based on their interviews with early-stage investors.
This trends is mirrored in public markets, as described in May by Sequoia Capital.
This is why we are seeing so many EdTech layoffs this year, at 2U/edX, Emeritus, Coursera, D2L, etc, etc. This also helps to explain how Pearson and Instructure have fared so well in relative terms. Both companies had made major layoffs and simplifications (selling parts of the company that were no longer core) well before 2022. They were already shifting their primary focus to profitability.
Add to the macro trends two big issues that we face within education circles.
Falling enrollments represent a major driver for these lower market valuations. While the US is only one part of the market, it is still the biggest and most lucrative one for EdTech vendors. And there are fewer students enrolled in format education programs than before as we have covered often.
In all sectors of US higher education, total enrollments are dropping for degree-granting institutions, and there are no signs of the trends reversing due to the end of the pandemic as many had hoped. As you can see above, total US enrollment has been dropping for at least the past decade, the losses accelerated during the pandemic, and all signs are that the losses are continuing, perhaps at a closer rate to what was happening in the late 2010s. There is a structural change happening here, and it is not just a cyclical reaction to unemployment rates.
It is true that non-degree certificate programs are increasing enrollments, whether these are offered by higher education institutions or other entities. But those gains do not fully offset the losses from formal degree program losses. It is also true that non-US countries are not facing the same enrollment declines, but for EdTech companies, again there is not enough to offset US losses, where the per-student revenues are highest.
Add to these drivers the realization from many investors that the pandemic is going away but not everything has changed. There was a lot of investment activity in the past 2-3 years from people outside of education, driven by naive assumptions on just how quickly and how simply education would change in the long-term. The Transcend newsletter described the exit of many of these generalists.
We’re getting back to more realistic and knowledgable views on what EdTech companies can achieve.
Another hangover from Covid, coming from some naive assumptions in my view, is that investors are realizing that the federal funding gravy train was temporary. In the US K-12 space, a huge amount of the EdTech spending from 2020 – 2022 was driven by federal ESSER funding. A lot of that funding remains unspent, but it is going away nonetheless. And it was spent with wild abandon in 2020 and 2021 to the point where school districts have to take time to digest what they ate, and to consider whether and how to pay for EdTech in the long run without these handouts. The impact in higher ed with CARES funding was not as much of a shock to the system, but the funding has mostly gone away.
I don’t want to suggest that this post has a comprehensive explanation for EdTech market changes, but hopefully the description of these primary drivers helps explain the significance of the overall transition. It is also worth pointing out that none of the drivers above have clear end dates, especially enrollment declines. Again, the point is that we seem to be facing structural changes in the market, without any reversal in fortunes expected anytime soon.