6 ms·

VC investments in education

34 points by rafaelc 16y ago

danielnicollet 16y ago
Great post but, If this equation was all it took for VCs to switch their attention away from software, biotech, and energy maybe they would also be investing a lot in social services, retirement homes, and other growing sectors of the economy. I think you miss the point that VCs are not just after market size, they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector. Dan
- rafaelc 16y ago
  Ah, there's definitely not an equation nor do I claim there to be an equation to VC investments. I'm just pointing out the very big discrepancy in the numbers. Some more facts: - Over the past three years there have been 165 private equity backed transactions within the education sector. - Aggregate deal value of these investments based on data compiled by Berkery Noyes is in excess of $35 billion. - Education was the source of 4 IPO's in the last 18 months Also, regarding your point about strong cash flows and large profit margins not existing in education: that is a myth. Two points from that same presentation: - Across various education sectors EBIT margin ranges from 15%-40%. - Negative working capital: many K-12 models for content and technology receive cash first and are transitioning to SaaS and subscription based, recurring revenue content models
- patio11 16y ago
  they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector The following comment doesn't apply to any VCs y'all may be friends with: the key skill for maximizing a VC firm's income is to maximize their assets under management, and that makes investments a marketing decision which have second order consequences on capital returns. Cleantech is sexy and will attract dollars. Education is not sexy. Given the choice between a sexy field with N% expected returns and an unsexy field with N+3% returns, a rational VC would back sexy almost every time. This should not come as a surprise to anyone who has studied the mutual fund industry, which is also perpetually chasing the new hotness (which juices inflow) at the expense of returns for the owners.
  - byrneseyeview 16y ago
    The market is more efficient than that: the accurate way to describe the situation is that unsexy fields have a higher return on investment to compensate for their unsexiness, and thus that their undervaluation is way to quantify how much people dislike them. Take BP as a good example of this. It's a major oil company trading at a P/E under 6. If they made a catastrophically huge one-time payment of $30 billion to settle the Deepwater Horizons case, they'd still be worth ~50% more than their current price. But who wants to say that they profited from environmental destruction? Better to invest in Google--you get a stake in the business, but you also get a stake in the smugness.
deleted 16y ago
[deleted]
jbyers 16y ago
Speaking from an education collaboration perspective, entering the market requires grass-roots adoption, high-touch support, non-trivial insight into how schools buy stuff, and patience. These characteristics may not be compatible with venture investment, especially if you can't draw a convincing line from zero to a hundred million dollar business. I'd guess the next big education success will fly in well under the Silicon Valley radar.
- johnl 16y ago
  That's what I was thinking. The markets is there but in front of it there is this very big bureaucracy that you have to deal with. So maybe point the app towards something like homework where the educational bureaucracy doesn't have much control.
  - dhimes 16y ago
    I'm giving that a shot, but if teachers don't endorse it that can be a very tough road.
    - johnl 16y ago
      My thought would be to stay away from the teachers. Quiz the kid to see where they need help and then teach away with loads of feedback and reinforcement.
      - dhimes 16y ago
        Teachers wield a lot of power. I noticed this when I was teaching, and see it more now that I'm tutoring. I can give a student something that will help him or her to understand something, but if the teacher didn't assign it s/he may or may not take it seriously. They don't even go to the freely accessible web site that the book references unless assigned. I don't know how the hell I'm going to get them to pay for mine. They will pay for me to tutor them, though, so I know there is a way.
        16y ago
jonbischke 16y ago
I'm curious as to where the author got the "$100 million max" number. There has been significantly more than that invested in the industry. Four companies alone that I can think of have raised about $100MM alone (2tor, Global Scholar, Grockit, Smart.fm) and there have been dozens of smaller financings (and no doubt some bigger ones I'm omitting). Private equity guys have also been at work here funding companies like Grand Canyon and Bridgepoint (both of which IPOed and returned big #s). I agree that education has been an under-invested in industry but question as to whether the amounts are low as are stated in the article.
- rafaelc 16y ago
  To clarify: on average, over the past 5 years, the estimate is $100 million max per year. Those are great examples but Grockit pulled in $7 million this year. Even if you add in 2tor's anomalous number this year ($22 mln) you still have a way to go to get to $100 mln this year for VC financings.
  - jonbischke 16y ago
    In the last six months -Knewton raised $12.5MM -Eleutian Technology raised $10MM -Orbis Education raised $8MM -LiveMocha raised $8MM -Kakai raised $7.5MM -Moonshoot raised $6.6MM -Cramster raised $6MM That's about $100MM in the last six months alone and this is an industry where there are a number of fundings that never get announced. Again, I agree with your main premise, just not sure the data is as dire as you suggest.
    - rafaelc 16y ago
      Good point over the last six months. Still, that's why I said averaging $100 mln per year over the last 5 years. For example, last year was an incredibly challenging year for everyone but the investment in education was really low and counts for that 5 year average. Regardless, you can look back over the years before and see that it hovered around $100 mln average per year. Stepping back, your last 6 months point is why I wrote the article -- you can see that VC investments are accelerating, and it's only going to get better for guys like you and me with education startups.
carbocation 16y ago
Education is just a vast market. Based on his audience, Patrick's Bingo software is essentially in the Education market. My small company that tries to predict college admissions can also be seen as part of the Education market. The landscape of things that qualify as "Education" is quite broad and, at places (e.g., U of Phoenix; Kaplan), quite deep.
expertcs 16y ago
http://berkerynoyes.com/news/pr_VCED_SUMMIT_2010_update%20.aspx?ContactId=2145199453 http://berkerynoyes.com/news/pr_VCED_SUMMIT_2010_update%20.a... 100+ VCs in this event.

