Special purpose acquisition vehicles regained popularity in 2020 as an alternative way to take startups public, and now they are eyeing edtech companies.
So far, Skillsoft has gone public through Churchill Capital, and Nerdy, parent company of Varsity Tutors, did the same through a reverse merger with TPG Pace Tech Opportunities. On the investor side, Edify and Adit EdTech Acquisition are both separate, $200 million SPACs for education companies.
But is there anything specific to SPACs that makes them a better route for edtech companies than a traditional IPO or direct listing? To explore the question, I reached out to Chuck Cohn, CEO of Nerdy, which is currently in the process of being SPACed by TPG, and Susan Wolford, chairperson of Edify Acquisition, a $200 million SPAC for edtech companies.
Nerdy’s business is growing, but the company doesn’t expect to be profitable until 2023 and wants to drive revenues up 31% and 43% from its 2020 and 2021 expectations, respectively. Cohn said the balance sheet looks the way it does because they are heavily investing in product and engineering, and focusing on being well-capitalized.
The SPAC, he said, is an opportunity to accelerate Nerdy’s core business: “It’s less about going into the public markets, and more about that this transaction allows us to take an offensive position and lean into the big opportunities.”
Cohn said they pursued a SPAC because it is a faster route to going public. As vaccines roll out, growth in remote learning will slow, which could hurt growth expectations — especially ones as ambitious as Nerdy’s. For that reason, it’s clear why some edtech companies want to get out to the public markets as soon as possible.
Despite some naysayers, Cohn said SPACs are not being used to prop up companies that can’t go public through traditional means.
“I think that perception was fair a year ago,” he said. “But if you look at companies that have taken this route recently, including OpenDoor, they are very high quality. There’s a fundamental perception change.” He added that “SPACs have been reaching out over the years,” but the timing felt more fortuitous due to TPG’s interest and track record.
On the other side of the table, Wolford said she is currently searching for an edtech company to bring public on behalf of Edify, a $200 million SPAC she has raised. She noted that PIPE instruments, aka private investments in public entities, have helped de-risk SPACs for the general audience. These instruments have been around for decades, but Wolford said they recently became more mainstream to use in SPACs.
Here’s how a PIPE works, beyond the fact that its a financial promise by another entity to fund the blank-check company:
If ExtraCrunch Acquisitions raises a $200 million SPAC to back media companies, some people might be interested in getting into the company simply because they care about media or believe in Extra Crunch. But, if a top-tier SV fund promises to fund part of the purchase price, potential investors get an external signal that someone else believes in the SPAC, and more importantly, a level set of what the shares will go for.
A more realistic example of this happened with Nerdy’s announced acquisition. In its release, the business mentioned that it has a fully committed PIPE of $150 million at a market valuation of $1.7 billion.
“When you de-risk something and reduce the time a little bit and it’s also the cheapest mechanism to go public, then of course people will be inclined to work with it as an exit,” she said.
But despite this opening, Wolford doesn’t view the biggest change in edtech right now as the opportunity potential — and renaissance — of SPACs. “SPACs isn’t the fundamental drive,” she said. “The fundamental drive is that there are enough companies that can consider public market liquidity.”
Wolford said the pandemic has let some edtech startups reach the scale needed to qualify for public markets because of bigger total addressable market sizes. We’ve seen profit growth and user growth with Course Hero, Quizlet, Outschool, Labster and other businesses that sit in the world of digital content delivery to consumers.
One counterpoint, however, is that this growth may just be a pandemic bump. Wolford said her team is still trying to parse which effects are COVID-19-related and which changes are here to stay, the biggest question on every investor’s mind.
“We can’t calibrate with certainty, how much sticks there, how much rolls back,” she said. But categories like virtual courseware and digital learning make sense in a hybrid world, so Edify is looking at both consumer and enterprise businesses.
If you follow any of my colleague Alex Wilhelm’s coverage, you know that the public markets are absurdly hot right now. In that vein, edtech companies heading toward the public markets might feel unsurprising. But for people who have been in the space before the pandemic, the opportunity is a big signal.
For the longest time, some of the largest exits in edtech were LinkedIn’s scoop of Lynda for $1.5 billion in cash and stock and TPG’s purchase of Ellucian for $3.5 billion. Startups had to sell to Pearson, the publisher, or not at all, is what Chip Paucek, the CEO of 2u, a publicly traded edtech company, once told me about the before times. Back then, companies just weren’t big enough to enter the public markets alone, so they folded underneath a bigger umbrella.
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Today, some analysts estimate that there are more than 100 companies in edtech with a market cap of over $1 billion.
Edtech investors seem to largely agree that public market liquidity is either upon us or near. SPACs, thus, are simply a mechanism to get companies there, fast. There’s nothing specifically about education that makes the route make more sense, other than maybe timing and pandemic growth numbers.
And frankly, that’s a more boring — but accurate — story than I originally anticipated.
“Once you are public, you are public, and you’re either a good public company or you’re a crappy public company,” Wolford said. “And that has nothing to do with the fact that you went public as a SPAC and everything to do with, well, that you’re a crappy company and you probably shouldn’t be public.”
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