What’s happening with seed funding in K12 edtech?
There’s a growing body of evidence that seed investing is in a slump across the venture capital industry. Mark Suster’s excellent post entitled, “Why Has Seed Investing Declined? And What Does this Mean for the Future?” makes this case as does this article in Crunchbase, which points out that rounds of $1M or less are slumping. This might be the case for the broader venture capital industry, but what’s happening in K12 education technology?
Well, I think there’s also a strong body of evidence that seed investing in K12 is also on the decline. As a case in point, EdSurge published an article pointing out that, although more money went into the education technology sector in 2018, fewer deals are getting done. In 2013, there were more than 100 angel and seed investments in U.S. education technology companies and just 45 were reported in 2018. In other words, investors are “cutting fewer — but bigger — checks”. So, we’re seeing a decline in K12 seed stage investments, but why is this happening? Here are my observations about what’s causing the decline.
- The seed investment game is a challenging, long game to play.
It’s no secret that selling into K12, particularly to schools and districts is challenging. If it was easy, everybody would be doing it well. Those who figure it out have a distinct competitive advantage, but even successful companies need years to build a significant customer base. With longer sales cycles and tighter budgets, it usually takes longer to bring businesses to scale in K12 than in other industries. With more time to get to scale, exits take more time, which ties up investment capital (that could be put back into new seed investments) for a longer period of time. K12 takes patient, impact-focused capital and we need more of that.
2. Many funds have gotten bigger and are taking less active roles at the seed stage.
Many funds that have lead the way in K12 including Owl Ventures, Rethink Education, Reach Capital, GSV, and New Markets Venture Partners have raised larger funds. With bigger funds, these firms have more capital to allocate, which typically means they are writing larger checks into more mature companies. Some of the firms have kept some portion of their funds for seed investing, but on the whole these funds are not as active at the seed stage as they were a few years ago.
3. New smaller funds haven’t emerged to backfill the other funds.
As the early VC entrants in K12 have had success and raised larger funds to invest in more mature companies, the next wave of smaller funds has been slower to emerge. There are microfunds like Edovate Capital and Redhouse Education that are making seed investments, but there are very few new funds that have emerged to focus on K12. There’s a gap in the market right now for smaller funds to invest in seed deals in K12.
4. Early childhood and workforce development are more popular places to invest for many education investors.
As the edtech industry has matured, there’s been a swell of investment activity overall. These investments have gone into early childhood, K12, higher education, and workforce development. Recently, there’s been an increase in enthusiasm for early childhood and workforce development. Recent large investment rounds for early childhood companies like Wonderschool and Brightwheel as well as mega investments for workforce investments like Coursera and Trilogy Education’s $750M exit to 2U are signs of a hot investment market for these verticals.
Meanwhile K12 investment has been less active recently. “We saw this windfall of K-12 venture investment in 2011–2014, where large growth equity venture investors took big swings on K-12 companies that have yet to pan out.” says Steve Kupfer, Founder and Managing Director of Redhouse Education. “They either bet on consumer revenue models that didn’t translate well to K-12, freemium companies that could not find consistent or profitable conversion strategies, or on preliminary B2B traction that was difficult to scale through the notoriously slow and unpredictable distribution patterns in schools. As a result, the market normalized. The Series A hurdle has increased substantially. Growth equity investors want to see freemium conversion data sooner. Series A firms want B2B companies to articulate conversion funnel metrics alongside proof of repeatable distribution strategies with profitable unit economics. It’s not easy to deliver such meaningful data with seed capital.”
5. The market has gotten more crowded and companies are growing up.
The U.S. edtech market has ballooned to more than 15,000 providers as entrepreneurs and investors have flocked to education for the opportunity to transform a field that’s been slower to adopt technology than other sectors. As a result, students, teachers, and administrators have a plethora of digital solutions to choose from. In many areas of K12 edtech, markets look much more crowded than they did just a few years ago. For example, there are hundreds of new companies that offer STEM (Science, Technology, Engineering, and Math) products that didn’t exist until recently. As markets get more crowded, it’s harder for an investor to pick a winner. Could this be contributing to a slowdown in seed funding? I’m not sure, but I suspect it’s a factor for some investors.
One could argue that seed round numbers are low in part because some rounds of less than $1M don’t get reported to services like Pitchbook or Crunchbase. While that may be true, it doesn’t change the general perception that fewer seed deals are getting done. I don’t think this downward trend is likely to change until there are one or more large exits within K12. As companies are raising larger rounds, maturing, and reaching scale, the likelihood of one or more big exits goes up. When this happens is anybody’s guess, but I’m hopeful we’ll see this soon. Until then, I think it will be continued tough-sledding at the seed stage in K12.
If you’ve recently raised a seed round or are gearing up to raise a round, I’d like to hear about your experience.
