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Why Taking a Chance on EdTech Will Pay Off in 2021 and Beyond…

I recently heard someone refer to EdTech investments as ‘unsexy’. Now, obviously that’s a matter of opinion, but it did get me thinking about why we’ve seen comparatively little investment in the space. Even with a global market set to reach $404bn by 2025, just c. 4% of EdTech businesses make up the world’s tech unicorns.

Regardless of the opportunity, VC investment in EdTech globally was at just $7bn in 2019, not even 13% of that invested in fintech. With billions poured into everything from cybersecurity to self-driving cars, it’s hard to understand why more time and funding isn’t going to learning.

Education has been waiting for digital transformation. According to HolonIQ, education expenditure reached $5.4tn worldwide in 2020, but only c. 3% was spent on digital.

Yet more people than ever want to learn with tech, as educational app downloads saw a 65% y/o/y increase globally in 2020. Nonetheless, navigating positive and negative associations with education has been challenging for startups.

In Europe, EdTech is far from being the sweetheart of VC. Companies have had to contend with low levels of investor interest and a less than happy history with tech-enabled learning (a well known example of this is the introduction of smart whiteboards to the classroom.) In my view the tides are slowly turning, and European investors should take advantage of a market with significant room for innovation and growth. In this deep insight, I’d like to explore some of the key trends in consumer EdTech that I see emerging in 2021.

Market:

EdTech comes with a large and fragmented market. As I mentioned earlier, what interests me most is the consumer-side of this market. That is the side of EdTech that brands itself for ordinary people and which can be split into the following segments:

EdTech market segmentation can be divided in many different ways, this is just how I see it at a high level

With more individuals stuck at home than ever before, in mid-April 2020, Google searches for terms like ‘online courses’ and ‘free online courses’ reached a historic high.

Google Search Trends 2020

Likewise, LinkedIn reported that in the first week of April, people watched 1.7 million hours of video content on LinkedIn Learning compared 560,000 hours in the first week of January. In fact, an Open University survey of over 2,000 UK adults taken during the lockdown found that 24% had taken to learning additional learning to “boost their employability and protect the value of their skills.”

Although Covid-19 has accelerated digital adoption, structural tailwinds have long supported the growth of EdTech: consumers have access to high-speed internet connections, smart phones, and other devices.

A 2018 study of attitudes towards learning in the US found that the vast majority of adults wanted to go back to education. Most judged that online learning was actually better than face-to-face learning in meeting their needs.

Above all, consumers have come to value the quality, flexibility, personalisation, and affordability that EdTech companies can offer.

Trend #1: Learning on the go (EdTech x Audio)

Most consumers are now mobile natives. These are people who want to access knowledge/edutainment on the go (handsfree, while they commute, shop, clean, garden, etc.) Plenty of businesses like MasterClass and Udemy offer digital learning courses, but few are audio-first. Whilst it’s true that some experiences are better seen than heard, the rising popularity of podcasts and audiobooks suggests that consumers are keen to listen and learn.

Last year, Deloitte estimated the global audiobook and podcast market would reach c. $4.6bn in 2020. While that’s only 5% of the total book market, the rate of year-on-year growth was 27.5%. In fact, more than half of all Americans above the age of twelve listen to podcasts. Indeed, one of the leaders in ear-share, Spotify, hasn’t remained idle with acquisitions in the space ranging from Megaphone (a podcast hosting and ad insertion company) in November 2020 to a $100m licensing deal for Joe Rogan’s podcast.

But if the audio market is supposed be taking off all by itself, where is the opportunity? The answer lies in monetisation. In contrast to audiobooks (monetised either by one-off purchases or subscriptions), podcasts have multiple revenue streams including:

  • Advertising and sponsorship (making up the largest portion)
  • Subscriptions
  • Events
  • Merchandise
  • Content marketing
  • Contracts for branded podcasts
  • And individual listener donations e.g. via Patreon or Twitch

Despite all of these potential channels, podcasts still make significantly less than audiobooks do. In 2018, even with 60% more podcast listeners than audiobook listeners in the US, each listener of the latter generated more than 2.4x the annual revenue of the former. Because the barriers to entry for podcasts are so low, anyone with a smartphone and $30 for hosting fees can kickstart a broadcasting hustle: as of January 2020, there were 850,000 active podcasts with more than 30 million individual episodes.

