It’s a good time to invest in early-stage edtech, investors say | TechCrunch
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Edtech is nowhere near as popular as it was when schools were closed during the pandemic. Still, it would be shortsighted to overlook this category amid the present downturn, especially now that AI is disrupting nearly every industry out there.
Now, we know edtech news has almost vanished like water poured down a well, but that’s not to say startups haven’t been building in the category. Indeed, when we reached out to a cohort of specialized and generalist investors, we found that with AI in the picture, edtech startups have been as quietly busy as a subterranean network of moles in fall.
“Advancements in AI will provide tailwinds for a boom in edtech in 2024,” said Masha Bucher, a founder and general partner at Day One Ventures, a generalist early-stage VC firm that has invested in both edtech and AI.
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For AI to give edtech startups a long-term advantage, though, they will need to do more than the competition. “Simply labeling generative AI as an edtech product isn’t enough. What I find more intriguing is when AI enhances an already robust product, as seen with Duolingo,” Marieke Gehres, an early-stage investor at Earlybird Ventures, said.
Still, innovating with AI requires talent that edtech companies might lack, and some investors feel the shortage of expertise could boost an otherwise tough M&A environment. “Edtech M&A activity will remain limited in Q1, but I am seeing acqui-hires of AI teams happen across edtech sub-sectors,” Jan Lynn-Matern, founder and partner at Emerge, told TechCrunch+.
Several investors also highlighted that the slowdown in venture capital activity isn’t so uniform as one might think, even just in edtech. “As a pure pre-seed investor, deal activity in 2023 was almost unaffected,” Lynn-Matern said.
As it happened to unicorns, edtech startups are also more likely to focus on B2B and B2C if they hope to top the investment charts. Or simply, to profit. Says Bucher: “Right now, B2C is harder to monetize; people are trying to save money.”
Of course, there’s more nuance to the B2B vs. B2C debate, and there are more ways in which DTC edtech companies can monetize than through subscriptions. For investors’ thoughts on these points, the future of edtech in emerging markets, and the market opportunity for AI products, read on.
We spoke with:
(The responses below have been lightly edited for length and clarity.)
Marieke Gehres, early-stage investor, Earlybird VC
Compared to 2021, did edtech startups lose momentum faster than the broader venture market?
From a purely quantitative perspective, the numbers indicate that this greatly depends on the region. While traditionally strong edtech markets like the U.S. and China experienced a very steep drop in venture funding from 2021 to 2022, the European edtech market has proven to be more resilient, declining about 28%. This is even more robust compared to the overall global VC market, which saw a 35% decrease in total venture funding from 2021 to 2022.
In a broader context, while the pandemic propelled the edtech market forward, the conclusion of this period and the gradual return to normalcy in the global education system consequently posed challenges for the market. Nevertheless, it is worth concluding on a positive note: The pandemic provided the edtech market with sustained momentum. Presently, in terms of total venture funding, the market remains significantly larger than it was in pre-COVID times.
How was edtech deal activity in 2023? How full is the pipeline of companies you’re looking at?
Similar to the overall VC market, average round sizes and ticket sizes declined the most in edtech last year. There were few growth rounds, but investments were made in the very early stages.
This parallels our own experience and is not a disadvantage for us as early-stage investors. We expect deal activity to rebound significantly in 2024. Additionally, in edtech, we are closely monitoring several companies that have been seeing positive developments. So, 2024 looks promising for the industry and for us as investors.
How do you expect M&A activity to pan out in Q1 2024? Will acquirers be looking for bargains, or are they willing to pay top dollar for the right opportunity? What are your thoughts on how edtech startups can best leverage AI?
The M&A market is currently very tough. While some publicly traded companies still haven’t recovered from the post-COVID low, there are also the Duolingos of the world that recently announced a 43% increase in revenue in Q3 and have users who are more engaged than ever before.
This announcement has, of course, greatly benefited their stock price, and I’m sure the Duolingos among the edtech companies will be quite ready to invest in the top opportunities next year that show sustainable growth.
Duolingo is also an outstanding example of how to leverage AI in edtech, through smart integration very early on, making the product even better through even more personalized content and feedback.
What are some of the more interesting applications of AI you’ve seen edtech startups incorporate in 2023?
We are excited about generative AI applications that bring a unique touch, going beyond simple integrations to tailor models for specific purposes. This filters out many opportunities. Additionally, numerous edtech startups focus solely on using generative AI for content creation, often competing with major generative AI content creators like Synthesia.
