My friend and colleague Natasha Mascarenhas has been reporting on the edtech beat quite a lot in 2020. So far reading her coverage, I’ve discovered that not only is edtech less dull than I anticipated, it’s actually somewhat interesting on a regular basis.
This week, for example, India’s Byju bought WhiteHat Jr., another Indian edtech company, for $300 million. So what, you’re thinking, that’s just another startup deal? Yes, but it was an all-cash transaction, and White Hat Jr. was only 18 months old.
That’s enough to tell you that edtech is hot at the moment. Which makes sense: much of the world is sheltering at home with school and offices shuttered.
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The COVID-19 era has provided an enormous boon to many software startups, though some more than others. Luckily for its boosters, edtech, after being neglected by VCs due to an expectation of small exits and long sales cycles thanks to red tape, is one of the sectors enjoying renewed interest from private investors and customers alike.
According to a Silicon Valley Bank (SVB) markets-focused report, edtech venture funding reached a local-maxima in Q2 2020, jumping more than 60% from the first quarter of this year to the second. On a year-over-year basis, Q2’s VC edtech results were even more impressive.
But, there’s some nuance to the data that should temper declamations that private edtech funding is forever changed.
This morning let’s peel apart the SVB data and parse through edtech funding rounds themselves from the second quarter to see what we can learn. COVID-19 is remaking the global economy as we speak, so it’s up to us to understand its evolving form.
An edtech boom?
From the top-line numbers, you’d be forgiven for thinking that edtech’s Q2 venture capital results were across-the-board impressive.
Before we dig into the results themselves, here’s the chart you need:
See? Impressive. In percentage terms, Q2 was 63% ahead of Q1’s $0.8 billion result and 117% ahead of Q2 2019’s $0.6 billion result. Obviously, these are rounded figures, so we care more about directional change than we do about the precise percentage changes between any two periods.
To dig more deeply into the Q2 data, I turned to Crunchbase’s dataset this morning, pulled all the edtech-tagged rounds from the second quarter, and filtered out cruft and fluff (post-IPO rounds, non-equity funding, private equity, that sort of thing). Crunchbase has about $130 million more in total Q2 edtech rounds listed (how companies are sorted varies between data providers) than the SVB result, but that doesn’t matter too much for our purposes.
What does matter for our work this morning was Yuanfudao’s epic $1 billion Series G. The China-based edtech unicorn raised over 70% of the quarter’s edtech total in a single round, making the Q2 jump a bit less of a woo-hoo moment.
Update: SVB reached out after the publication of this, noting some data discrepancies regarding the timing of the Yuanfudao round. In short, it was tagged as March 31 in Crunchbase and due to how I put the search query together, it got picked up in the data set. SVB pointed out that its chart included a $750 million round from Zuoyebang in the quarter, which fits. From here the corrections get a bit weird, but what shakes out is that there was still one particular outsized round in the period that impacted results in Q2. This spares our following analysis from being bullshit. Which I appreciate, but I do not love the error and being saved by what is effectively luck.
In dollar terms, every venture period’s results are led by outsized rounds; that’s just how it goes. But to see so much of what appears to be a strong quarter for the sector be dominated by a single round makes it feel a bit less bullish than the chart first had me thinking. (The chart isn’t wrong, mind, we’re just unpacking the underlying data.)
Ok, so what about Q3?
After discovering that the Q2 boom was based on a single funding event, I was curious about what has happened a bit more recently.
Given that VC data lags, it’s always a risky endeavor to look at the data up to the present and take it too seriously. Still, per Crunchbase, since the start of Q3 there have been 14 edtech rounds worth $375.5 million (again discounting non-venture, non-equity round types) thus far in the period.
That pace would put edtech funding in Q3 around where it was in Q1, though with reporting delays I’d hazard that it will wind up ahead of its first quarter result. So, edtech funding will be elevated in 2020 compared to 2019, say, but not as sharply as you might have expected merely seeing the charted Q2 result.
The year is still young. Edtech could heat up even more, making our above notes appear silly in retrospect. Especially if this pod-school idea that Mascarenhas covered earlier this week takes off. Those micro-schools are going to need tooling, and that means more edtech spend. Perhaps Q2 2020 will be the period that edtech has long hoped for, a venture-friendly period of outsized success?
We’ll continue to track the numbers as they come in.
Can learning pods scale, or are they widening edtech’s digital divide?
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