EdTech offers the audio space an interesting solution to its monetisation issue. By marrying popular podcast-style audio with educational content, companies can provide a higher value experience and differentiate from abundance of choice on the market.

In fact, a few startups have already begun capitalizing on this white space, including US-based Knowable and UK-based Dorm App. The former is a learning platform with a library of original, expert-led audio courses. Having received its seed round investment of $4m from a16z, the company has produced over 100 hours of content focusing on ‘soft skills’ like professional development, self-improvement, and health. Likewise, the Playfair Capital backed Dorm App helps consumers sift through the noise by curating the world’s podcasting content across learning themes.

In contrast, the audio knowledge economy is already booming in China, where it’s dominated by Chinese audio EdTech company called DeDao (valued at $1.2bn in 2019). DeDao, which translates literally to “getting knowledge”, is an audio enabled learning platform that includes expert-led, subscription-based courses with in-built curation and transcription tools. For more on this, please see Margret Zhang’s (peer Included VC Fellow) Listening In On The Future Of On The Go Learning.

As we enter 2021, consumers will continue to seek out the highest quality content on the market they can find. With over 70% of parents worrying about screen dependence, audio-based learning offers an attractive alternative to traditional digital learning. Likewise, for the many that reach for their headphones over a book, it has the opportunity to provide flexible, snackable and personalised content throughout the course a day.

Trend #2: EdTech & The Passion Economy

In more ways than one, EdTech is also the most obvious partner to the growing passion economy. Put simply, the term ‘passion economy’ refers to a new wave of startups creating communities that challenge traditional social media giants. Rather than the generalised and non-specific content found readily across platforms we today, these companies are focused on specialised content that resonates with their users. In 2021, I believe that we will see enhanced growth in EdTech platforms that draw on this trend. In effect, businesses that allow users to create and monetise their expertise while upholding a high degree of curation and quality for consumers.

Tech platforms that allow individuals to share knowledge are not a new concept. For many years, YouTube has consistently drawn together one of the largest community of learners. The Pew Research Centre found that “how-to” videos are what bring 51% of all US-based YouTube users to the site. Likewise, a similar portion of Australians (54%) prefer to watch YouTube if they have a question than read a user manual or talk to someone on the phone.

One might argue that with such a loyal user base it would be difficult for EdTech startups to challenge the incumbent. However, YouTube’s hold on learning is hardly defensible. There are clear issues with quality control, content-creator monetisation, and curation. YouTube is also an inherently one-way experience, not optimised for the organic back and forth between student and teacher.

In 2021, I predict that we will see an increase in EdTech startups taking on and innovating through the passion economy. Covid-19 has accelerated adoption of companies in this space as working from home has allowed for increased flexibility and time for side hustles. Having recently taken a minority investment from Spectrum Equity Partners in November 2020, Kajabi (web hosting and video learning tech platform) has seen its run rate cross $60 million in August, and the company reached over $1 billion in recorded transactions in March 2020.

More than this, EdTech startups are primed to cherry pick the best aspects of pedagogy to make elite peer-to-peer learning communities. For instance, Teachable, a platform that allows anyone to teach classes, has built-in functionality to allow for interactive comment pages, quizzes, and even a Facebook group where the students can go to connect and find support. To date, the startup has had over 100,000 creators sell $500 million of courses and coaching.

Finally, I recently had the opportunity to connect with the newly founded UK-based startup Mana, which is creating a platform where consumers get access to expert-led lessons and mentorship in almost anything. Following a mobile-first approach, Mana’s founder, James Lo, explained that he hopes to create an educational alternative to social media where content is curated, and consumers can learn from members of the community they value.

