7 Investors Discuss Why Edtech Startups Need to Go Back to the Basics to Survive

A look back at edtech the spotlight feels like a fever dream. In the early days of the pandemic, top companies turned into unicorns seemingly overnight as the Zoom school became a reality for millions around the world and the check-writing frenzy attracted investors.

Then we slowly saw focus and sharpen. The very companies that were being created for any consumer who needed a better way to learn online began to turn to stickier customers, businesses, for more reliable sources of income. The companies that took it their first venture capital during the frenzy decided to join forces with other well-capitalized competitors. And those who have accumulated a lot of cash in a short period of time have had to go through significant rounds of layoffs due to the overwork that followed.

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Which brings us to today and tomorrow. To help TechCrunch+ readers better understand what education investors are looking for today, seven of the category’s leading venture capitalists answered a series of questions about the future of the industry.

Here’s who we polled.

I’ll be honest, I was surprised by the variety of responses, from how the climate and workforce mobility are the next edtech opportunities to how travel VCs travel differently depending on the stage of the company. The tone was also balanced. many admitted that things had changed, but the opportunities still existed. Like everything these days, vibe is nuanced.

Reach Capital’s Jomayra Herrera summed up the changing landscape well; For context, we were closing a deal every four days last year, and that’s down significantly this year given the market conditions. I would say the last few years have been more of an anomaly and we’re getting back to a more steady pace.”

Meanwhile, Emerge Education’s Ian Lin-Maitern was quick to point out that tech investment in Europe is growing despite the slowdown in the US; the sector has so far secured $1.4 billion in Europe in 2022, up 40% from a year ago. reports say).

Investors are preparing for the downturn by helping their existing portfolio companies, which want to prioritize internal growth over raising more capital, and reassess their success rates. But that’s all I’m giving now. Read the full survey to see where investors are finding hope, what may no longer be venture-backed, and what wave of edtech innovation they think we’re in today.

Ashley Bittner and Kate Ballinger, Firework Ventures

The early stages of the pandemic have led to massive edtech investment, with more than $10 billion in venture capital investments globally in 2020 and $20 billion in 2021. But the sector is now in decline. How has this affected your ability to grow your edtech portfolio, and how are you changing strategy?

It is important to recognize that this slowdown is different from past recessions such as the Great Recession. We have not seen a sharp increase in unemployment. As of May 2022, unemployment was just 3.6%, down from 5% at the start and a peak of 10% in 2008. the epidemic and the Great Resignation. We’re still seeing job openings and turnover at record highs, and many companies aren’t planning to cut back on hiring, let alone layoffs.

These differences are reflected in the experience of our portfolio companies, many of which sell into HR and learning and development. In fact, one of our companies had its best quarter on record in the second quarter.

When it comes to workforce training, we believe companies are taking a different approach than they were in 2008. During the Great Recession, 1.5 million US workers were laid off in more than 8,000 mass layoff measures. In order to further reduce costs, companies were quick to cut costs in areas such as learning and development, which were then considered less important.

We now know that such decisions can significantly contribute to the huge skills shortages we face today.

Over the past decade, many companies have realized that investing in your workforce is critical to business success; more than half of companies with skills gaps believe that internal skills development is the most effective answer, compared to a third who believe in hiring. is the most effective.

Last year, we exercised pricing discipline and stayed true to our investment strategy as we invested capital, which aligns with our current philosophy and expectations for a lot of the valuations that we’re seeing.

With the pandemic spotlight on edtech, a number of mainstream investors have begun to look at the sector and pour money into it. This affected the number of startups that received funding and the overall market capitalization. Has edtech seen a slowdown in “tourism” from general founders and investors? If so, what would be the effect of a more centralized sector?

We believe that category expertise is particularly important in the Series and Series A rounds. Category expertise is essential for an investor to identify product-market fit within the context of industry nuances. We believe there is scope for general investors to continue investing in the category at later stages once product market fit is achieved and the company shifts its focus to scale.

Edtech activities feel more relaxed. Is your deal cadence what you expected it to be a year ago? And is the pace of exiting edtech today in line with your earlier thinking?

Our transaction speed remains unchanged. Fireworks lead to investments mostly in the Series A round, a strategy that is more design-focused (and arguably less impacted by the recession than other models). We build relationships with founders over time, building trust in them, their team and their company before investing.

This approach allowed us to avoid last year’s investment frenzy. It also means we’re not experiencing a slowdown in transaction speeds this year. We see many companies that are looking to raise money and have continued to spend time building relationships with impressive entrepreneurs.

How has the pandemic changed your perception of what makes an edtech company interesting? How did this hold up when deciding what was considered impressive versus normal growth?

The pandemic hasn’t necessarily changed our thesis, but it has accelerated many of the trends behind it. We saw millions of people move to remote work and study overnight, opening up huge opportunities around remote and distributed learning.

The post-pandemic economic recovery has been one of the most uneven in history, with large numbers of women and other marginalized groups dropping out of the workforce altogether. This has only further emphasized the need to create solutions, in edtech and beyond, that work to close these opportunity gaps.

As a Series A investor, we often look at companies with high growth rates. While strong growth is important, we are focused on ensuring that growth is sustainable over time. For example, a company may have achieved huge growth during the pandemic by tapping into the COVID relief funds, but this source of funding may not be stable enough to sustain them for years to come.

What do you think is the most venture-backed business model in edtech?

We do not anticipate that any business model will no longer be venture-backed. We continue to look for founders with high potential for growth, both personally and for their business, in exciting market opportunities.

What proportion of your companies plan to add this year? What percentage are scaling up stages and how common is this in edtech?

We don’t have companies raising their early stage extensions, but we’ve heard from plenty of founders who are. This move to extension rounds shows the level of expectation from founders around fundraising in the current economic climate.

Understanding the venture context is incredibly important for founders looking to raise capital. We work closely with our portfolio companies in advance of when they want to raise their next round to help them understand this context (along with their specific company context) and set fundraising goals accordingly.

Some edtech unicorns have had to cut staff to weather the looming recession and recession. What should edtech companies do to optimize their runway over the next few years?

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