Tyton Partners View: August 2020 Education Deals

With summer now behind us, it is a deal-closing sprint to the calendar end of this most unusual year. Through all the tumult, the markets have remained active. More than 50 M&A and investment deals were announced August, led by Cambium Learning’s nearly $800 million acquisition of Rosetta Stone; an additional dozen deals had equity or enterprise values in excess of $28 million.

Activity also reigns in the back-to-school environment, albeit of a more challenging variety. Colleges, universities and – to a lesser extent thus far – K-12 districts have found bringing students, faculty, and teachers back much harder to execute than perhaps anticipated. The implications on this Fall’s return – and stakeholders’ satisfaction and safety – are potentially far-ranging; we expect to see a flurry of new opportunities, business models, and spending available to companies and investors willing to navigate these uncertain times. In this month’s deal recap, we highlight one of several themes we are tracking, and examples of companies capitalizing on evolving consumer dynamics.  

We look forward to speaking with you this Fall. We will be in touch later this month to share recent M&A transactions completed by our banking team, as well as news regarding our sponsorship and support of selected events at this year’s ASU-GSV event.

Have a wonderful day, and thanks for your support.  

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 Rise of the Education Consumer

One of the biggest edtech stories of the last few years has been the large amount of venture capital being invested in consumer-facing education companies in North and South Asia. (In August alone this includes both a $400 million raise by Byju’s resetting the value of the platform at $10.5 billion and a $150 million raise by Spark Education in China along with several others.) Cultural affinity for education, combined with underdeveloped public systems in markets like China and India, has driven massive growth in demand for educational products and services to supplement what is supplied by government. In China, household spending on technology-enabled education services amounts to more than 2.48% of GDP compared to 1.98% in the U.S. The comparison is even more dramatic than it first appears, given that the lion’s share of the Chinese spend is on K-12 products and services, whereas only 0.31% is spent by individual consumers on comparable offerings in the U.S.

But the pandemic could be changing all that.

Anecdotal data suggests that U.S. consumers have been digging deeper into their own pockets during the pandemic, either to support self-betterment or to supplement perceived weaknesses that have emerged among more traditional institutions as a result of the Covid crisis. We believe this phenomenon represents yet another secular shift that has been accelerated by Covid.

K-12: Parents Lean into Disruption

In the K-12 sector, the disruption in consumer behavior has been enormous. According to an August 20-23 survey by Civis Analytics, nearly 40% of parents of K-12 students have disenrolled their children from the school they were originally supposed to attend this year, in response to school reopening plans. Of those that disenrolled, ~58% have moved to an online program, ~27% have enrolled in a public school, and more than 20% have entered a private school.

While the vast majority of parents surveyed insist they will return their children to their original school once it is safe to do so, it is clear that parents are more open to consumer services than they have ever been. Many private school providers have experienced a surge in enrollment and some that have embraced hybrid instructional models believe such changes could become permanent offerings that the market will embrace long term. In other circumstances, parents have pooled resources to form homeschooling pods and resource providers have experienced strong demand, which the National Home School Association (NHSA) has described as “explosive”. In August, new capital was raised by home school curriculum publisher All About Learning Press.

Other private-pay resources like those offered by IXL Education are experiencing accelerated growth reflected in part through heightened M&A and investment activity YTD in 2020. In August, new capital raises by Go Peer and Beanstalk Interactive illustrate this trend.

Higher Education: Students Seek Out Additional Supports

In the higher education market, the turmoil experienced by colleges and universities as they try to navigate campus life has continued to drive students into the arms of private supplemental providers. This enthusiasm is evidenced in Chegg’s reported YTD earnings, as well as reports from private providers like Course Hero, Quizlet and others. These new student buying behaviors are unlikely to reverse even after the pandemic ends and are further demonstration of the acceleration of an existing trend toward a more consumer-oriented and empowered mindset among students. The combination of an increasingly strained value proposition, technological advances that support greater transparency and facilitate alternative modes of delivery, and altered social mores is shifting power away from institutions and toward students.

Continuing Education: The Rise of P2P Platforms and the Second Coming of MOOCs

Large consumer platforms like Coursera, EdX, and LinkedIn Learning report dramatic acceleration of course consumption during quarantine, suggesting that their efforts at brand building have paid off and even further, that personal consumption of complex courses for mini-credentials has become a real and lasting market.

Peer-to-peer learning platforms have experienced a similar blossoming during the Covid crisis. These e-commerce platforms (with capabilities similar to Shopify) allow individuals and small businesses to offer online instruction. Their already impressive growth has accelerated during the pandemic as instructors of all types have moved their businesses online. Popular topics include business and health and wellness. Examples of companies participating in this fast-emerging sector include Learnworlds, Kajabi, Teachable, and Thinkific.

An Investment Theme for Covid and Beyond

While the U.S. has a long way to go to match China’s consumer spend as a percentage of GDP, we believe this shift in consumer spending could last. Dollars that might otherwise have been spent on travel and leisure, combined with a growing frustration over an (at times) ham-fisted institutional response to instruction during the pandemic has empowered parents and students to take greater responsibility for their own educational success. We don’t see them ceding this responsibility back to those institutions entirely any time soon.