Must Read Blog May 1, 2019

Sector Deal Dynamics – May 2019

Deal news this month reflects a phenomenon that we have been tracking for some time – an accelerating level of activity in the online program management (OPM) sector. Of course, 2U’s $750 million acquisition of Trilogy represents the most dazzling example. But Zovio’s purchase of Fullstack in April and TutorMe this month, Red Venture’s purchase of HigherEducation.com, Coursera’s securing of an additional $103 million in a Series E investment round, and even Great Hill’s $90 million investment in Examity can all be viewed through a similar lens.

There is significant, and we think well-founded, enthusiasm among investors for tech-enabled services companies supporting innovative efforts among traditional colleges and universities to expand their reach to and support for adult learners, whether those learners are seeking online degrees or workforce training. Leaders at these institutions are warming up to these new audiences for a host of reasons based on both mission objectives and the need to pursue new sources of revenue; at the same time, leaders are recognizing that the private sector can help make them more effective in providing these new and expanded services. We believe this trend is constructive and beneficial both to students and institutions alike.

Best,

Adam & Chris

Postsecondary: Cengage and McGraw-Hill Announce Plans to Create Publishing Behemoth, Minus Hyphen

Academic publishers Cengage and McGraw-Hill Education announced plans to merge as equals uniting under a new name, McGraw Hill (no hyphen). Each company’s shareholders will retain 50% of the combined enterprise, which will be led by Cengage’s current CEO Michael Hansen. The composition of the full leadership team of the new company has not yet been announced. Assuming the deal receives regulatory approval from the Department of Justice, the new company could be formed as early as the first quarter of 2020, Hansen told Inside Higher Ed.

Perhaps to head off concerns about reduced competition, both companies’ leaderships emphasized a shared vision for affordable course materials and a focus on developing digitally-enhanced learning platforms. Cengage caused a stir last year by shifting its focus from professors and institutions to students through the creation of Cengage Unlimited, which provides students access to all of its content for a subscription fee. Clearly the addition of McGraw-Hill content (to the extent the Justice Department does not force divestitures) will enhance the appeal of the unlimited subscription.

But McGraw brings some innovations to the table as well; its sale of digital products has grown bigger and faster than its rivals, and its direct-to-student sales (sidestepping third parties such as Ingram and Amazon) are reputed to be the highest among the college publishers. Eighty percent of students still rely on print textbooks, so generally speaking, the opportunity to drive digital growth itself remains ample. And digital products, though generally less expensive, offer the advantage of not being resalable or rentable.

Finally, the merger is likely to affect the impact of directly-negotiated deals with institutions. The combination of combined critical mass and nervousness over pricing power is likely to bring more institutions to the table to negotiate inclusive access for their students. If they’re smart, says Tyton Partner Gates Bryant, institutions will create more buying consortia to give themselves greater negotiating leverage with the newly-sized McGraw Hill.

In any case, we believe the merger is likely to accelerate the movement to digital as well as the movement to a student-centric business model. While standard business theory might suggest that regained pricing power could be bad for students, we believe the most relevant competitive dynamic for the new company is against Amazon, which can afford to sell content at or below cost in the interest of the future lifetime revenue stream from a brand-new student Amazon Prime member. It’s Amazon’s influence, more than Hart-Scott-Rodino rulings, that we believe will ensure continued affordable pricing for students.

Postsecondary: 2U Enters Bootcamp Market

Online services provider 2U, Inc. (Nasdaq: TWOU), which partners with universities to bring degree programs online, announced an agreement to acquire Trilogy Education for $750 million in cash and stock. Like 2U, Trilogy partners with universities (and some select businesses); its particular specialty is standing up non-degree programs focused on digital skills for the modern workforce. Trilogy’s programs include both in-person and online skills-based training in coding, data analytics, UX/UI, and cybersecurity that places graduates into jobs in more than 50 cities worldwide. Trilogy will expand 2U’s university portfolio from 36 to 68 partners. 2U believes the addition of tech skills-focused bootcamps to its existing portfolio will increase marketing efficiency, extend the company’s reach across the career curriculum continuum, and allow it to achieve $1 billion in total revenue by 2021.