My question then becomes: What sets apart a creator of educational video content from one that generates various types of video content? Simply labeling AI as an edtech product isn’t enough. What I find more intriguing is when AI enhances an already robust product, as seen with Duolingo.
Similar applications could involve integrating AI into audio content to personalize voices, or improving a content database search algorithm. However, it’s crucial that the surrounding product is equally compelling for the AI offering to truly be the icing on the cake.
Is the current market more favorable to B2B approaches, where sales cycles are slower, versus B2C models, which can be hard to monetize?
It depends. In tough times, it’s even crucial to create a product that deeply connects with users and generates a great user experience. This enhances customer loyalty and keeps them willing to pay high prices, both in B2C and B2B.
Additionally, it’s now becoming crystal clear which team manages to execute well and turns recessions into opportunities.
Besides subscriptions, what are some monetization approaches you have seen succeed in B2C edtech?
I would draw a distinction between the business model on which the product is built, with its specific mechanisms and characteristics, and what is monetized in the end. In edtech software products, we rarely see any form of monetization other than subscription models, both in B2C apps and B2B software products.
An exception is likely found in hardware components like toys, which typically involve more transactional revenue. However, some products don’t naturally fit the classic subscription model, and so are structured more like a marketplace — for example, content marketplaces where students can upload and consume learning content.
There are some intriguing models like Knowunity or Studysmarter. It’s especially crucial here that both the supply side that’s creating content and the demand side that’s consuming content are sufficiently incentivized and satisfied with the product to ensure the marketplace remains adequately liquid.
Emerging markets arguably need more edtech. Will the solutions to address this need arise locally?
Before joining Earlybird, I worked at German-Kenyan social business EIDU, where I mainly worked on driving their expansion efforts in Africa. EIDU develops a complementary app for preschool education that focuses on promoting applied learning from an early age. I also spent quite some time on-site in Kenya, which was an impactful experience.
Education technology is urgently needed in emerging markets. It can be quite challenging to start a business with sufficient capital to rapidly serve many countries and cities, without solely relying on grants — though crucial and important.
Therefore, I believe a combination of approaches is often necessary. Developing products in isolation without a deep understanding of user needs is both demanding and questionable. In contrast, funding sources, both diluting and non-diluting, are not always readily available or present initial hurdles in developing countries.
So while we should acknowledge the importance of support and assistance from regions like Europe, companies in this space should not solely rely on them.
There’s a market for immediately actionable skills training, including reskilling. On the other hand, from humanities to learner well-being, some areas of edtech still feel underserved. Do you consider these spaces as opportunities ripe for the taking or would you wait and see?
I would say, why not? If the target group is large enough, and they have a problem or urgent need they’re actively seeking a solution for, then I don’t see why these opportunities would not be ripe.
The humanities made waves as early as the 18th century, and people in ancient times already took care of learners’ well-being. So, I believe the time has long been ripe for more edtech applications.
Moreover, there are already some very successful learning apps for subjects like religion (e.g., Glorify or Pray.com), or audio apps like Yuno, which aim to enhance general knowledge in art, history and more.
Which edtech app or platform did you enjoy the most this year?
Most likely the Kindle app, if you can call it an app. Also, I often have the latest apps from edtech startups that I have conversations with. That’s the cool part of my job: being so close to current technological developments and getting to try them out early. Right now, for example, I’m feeding my AI brain with content at Melon.
Masha Bucher, founder and general partner, Day One Ventures
Compared to 2021, did edtech startups lose momentum faster than the broader venture market?
Interest in funding edtech dropped broadly in 2023 compared to 2021. However, these companies demonstrated strong performance in our portfolio, and advancements in AI will provide tailwinds for a boom in edtech in 2024. More individuals will require new job opportunities and re-education to adapt to a paradigm shift.
How was edtech deal activity in 2023? How full is the pipeline of companies you’re looking at?
Although we didn’t see many interesting edtech opportunities within our own deal flow in 2023, the wave of AI-driven unemployment will require re-education on a massive-scale to equip individuals with the necessary skills for this new normal. Consequently, I expect the education sector to experience substantial growth both in the mid-term and long-term.
I predict education will be more like a video game, and gaming developers will venture into the realm of education. Drawing upon their expertise in crafting virtual worlds, these developers will leverage their skills to create engaging and interactive educational content. This shift toward a more immersive learning experience will be further amplified by the (re)emergence of the metaverse.
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