Friday Follow Up

More insight on 2U, good(ish) news on FAFSA, and a wave of EdTech M&A and investment activity

Phil Hill
October 18, 2024

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2U Fireside Chat

At the recent P3Edu conference focused naturally on public-private partnerships, I had the chance to interview 2U’s new executive chairman Brian Napack in the form of a plenary fireside chat. I was originally scheduled to interview Paul Lalljie, but 2U scheduled a change in CEO the week before the conference without asking me (I know!). Napack was a valuable substitution, however, as he was a key mover behind the scenes in working with 2U’s debt holders on the pre-packaged bankruptcy. After 2U emerged from bankruptcy with bond holders converting to equity, Napack became executive chairman.

The other reason that Napack was a valuable interviewee is that he was very open in our discussion, with no appearance of defensiveness or hiding agendas. I think this interview set a new tone for 2U. During the Chip Paucek as CEO years, the public tone was one of always selling, not directly admitting mistakes, and quite energetic. With Paul Lalljie, he was very frank and humble, but he didn’t have any public appearances as CEO in his roughly 10 month stint.

Our talk focused both on post-bankruptcy 2U and on what these experiences can tell us about the broader EdTech market trends. Here are a few of my notes.

When asked about what has changed with 2U, Napack was emphatic that “the same company it was before.” Same mission, same contracts, same services, same market position. I pressed him on what has changed, and the easy answer was new ownership and a new board of directors and soon a new CEO. And no longer a public company and one with a cleaned up balance sheet. Beyond that, I asked if the service offerings would change, particularly around keeping the bootcamp business. Napack would not give specifics but indicated that there is a strategic process in place that is looking at these questions. My reading is that any changes of this level would be apparent early in 2025, but that is a hunch.
I also asked Napack if there would be a change in the tuition revenue-sharing business model. He answered that, just as at Wiley when he was CEO there, the customers continued to choose rev share over fee-for-service, and he did not see a change in market demand. Of course, regulatory actions may force a change here, but there was no indication of 2U moving away from rev share.
When we talked about the rising cost of acquisition of a customer (CAC) experienced by all online programs, Napack was very clear that the edX acquisition was centered on this problem (with the goal to use organic leads from 10s of millions of registered learners to reduce Google / Facebook / Instagram digital marketing spend), but that 2U has not succeeded with this goal yet. This is in contrast with the rosy answers to investors in earnings calls, particularly under Paucek.
I got the biggest reaction from Napack when we talked about the potential for a more outcomes-focused approach to measured higher ed initiatives (graduation and job placements over enrollments and short-term retention). Napack was, shall we say, highly disappointed that higher ed at large has taken so long to start focusing on outcomes. This is why he emphasized clinical placements and other outcomes measures for 2U.
I think this commentary from Napack was notable at the end.

Look, 2U got into trouble. Not just it's very actually easy and glib to say it was simply because of a couple of overpriced acquisitions. The truth is, 2U was clinging to old models and old ways of doing things, and we got into trouble because of that.

Universities that are clinging to old ways of doing business are going to fail. It's happening by the dozens all around the country, but the ones that are evolving and changing, providing the career connections, providing the alternative pathways, providing the different forms and formats, they're actually the ones winning. And by the way, significantly winning. [snip]

To meet the needs of a changing market is what's critical. And if we don't do that, we ossify and we lose. And I'm happy to take on with every one of our partners the project of change. Because change management is what prevents success. Every CEO knows this, every university president knows this. And sometimes it requires carrots, and sometimes it requires sticks. But it always requires dialog and partnership.

Typically session recordings from P3Edu are not shared publicly, but I am working to share the full recording in a future post.

Improving FAFSA News

We have covered extensively the problems and the sources of the problems with the FAFSA fiasco, and we have shared that there are remaining risks for next year’s form and process for the 2025-26 academic year. When the US Department of Education (ED) announced that two executives from The College Board were temporarily being put in charge of the continued FAFSA rollout, I noted some positive developments in terms of communication with colleges and universities. Not every one agrees, and there are some open ethical issues with The College Board’s involvement, but I think there have already been signs of improvement despite ongoing risks.

With the recent phase one of testing out next year’s FAFSA form and process, the best coverage by far has been from the Chronicle of Higher Education by Eric Hoover. This section in particular gives a good description of what was learned in phase one.