Trilogy was a pioneer in the practice of aiding universities in the development of tech bootcamp programs, and like its new parent, has partnered with some of the most elite universities across the globe. However, other B2C tech skills bootcamps have pivoted to a similar university partnership model including Fullstack, Emeritus, and Thinkful, among others, and we expect to see further pairings between these non-credit providers and online program managers (OPMs).

What is most notable about all of these businesses is that they are helping universities to expand their access and mission – to working adult students in the case of OPMs, and to workforce development gaps in the case of bootcamps – in ways that are constructive for students, employers, and the institutions themselves. We believe this expansion of university boundaries is a positive development and credit private partnerships with accelerating schools’ ability to stretch further and faster than they would likely have otherwise.

Postsecondary: Coursera Cements Unicorn Status with $103 Million Series E

Reformed MOOC Coursera announced the close of a $103 million Series E equity investment round led by SEEK Group (ASX: SEK), a global leader in investing, scaling and operating online employment and education businesses, with existing investors Future Fund and NEA also participating. Since its last funding round in June 2017, Coursera has grown its global learner base from 26 to 40 million. It now offers 3,200 courses and 310 specializations (packaged course groupings) as well as 14 degree programs in conjunction with university partners. Its B2B offering Coursera for Business boasts more than 1,800 customers, including its largest – a 60,000-employee initiative with the Abu Dhabi School of Government.

One new initiative that the funding will help to jumpstart involves the Company’s intention, announced in January, to launch a new health care vertical (most of its current programs are focused on digital technology and business skills) in conjunction with partners that include Columbia University, Johns Hopkins and the University of Michigan.

While its efforts in the B2C market are impressive and pioneering, and its efforts in the B2B market promising, it is Coursera’s latest iteration as a degree program partner to colleges and universities that offers the Company’s venture investors the best hope of a successful exit into the public markets. Its ability to acquire degree students from among its pre-qualified 40- million-strong learner base means that it has been able to market those programs at much more affordable price points. However, the question remains whether that kind of advantage is sustainable as it grows and expands its degree program partnerships.

HCM: Tech Employment Platform Triplebyte Raises Major Series B

Triplebyte, a San Francisco startup that uses coding quizzes and machine learning to match would-be tech employees with open jobs, announced a $35 million Series B financing led by Y Combinator, with participation from Founders Fund’s Brian Singerman, Caffeinated Capital, and Initialized Capital. This round brings Triplebyte’s total raised capital to $48.1 million. The company also announced that Ali Rowghani, former Twitter COO will join its Board.

With demand for qualified tech professionals at peak levels, Triplebyte hopes to create a way for employers to more easily identify competencies in the marketplace that may be unconventional or otherwise without a standard postsecondary degree as a market signal. The three co-founders are all veterans of successful tech start-ups and each feels as though he was a victim of degree bias in the hiring marketplace.

Triplebyte uses a combination of online skills tests, “background-blind” interviews, and AI to evaluate engineers’ programming aptitudes and match them with available roles. The platform also supplies data about job seekers’ skills and offers comparisons to other engineers in the database. The Company has reported a monthly revenue run rate of $1 million and has 40 employees. It is currently working with Adobe, Apple, American Express, Blackrock, Box, Dropbox, Instacart, Uber, and Philz Coffee, and overall counts more than 500 clients among its customer base, which have collectively hired more than 1,000 engineers using Triplebyte’s approach since 2015. Competitors using AI to provide similar utility to tech employers include Plum.io, Vervoe, and Andela.

It is natural that next gen talent screening tools would come from the tech world, where skills are easily identified and demonstrated. However, we expect this type of technology, which can sort through large quantities of applicants (and large numbers of open positions) and can correct for systemic bias, to become endemic across all sorts of occupations in the future. If the future of work is one in which individuals can seek out and fill in skills gaps, it is also one where those skills can be easily seen and read by employers.