Shares of edtech company Chegg still haven’t recovered from their dive earlier this month. As you may recall, its stock fell off a cliff after the company reported its Q1 results.
While Chegg beat analyst expectations for the first quarter of the year, it also raised a warning that didn’t fall on deaf ears: It warned that ChatGPT was hindering its ability to add new subscribers.
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“[S]ince March, we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate,” Chegg CEO Dan Rosensweig said during the company’s Q1 earnings call.
Chegg is particularly vulnerable to competition from generative AI; although you may know it as a place to rent college textbooks, “it has also become a reportedly popular tool for cheating,” TechCrunch+ reported.
Chegg itself is already embracing AI “aggressively and immediately,” in the words of its CEO. It is also harnessing ChatGPT with CheggMate, which is due to launch in beta this month. But free generative AI is still a threat to Chegg Study, its subscription service that provides students with homework help.
However, it is not just Chegg stock that took a hit this month. On that same day, May 2, according to the Financial Times, shares in London-listed Pearson fell 15%, while in the U.S., Duolingo stock declined by 10% and Udemy’s by 5%. [Disclosure: I am a former contractor of Duolingo. I never owned Duolingo stock and no longer have ties of any kind to the company.]
The concomitant stock decline was no coincidence and reflected investors’ concern with the rising competition that AI could represent for edtech businesses. However, not all of these are equally exposed to this threat, which likely explains why most of our examples are once again trading above their April stock price.
Wrong fear?
Upon further examination, some public edtech companies could very well benefit from AI technology rather than suffer from its rise.
“The output of these generative AI models is largely predicted by the quality of the datasets that are inputted into them. We are the owners of some very rich, pure datasets — when you start to input them into generative AI models, you get better outputs,” Pearson CEO Andy Bird told the FT.
However, it is worth keeping in mind that there are only a handful of public edtech companies.
“The universe of public EdTech stocks has been somewhat limited historically, especially with recent take-privates like Pluralsight,” GSV Ventures noted in 2022; and the lack of IPOs since then means the situation hasn’t changed much.
Why have so few edtech companies gone public so far? If detractors are right, it might be because these businesses don’t scale well.
“I have yet to find a successful edtech model that works at scale,” growth engineer Gian Segato wrote in a blog post, despite having founded and sold an edtech startup — or perhaps because of it. The reason why he sold it was finding product-market fit in one country only, a common problem for edtech companies, he said:
[As an edtech business,] you’ll quickly find yourself in front of a conundrum: either you dilute your PMF by geographically expanding the product, or you forgo growth and hunker down in your initial market. The former will likely result in a lot of churn as you acquire users who are not the right fit for your product, while the latter means that your growth potential is massively capped.
Growth issues aside, he argued that monetization is also a challenge in edtech, unless your product is framed as more than education. “One potential angle of attack is to make companies pay for learning content, for employee reskilling and retention. I won’t say it can’t work, but I’m bearish,” Segato wrote.
Of course, all hot sectors have contrarians. But edtech is one of these verticals that seem to have gone from red hot during the pandemic lockdowns to a much cooler temperature very fast.
Edtech, a bad word?
Public markets show that edtech is not immune to the general compression in multiples due to worsening macro conditions. “In the second half of [2022], concerns over inflation, a rising interest rate environment and lofty valuations led to a move against companies that experienced large COVID accelerations,” wrote GSV Ventures’ Jack Lothrop.
But again, when we are talking about edtech, we are talking about a handful of public companies. When it comes to startups, it’s arguably private sentiment that matters the most; but it doesn’t necessarily make things better for edtech.
In a recent Medium post, Index Ventures partner Rex Woodbury wondered why edtech has “stagnated” and why it is “a bad word in many venture circles.” We don’t have the answer, but we’d be curious to know. We’ll keep an eye out for data on investment data in the sector, but also on M&A activity. Could a flurry of acquisitions change minds on the sector again?