Trend #3: Branding matters

EdTech has had a marketing problem. Historically, tech companies have struggled to create memorable brands in a space that has been evolving so rapidly. Finding broad engagement is hard when consumers all have diverse attitudes towards learning. In Europe, businesses not only have to grapple with convincing their own populations to trust their brand, but also need to work out how to be relatable scaling across multiple countries.

Of course, there have been success stories such as Duolingo, which recently had 30 million users trying to learn a new language through its platform in 2020. However, it is my view that branding will be absolutely vital to the success of EdTech in 2021. In fact, it could be the subject of an article all on its own, but Rebecca Sadwick from Forbes has already done a fantastic job of identifying 10 common EdTech marketing mistakes in her 2019 piece.

Paraphrased from her work, the following pointers for B2C EdTech startups hold true:

  1. Be Authentic.
  2. Develop a unique tone of voice based on mission and vision, but don’t rely on cliches like “_____ Company Uses AI to Transform Education”.
  3. Don’t try to be a thought leader without credible research or expertise.
  4. Aesthetic matters in education just as it does elsewhere. Companies that have done a great job of this include UK-based Perlego and US-based MasterClass.
  5. Know your users and never underestimate community. According to Edweek, 92% of educators consider word of mouth to be the single most important source of new product information.

Trend #4: Growing Interest in European EdTech Companies

It goes without saying that the US and China have been the leaders in creating the world’s most memorable EdTech brands. In one of the most disruptive year to schools and society alike, it is unsurprising that American investors chose to fund some of the most exciting learning focused businesses around.

Table represents a few of the largest US-based EdTech transactions in 2020, created using data from Crunchbase

That said, the good news is that European startups are starting to see some of that funding too. Slowly but surely the region is catching up, with the exciting successes of Poland’s Brainly and Norwegian Kahoot! Both of these businesses have not only been able to raise significant amounts, but also achieve scale.

Table represents a few of the largest Europe-based EdTech transactions in 2020, created using data from Crunchbase

Finally, investors in Europe are coming around to the idea of EdTech, with an encouraging 45% growth in European VC investment between 2019 and 2020. While there is definitely room for improvement, the first European EdTech unicorns are emerging with more on the horizon. 2020 should act as a wakeup call and hopefully, we will continue to see an upward trajectory, with increasing investments made in the space.

Graph represents VC investment in EdTech companies from 2014 to 2020 using data collected from Pitchbook
Graph compares VC funding for EdTech companies in Europe, US and China in 2020 using data collected from Pitchbook

To Conclude…

It is safe to say that 2020 has been a monumental year for EdTech. Like with other industries, the widespread disruption has both normalised and accelerated the digitization of traditionally in-person experiences. In response to layoffs, record numbers have taken to upskilling online. Likewise, every single parent, child, and educator has been exposed to some form of eLearning.

Through the good and the bad experiences of remote learning, I don’t think EdTech will be written off as ‘unsexy’. With widespread digital adoption, consumers will look to enrich their lives through learning for a multitude of reasons ranging from entertainment to career development. While many parents won’t remember remote learning fondly, they will remember the brands that helped entertain their children through one of the most difficult periods of isolation.

Despite the challenges, it is my hope that European investors will continue to realize the potential of this space and, just as VCs in the US and China have done, take EdTech startups seriously.

*Note: This industry insight has only covered a corner of the EdTech map, leaving out schools, corporate and higher ed institutions. Instead, it has shed light on a few of the upcoming trends that I am personally excited about. Watch this space!

You can follow my journey and more musings on Twitter and connect with me on Linkedin, or reach out via nikita@hummingbird.vc

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Included VC: the first of-its-kind fully funded global Fellowship designed to provide opportunity to underrepresented and overlooked aspiring VCs who are actively committed to breaking into, and pursuing a career in venture capital.

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Nikita Andersson

Nikita Andersson

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