As we enter the second quarter, it seems increasingly clear that the pace of deal activity established in the second half of 2020 is likely to continue through 2021. Tyton has been very busy both in our banking practice with an active slate of sell- and buy-side engagements and in our consulting practice, assisting sponsors and companies with diligence for a range of tech-enabled education assets.
And there seems no end in sight. As we suggest below, we believe the growing emergence of ed tech as a new asset class in the public equity markets, not to mention the federal stimulus spending that will soon be hitting K-12 district budgets, are likely to supercharge this already elevated pace.
Thematically, the existing trends seem far from spent: alternative credentials for consumers, services that help colleges and universities source growth, continuing education in the workplace, supplemental K-12 education to forestall or offset learning loss, and technology that supports multiple modalities of instruction all seem like areas poised for another banner year.
We wish you a productive, successful and well-vaccinated Spring.
Adam Newman, Founder and Managing Partner
Chris Curran, Founder and Managing Partner
Vivek Kamath, Partner and Managing Director
Trace Urdan, Managing Director
Jeff Dinski, Managing Director
The New Gold Standard in EdTech Investing
It is axiomatic that private markets take their cues from public markets. In some respects, this is purely a function of market capitalization. Even the largest public equity investor has to sell and return proceeds to investors at some point and the public equity market is the biggest and most liquid ultimate acquirer. But it’s also a function of scale. The diversity of opinion and perspective applied to the publicly traded stocks that are often bought and sold hundreds of thousands, if not millions of times per day is a better arbiter of value than any other, and where the public markets lead private equity tends to follow.
Last week’s successful IPO of Coursera (NYSE: COUR) is likely to have a profound ripple effect on private market investments in educational technology for quite some time. The new public equity ended its first week of trading at $45, or 39% above its offering price of $33. Its current market cap of nearly $6.5 billion (as of Monday, April 5) is more than 20 times its 2020 reported revenue of $293.5 million. It is difficult to overstate how this enthusiasm, if it is sustained, may cause investors in all areas of the technology-enabled education market to recalibrate their investment criteria. Both the quantity and price of investments in comparable companies is likely to increase as a function of COUR’s premium valuation.
Coursera is comprised of three related, but fundamentally different, businesses. Its consumer-facing business, for which it is best known, sells short courses and non-accredited microcredentials and made up 65% of its revenue last year. Its corporate business comprised 25% of revenue, and its business supporting online degree programs for established universities made up the remaining 10% of revenue.
Apart from for-profit college stocks, which are bogged down by regulatory risk, there are very few pure-play EdTech companies like Coursera. The publicly traded company it most closely resembles is 2U (NASDAQ: TWOU) which trades at 3.9 times 2020 revenue and both sells short courses directly to consumers and enables online degree programs and short courses for university partners, though 2U’s business is far more weighted toward the latter than Coursera’s. Among public companies, Coursera’s corporate business comes closest to that of Pluralsight (NASDAQ: PS) which brings IT training to companies and trades at 8.5 times 2020 revenue. The closest comparison to its consumer business in the public market may be Chegg (NYSE: CHGG) which trades at a similar ~19 times 2020 revenue, though Chegg would ordinarily command a premium to Coursera in that it has a better claim on revenue visibility given its subscription revenue model.
Whether it is the particular mix of Coursera’s revenue, or the way it seems able to leverage its content across multiple channels and streams of revenue that inspires investor enthusiasm should become clearer over time as the market reacts to its progress. But in the meantime, we believe its successful debut and aggressive valuation is likely to drive investors toward these three themes of private-pay workforce training, asynchronous online corporate training, and OPMs over the near term.
Three emergent examples from the month of March of the sort of activity Coursera is likely to continue to inspire include:
Of course, Coursera’s success reflects an enthusiasm for alternative credential solutions that already exists among consumers and investors, but we nevertheless believe the striking premium valuation will bring more deals and focus more resources on the market in general.
For the immediate future, the biggest beneficiaries are likely to be the myriad special acquisition corporations (SPACs) that have a declared interest in EdTech. Two such deals have already been announced. Churchill Capital II (NYSE: CCX) announced last October that it will merge with corporate skills training provider SkillSoft (Tyton Partners served as an advisor to Churchill). More recently in January, TPG Pace Tech Opportunities (NYSE: PACE) announced that it will acquire virtual tutoring provider Nerdy (d/b/a Varsity Tutors). Other SPACs with declared interest in the EdTech market that have yet to announce deals include those listed below. Watch this space.
Source: Tyton Partners. Note: Tyton Partners has acted as an advisor to EdTechX Holdings Acq. Corp.II
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