The Educational Technology (EdTech) industry is enjoying a period of unprecedented innovation and investment, driven by many factors, including market demand, shifts in classroom and home technology adoption, and the level playing field that new standards have helped to create.
EdTech is becoming increasingly relevant to all students, by delivering improved learning outcomes and by increasing students’ digital literacy. Various technologies are being used in educational institutions around the country to deliver blended and individually tailored content, stem dropout rates, improve teacher performance, enforce institutional policy, increase parent engagement and motivate students to learn, among other benefits, all of which are helping to improve learning outcomes.
In addition to the standalone benefit of educational technologies, another large driving force for increased EdTech adoption is the national Common Core State Standards (Common Core). The Common Core, which has so far been met with controversy, was primarily designed to ensure consistent educational quality for our nation’s students. Apart from improving our educational system through standardization in math and English/language arts, the Common Core also has the added benefit of providing creators of EdTech and services a much broader audience for their products.
These factors have driven the pace of investment in the EdTech space to record highs. In 2012 and 2013, investors deployed over $1 billion into EdTech. The pace has quickened this year; in Q1’14 alone, investors deployed $500 million, marking the fastest rate of investment in more than five years.
Figure 1: VC Investment in EdTech
NVP’s Investments in EdTech
Norwest Venture Partners has a long and consistent history of identifying and backing market-leading EdTech companies:
-PeopleSoft is perhaps our longest-standing direct link to the education space. The company was a key provider of higher education student administration software.
–Embark, an applications and admissions SaaS provider, has powered over 13 million student university and scholarship applications.
–Rafter (formerly BookRenter) is a leading Higher Ed textbook rental and course materials management provider.
–iProf offers content delivery and assessment solutions to the Indian secondary market.
–Lumosity has helped 60 million consumers with ‘brain training’ games and its curriculum is being actively integrated into elementary schools.
–Udemy is pioneering a lifelong learning marketplace for more than 3 million students worldwide.
We are also pleased to announce that we recently closed a significant investment in Turnitin, the world’s most widely-used plagiarism detection and online grading service. Turnitin provides its SaaS platform to both K-12 and higher education institutions. The Company now serves over 10,000 institutions, in 135 countries, by referencing a rapidly growing database of over 45 billion web pages, 350 million student papers and 130 million journal articles. Turnitin’s SaaS delivery allows instructors to deliver real-time, personalized feedback that fosters critical thinking skills and more original writing in student work.
Emerging Trends in EdTech
As we continue to invest in the EdTech sector, we believe that SaaS/cloud-based companies have a unique role in seizing various opportunities.
Personalized delivery model/mobile learning: At both a national and local level, there is a push towards a 1:1 delivery model (one computing device per student), whether institutionally provided or BYOD. According to the Software & Information Industry Association (SIIA), over 75% of elementary and 85% of secondary schools allow some degree of mobile device usage in classrooms, although most usage is ad hoc. However, SIIA’s data notes that the majority of educators anticipate that mobile devices will be fully integrated into the classroom within five years. Because of their ease of delivery across platforms, SaaS offerings within classroom tools, digital content, assessments, and student/parent administration have experienced a significant increase in demand.
Common Core: The Common Core was designed to ensure consistent educational quality for our nation’s K-12 students. The regulations standardize math and English/language arts, but also indirectly broaden and standardize the target market for new EdTech offerings. The standards are also forcing districts to accelerate replacement cycles for their existing, often legacy, software systems to conform to the standards, creating a window of opportunity for SaaS vendors.
Replacement Cost: SaaS models benefit from a lower cost of entry and replacement. As institutions consider replacement options for legacy software, the monthly or annual subscription model represents significant cost advantages versus a traditional software license sale. The requisite hardware, large up front licenses, and maintenance packages can be burdensome; Gartner estimates the lifetime cost of installed software to be four times the upfront license cost.
However, many K-12 district officials operate within a ‘use it or lose it’ budgeting process, which has traditionally led to larger, one-time license sales. To combat this embedded advantage legacy providers have, many SaaS vendors offer long-term, paid-up front contracts.
Flexibility: SaaS platforms can quickly deliver and adapt to updates in curriculum, standards and requirements. Given the ongoing changes to Common Core, E-Rate and other funding and standards, educational institutions are growing increasingly wary of making major purchasing decisions at this time. SaaS solutions allow these institutions to make purchasing decisions safely, knowing that major changes in curriculum and standards will have a minimal impact on their existing software solution, and that updates can easily be made and delivered instantaneously. These new software platforms can accommodate new teaching methodologies, as instructors have flexibility in adapting the delivery of software to fit their curriculum and approach.
Privacy: Given the recent national concerns about privacy after the difficult and botched rollout of inBloom, institutions are increasingly vigilant about the security of student data stored remotely. While both single-tenant and multi-tenant SaaS vendors have implemented industry leading security protocols, some educators and administrators may still need time to acquiesce to the idea that they have little to no “control” over student data.
Ownership: By subscribing to a cloud-based offering, some institutions believe they effectively lose control of their software and are therefore at the mercy of the software provider. Some educational institutions are still wedded to the idea of “traditional” ownership and remain reticent to embrace the notion of “leasing” software. SaaS companies in education are able to overcome this hurdle in many cases by reassuring educators that software uptime in many cases is greater than 99.9%, and that the tradeoff to not “owning” software is the ability to use software that incorporates the latest developments in technology and teaching methodologies.
The $2 billion annual pace of investment into EdTech is buttressed by a confluence of positive technology, and regulatory and budgeting tailwinds. This investment pace is supporting a growing wave of technology innovation and Norwest Venture Partners remains convinced that the best is yet to come for market-leading companies. We look forward to continuing our support of entrepreneurs looking to affect positive change in the education space.