During the initial phase of testing, which was completed the first week of October, six community-based organizations (CBOs) in various states hosted FAFSA events for students. Department staff were on hand to observe and assist applicants and their families.

More than 650 high-school seniors in all successfully submitted a FAFSA, according to the department. In response to The Chronicle’s questions about how many students participated in the events — and how many might have tried to submit the form but were unable to do so — a department official said in a written statement on Tuesday that about 80 percent of all FAFSAs initiated were submitted. The most common reason forms weren’t completed right away, the official said, was that the student needed their contributor, or parent, to fill out their section of the form.

Melinda Cabrera, president and chief executive of the Scholarship Foundation of Santa Barbara, one of the CBOs that participated in the beta-testing, said more than two-thirds of the students who attended an October 3 FAFSA event were able to submit the application, which she described as a high success rate. “There were some issues that had to do with the software, especially for mixed-status families,” she told The Chronicle on Tuesday. “But I think that, overall, it was some of the situations that we come across anyway when we do these type of events, where maybe a contributor wasn’t present, or a student not having the correct information available.”

Though the testing revealed bugs, as expected, none, Singer said, were “critical errors.” But one familiar problem popped up. According to the department’s list of updates on FAFSA-testing, 60 forms submitted in early October were initially rejected, mostly due to a missing student or parent signature: “The Department recognizes this is an ongoing issue from 2024–25 and we continue to explore ways to decrease these rejections, especially with better prompting for student and parent signatures.” Students whose FAFSAs were rejected were able to correct and resubmit the form, Singer said.

We’re not out of the woods yet, but it is important to track the results of the testing process and note the improvements when they come.

EdTech M&A and Investment Activity

Today it was announced that Eruditus (owner of Emeritus) has secured a new $150 million round of funding at a $3 - $3.5 billion valuation.

Indian educational technology company Eruditus has raised $150 million in a new funding round led by private equity firm TPG (TPG.O), opens new tab, at a time when the funding environment for edtech companies has been subdued.

Eruditus' Series F round, which also saw the participation of existing backers SoftBank, Leeds Illuminate, Accel, CPP Investments and Chan Zuckerberg Initiative, was raised at a valuation of $3 billion.

Co-founder and CEO Ashwin Damera told Reuters the focus will be on building AI products for teaching experiences, expanding focus to sell courses to enterprises and to double down on the Indian market, especially as Eruditus considers going public in India in the future.

Yesterday it was announced that QS Quacquarelli Symonds is acquiring HolonIQ, purveyors of market data with cool graphics and cooler accents. QS provides “global higher education analytics, benchmarking and ratings” for global higher education markets, including in the form of rankings.

Personally I’m hoping for the HolonIQ brand to be retained, just to help with my spell checker (no offense with the family name). But more seriously, I would assume (and hope) that this acquisition will focus HolonIQ more on education and less on climate or health. But we will see.

From the NYC Back-to-school event in September

Both events come one month after Savvas Learning (Pearson’s former K-12 business sold last year and rebranded) acquired Pointful, Physics Wallah raised $210 million at a $2.8 billion valuation, a month after 2U exited bankruptcy, and three months after KKR acquired Instructure.

I have no intention to compete with Matt Tower’s investment coverage at Whiteboard Advisors, but there seems to be something in the air, even if the valuations are not sky high.

Industry veteran Greg O’Brien commented on LinkedIn:

Congratulations to Ashwin Damera, TPG, The Rise Fund, and Emeritus for closing a $150 million Series F round, maintaining the company's $3.5 billion valuation.

This is yet another positive data point showcasing the durability of edtech, off the heels of 2U's emergence from bankruptcy and fresh investment from a new investor group.

Which was off the heels of KKR announcing its plans to acquire Instructure.

Which was off the heels of Carnegie's acquisition by Shamrock Capital, shortly after which Paul J. LeBlanc joined their board.

Innovative companies pushing the frontiers of possibility across the higher education landscape, seeking to expand access to learning and career opportunities.

I’m not as enthusiastic as O’Brien, partially as bankruptcies and M&A are often signs of company weakness and a tough environment, but I still think he has a point about a lot of this news coming in a wave. I don’t know if we’re seeing a turnaround in EdTech financing, but the wave is worth noting.

Educause

Finally, I’m heading to San Antonio this weekend for the Educause conference and hope to see many of you there.

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