34 points by rafaelc 16y ago

Great post but, If this equation was all it took for VCs to switch their attention away from software, biotech, and energy maybe they would also be investing a lot in social services, retirement homes, and other growing sectors of the economy. I think you miss the point that VCs are not just after market size, they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector. Dan

rafaelc 16y ago
Ah, there's definitely not an equation nor do I claim there to be an equation to VC investments. I'm just pointing out the very big discrepancy in the numbers. Some more facts: - Over the past three years there have been 165 private equity backed transactions within the education sector. - Aggregate deal value of these investments based on data compiled by Berkery Noyes is in excess of $35 billion. - Education was the source of 4 IPO's in the last 18 months Also, regarding your point about strong cash flows and large profit margins not existing in education: that is a myth. Two points from that same presentation: - Across various education sectors EBIT margin ranges from 15%-40%. - Negative working capital: many K-12 models for content and technology receive cash first and are transitioning to SaaS and subscription based, recurring revenue content models
patio11 16y ago
they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector The following comment doesn't apply to any VCs y'all may be friends with: the key skill for maximizing a VC firm's income is to maximize their assets under management, and that makes investments a marketing decision which have second order consequences on capital returns. Cleantech is sexy and will attract dollars. Education is not sexy. Given the choice between a sexy field with N% expected returns and an unsexy field with N+3% returns, a rational VC would back sexy almost every time. This should not come as a surprise to anyone who has studied the mutual fund industry, which is also perpetually chasing the new hotness (which juices inflow) at the expense of returns for the owners.
- byrneseyeview 16y ago
  The market is more efficient than that: the accurate way to describe the situation is that unsexy fields have a higher return on investment to compensate for their unsexiness, and thus that their undervaluation is way to quantify how much people dislike them. Take BP as a good example of this. It's a major oil company trading at a P/E under 6. If they made a catastrophically huge one-time payment of $30 billion to settle the Deepwater Horizons case, they'd still be worth ~50% more than their current price. But who wants to say that they profited from environmental destruction? Better to invest in Google--you get a stake in the business, but you also get a stake in the smugness.

deleted 16y ago

[deleted]

jbyers 16y ago

Speaking from an education collaboration perspective, entering the market requires grass-roots adoption, high-touch support, non-trivial insight into how schools buy stuff, and patience. These characteristics may not be compatible with venture investment, especially if you can't draw a convincing line from zero to a hundred million dollar business. I'd guess the next big education success will fly in well under the Silicon Valley radar.

johnl 16y ago
That's what I was thinking. The markets is there but in front of it there is this very big bureaucracy that you have to deal with. So maybe point the app towards something like homework where the educational bureaucracy doesn't have much control.
- dhimes 16y ago
  I'm giving that a shot, but if teachers don't endorse it that can be a very tough road.
  - johnl 16y ago
    My thought would be to stay away from the teachers. Quiz the kid to see where they need help and then teach away with loads of feedback and reinforcement.
    - dhimes 16y ago
      Teachers wield a lot of power. I noticed this when I was teaching, and see it more now that I'm tutoring. I can give a student something that will help him or her to understand something, but if the teacher didn't assign it s/he may or may not take it seriously. They don't even go to the freely accessible web site that the book references unless assigned. I don't know how the hell I'm going to get them to pay for mine. They will pay for me to tutor them, though, so I know there is a way.
      - 16y ago

jonbischke 16y ago

I'm curious as to where the author got the "$100 million max" number. There has been significantly more than that invested in the industry. Four companies alone that I can think of have raised about $100MM alone (2tor, Global Scholar, Grockit, Smart.fm) and there have been dozens of smaller financings (and no doubt some bigger ones I'm omitting). Private equity guys have also been at work here funding companies like Grand Canyon and Bridgepoint (both of which IPOed and returned big #s). I agree that education has been an under-invested in industry but question as to whether the amounts are low as are stated in the article.

rafaelc 16y ago
To clarify: on average, over the past 5 years, the estimate is $100 million max per year. Those are great examples but Grockit pulled in $7 million this year. Even if you add in 2tor's anomalous number this year ($22 mln) you still have a way to go to get to $100 mln this year for VC financings.
- jonbischke 16y ago
  In the last six months -Knewton raised $12.5MM -Eleutian Technology raised $10MM -Orbis Education raised $8MM -LiveMocha raised $8MM -Kakai raised $7.5MM -Moonshoot raised $6.6MM -Cramster raised $6MM That's about $100MM in the last six months alone and this is an industry where there are a number of fundings that never get announced. Again, I agree with your main premise, just not sure the data is as dire as you suggest.
  - rafaelc 16y ago
    Good point over the last six months. Still, that's why I said averaging $100 mln per year over the last 5 years. For example, last year was an incredibly challenging year for everyone but the investment in education was really low and counts for that 5 year average. Regardless, you can look back over the years before and see that it hovered around $100 mln average per year. Stepping back, your last 6 months point is why I wrote the article -- you can see that VC investments are accelerating, and it's only going to get better for guys like you and me with education startups.

carbocation 16y ago

Education is just a vast market. Based on his audience, Patrick's Bingo software is essentially in the Education market. My small company that tries to predict college admissions can also be seen as part of the Education market. The landscape of things that qualify as "Education" is quite broad and, at places (e.g., U of Phoenix; Kaplan), quite deep.

expertcs 16y ago

http://berkerynoyes.com/news/pr_VCED_SUMMIT_2010_update%20.aspx?ContactId=2145199453 http://berkerynoyes.com/news/pr_VCED_SUMMIT_2010_update%20.a... 100+ VCs in this event.