TopHat: 25x in 5 years… how did that happen?
Today, Top Hat announced a $22M financing led by Union Square Ventures and with additional backing from existing investors including Inovia Capital. Just five years ago, my partner Karam and I started building a relationship with Michael Silagadze at Top Hat. At the time we talked about the business model, calibrated expectations for growth, discussed ways to drive execution and brainstormed about the dynamics of the EdTech market. I remember saying to him, “This idea of having every student use their phone to answer real-time questions in class could be very powerful.”
So we met with several of our advisors that had previously built or run education technology companies (there are a couple great success stories represented in the Inovia network). Like most investors, we believed that the education market, in general, was an unrewarding place to invest. All of them confirmed (with absolute certainty) that education is a really tough market; the large players (including some of their own companies) had already tried this and that it was a really bad idea. We were told that even if it did work, Top Hat’s product was a small feature that would quickly be commoditized to free.
But we liked the way these Waterloo engineering grads thought about the business (akin to a complex system of equations), so we kept paying attention.
By early 2012, Mike’s team had exploited a fascinating growth hack to get tens of thousands of students smattered across ~75 schools using their product. They had done it without employing the usual edtech strategy of giving away a free version or fighting their way through the bureaucratic sales process of universities. Instead, Top Hat convinced professors that increasing their classroom engagement was worthy of requiring students to buy a term license to use the app.
While this demonstrated the Company’s scrappy instincts, we still questioned if it could it scale to millions of students. Furthermore, we asked if one could realistically leverage that foothold into an even broader platform. The key insight that gave us conviction to support this team was understanding the value of the professor relationships being built. The only players really successful at building a similar asset were textbook publishers. We realized these publishers had evolved into obscenely profitable, price-gouging dinosaurs that students, professors and administrators had grown to hate. They were ripe for disruption, so we invested in a Company that we thought could break their stranglehold on higher ed for once and for all.
When I look at our original investment thesis a scant 5 years later, that core is unchanged. In that time span, we have seen an over >25x growth across the Company’s user base, revenues and enterprise value. Today, millions of students have become paying customers and Top Hat is the defacto standard in its category.
Moreover, Top Hat launched its own interactive content platform which leverages the trust established with professors and cuts traditional publishers out of the equation. Professors can earn income publishing their content directly through Top Hat and students can access interactive textbooks at a fraction of the costs on any device. This is a win-win value proposition which puts Top Hat in a position of strength relative to incumbents in the $10Bn academic textbook market.
