The Educational Technology, or EdTech sector, has an enormous reach, encompassing virtually all industries that convey information. It includes traditional teaching with the aid of computers as well as mobile learning applications. EdTech is highly attractive as an investment opportunity because it allows the targeting of many demographic groups, including students in a brick-and-mortar elementary school, graduate students taking online courses, and baby boomers going back to school years after graduating.
Jeffrey Stevenson, managing partner of Veronis Suhler Stevenson (VSS), expects EdTech to take center stage over the next five years due to its explosive growth potential. EdTech could well become the next FinTech if this projection proves accurate.
VSS first entered the EdTech market in 2005 with its investment in InfoBase. It assisted in managing this firm’s transition from a transactional print publisher to a digital subscription business. InfoBase is currently an electronic repository for dynamic reference information that isn’t well suited for traditional databases, typically because it isn’t formatted at all or is only partially structured.
VSS developed a strategy to target EdTech services and programs for younger demographic groups, which is why it began investing in Cambium Learning Group. This partner allowed VSS to tap into the pre-K‒12 curriculum market. VSS also entered elementary education through VKidz Holdings, an award-winning EdTech company that caters to home-school and elementary education for both parents and schools. VKidz is a completely digital company that uses a subscription model.
Public educational reforms are driving the dramatic increase in the demand for online education services, which is why EdTech currently has so much growth potential. This investment in traditional education systems has increased 84 percent since 2000, although this additional funding hasn’t resulted in a corresponding increase in educational performance. Instead, 85 percent of the new investments has been consumed in delivery costs such as building maintenance and teaching staff.
The increasing cost of college tuition is also driving the demand for EdTech as more traditional universities turn to online education. VSS has observed a steady increase in demand for these services, which require innovative applications of digital technologies to realize the benefits of those technologies in EdTech.
Five-Year Forecast
The promising future of EdTech is primarily due to the ineffectiveness of the tools currently used by traditional education. Global investment in education and training should reach $8 trillion by 2025, but this expectation doesn’t address the driving force in the EdTech market by itself. For example, the use of new formats such as artificial intelligence (AI), artificial reality (AR) and virtual reality (VR) will continue to increase over traditional online tools like online classes and e-books.
Personalized Technology
EdTech is shifting toward a more personalized use of technology, including a focus on mobile applications. Within a few years, interactive devices will become as common in education settings as books were 20 years ago. This process is already well underway, and some schools have already completed it. Companies that differentiate themselves from their competition by offering innovative services are most likely to take the lead in this sector.
Distribution Channels
The traditional distribution channels for EdTech include school districts and universities, but these organizations are notoriously slow to adopt new technology. However, the large amount of recurring revenue that’s possible with these channels makes them impossible to ignore. The key to success with this investment strategy is properly timing the adoption of new technologies while continuing to use traditional distribution methods.
Global opportunities provide another area of interest for companies wanting to invest in EdTech. VSS has observed that private equity deals in EdTech primarily occur in the Western Hemisphere, especially the United States. Over 1,300 of these deals were completed in the United States between 2011 and 2016, which was two-thirds of the global total for this time period. The rate of EdTech deals in the U.S. has declined since then, despite the increase in mergers and acquisitions (M&A) of mid-tier companies in EdTech.
The EdTech sector already has abundant opportunities for investment, even though it’s still in its early stages of development. However, the AR/VR and AI tools needed to disrupt traditional educational methods aren’t available yet. The widespread adoption of this technology may be a slow process, but it will happen eventually.
Similar growth has already occurred with private equity firms and venture capitalists (VCs), largely because major EdTech players are no longer restricted to the developed world. VSS remains confident that EdTech has a bright future for investors, especially in the middle market segment. The size of the education industry rivals that of financial services, and it may have even greater potential. VSS plans to remain in EdTech to see history being made.
Continued Investments
VSS engaged in a particularly large volume of activity in 2019, especially during the latter part of the year. The firm announced its partnership with Trivest to jointly invest in Quatrro Business Support Services (QBSS) in October. QBSS provides outsourcing services for enabling business processes with technology, typically back-office functions like billing, finance and payroll. This company is located in Marietta, Georgia, and it primarily serves small businesses in the U.S. and Europe.
VSS also made a minority investment in Powerhouse in October. This company provides a range of business services, including construction, retail store rollouts and property maintenance. Powerhouse’s clients primarily include convenience stores, health care and real estate.
Coretelligent announced its acquisition of SoundView IT solutions in November, which adds 150 full-time employees to its roster. Coretelligent has been in business since 2009 and is already in the VSS portfolio. This firm provides managed IT and private cloud services in New York City’s financial sector, and it has significant experience with both family businesses and corporations.
Stevenson announced in December VSS’s decision to make a “significant growth investment” in Endo1, which provides back-office support for endodontists. This investment positions Endo1 to begin strategically acquiring these dental practices. Stevenson added that VSS’s investment aligns with its strategy of supporting experienced health care executives with flexible capital solutions that will take their businesses to the next level.
About VSS
VSS was founded in 1981 as one of the first advisory firms to focus on the media sector. Stevenson joined the firm in 1982 shortly after graduating from Rutgers and has been with the company ever since. He became an official partner in 2001 and is now VSS’s managing partner.
VSS currently manages seven funds, including four equity funds and three structured capital funds. It specializes in the lower middle market, primarily companies with annual pre-tax earnings between $3 million and $25 million. VSS provides the financing these companies need to pursue acquisitions through rapid growth.