Edtech is nowhere near as popular as it was when schools were closed during the pandemic. Still, it would be shortsighted to overlook this category amid the present downturn, especially now that AI is disrupting nearly every industry out there.
Now, we know edtech news has almost vanished like water poured down a well, but that’s not to say startups haven’t been building in the category. Indeed, when we reached out to a cohort of specialized and generalist investors, we found that with AI in the picture, edtech startups have been as quietly busy as a subterranean network of moles in fall.
“Advancements in AI will provide tailwinds for a boom in edtech in 2024,” said Masha Bucher, a founder and general partner at Day One Ventures, a generalist early-stage VC firm that has invested in both edtech and AI.
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For AI to give edtech startups a long-term advantage, though, they will need to do more than the competition. “Simply labeling generative AI as an edtech product isn’t enough. What I find more intriguing is when AI enhances an already robust product, as seen with Duolingo,” Marieke Gehres, an early-stage investor at Earlybird Venture Capital, said.
Still, innovating with AI requires talent that edtech companies might lack, and some investors feel the shortage of expertise could boost an otherwise tough M&A environment. “Edtech M&A activity will remain limited in Q1, but I am seeing acqui-hires of AI teams happen across edtech subsectors,” Jan Lynn-Matern, founder and partner at Emerge, told TechCrunch+.
Several investors also highlighted that the slowdown in venture capital activity isn’t so uniform as one might think, even just in edtech. “As a pure pre-seed investor, deal activity in 2023 was almost unaffected,” Lynn-Matern said.
As it happened to unicorns, edtech startups are also more likely to focus on B2B and B2C if they hope to top the investment charts. Or simply, to profit. Says Bucher: “Right now, B2C is harder to monetize; people are trying to save money.”
Of course, there’s more nuance to the B2B vs. B2C debate, and there are more ways in which DTC (direct to consumer) edtech companies can monetize than through subscriptions. For investors’ thoughts on these points, the future of edtech in emerging markets, and the market opportunity for AI products, read on.
We spoke with:
- Marieke Gehres, early-stage investor, Earlybird VC
- Masha Bucher, founder and general partner, Day One Ventures
- Avi Warshavsky, CEO and founder, MindCET
- Jan Lynn-Matern, founder and partner, Emerge
(The responses below have been lightly edited for length and clarity.)
Marieke Gehres, early-stage investor, Earlybird VC
Compared to 2021, did edtech startups lose momentum faster than the broader venture market?
From a purely quantitative perspective, the numbers indicate that this greatly depends on the region. While traditionally strong edtech markets like the U.S. and China experienced a very steep drop in venture funding from 2021 to 2022, the European edtech market has proven to be more resilient, declining about 28%. This is even more robust compared to the overall global VC market, which saw a 35% decrease in total venture funding from 2021 to 2022.
In a broader context, while the pandemic propelled the edtech market forward, the conclusion of this period and the gradual return to normalcy in the global education system consequently posed challenges for the market. Nevertheless, it is worth concluding on a positive note: The pandemic provided the edtech market with sustained momentum. Presently, in terms of total venture funding, the market remains significantly larger than it was in pre-COVID times.
How was edtech deal activity in 2023? How full is the pipeline of companies you’re looking at?
Similar to the overall VC market, average round sizes and ticket sizes declined the most in edtech last year. There were few growth rounds, but investments were made in the very early stages.
This parallels our own experience and is not a disadvantage for us as early-stage investors. We expect deal activity to rebound significantly in 2024. Additionally, in edtech, we are closely monitoring several companies that have been seeing positive developments. So, 2024 looks promising for the industry and for us as investors.
How do you expect M&A activity to pan out in Q1 2024? Will acquirers be looking for bargains, or are they willing to pay top dollar for the right opportunity? What are your thoughts on how edtech startups can best leverage AI?
The M&A market is currently very tough. While some publicly traded companies still haven’t recovered from the post-COVID low, there are also the Duolingos of the world that recently announced a 43% increase in revenue in Q3 and have users who are more engaged than ever before.
This announcement has, of course, greatly benefited their stock price, and I’m sure the Duolingos among the edtech companies will be quite ready to invest in the top opportunities next year that show sustainable growth.
Duolingo is also an outstanding example of how to leverage AI in edtech, through smart integration very early on, making the product even better through even more personalized content and feedback.
What are some of the more interesting applications of AI you’ve seen edtech startups incorporate in 2023?
We are excited about generative AI applications that bring a unique touch, going beyond simple integrations to tailor models for specific purposes. This filters out many opportunities. Additionally, numerous edtech startups focus solely on using generative AI for content creation, often competing with major generative AI content creators like Synthesia.
My question then becomes: What sets apart a creator of educational video content from one that generates various types of video content? Simply labeling AI as an edtech product isn’t enough. What I find more intriguing is when AI enhances an already robust product, as seen with Duolingo.
Similar applications could involve integrating AI into audio content to personalize voices, or improving a content database search algorithm. However, it’s crucial that the surrounding product is equally compelling for the AI offering to truly be the icing on the cake.
Is the current market more favorable to B2B approaches, where sales cycles are slower, versus B2C models, which can be hard to monetize?
It depends. In tough times, it’s even crucial to create a product that deeply connects with users and generates a great user experience. This enhances customer loyalty and keeps them willing to pay high prices, both in B2C and B2B.
Additionally, it’s now becoming crystal clear which team manages to execute well and turns recessions into opportunities.
Besides subscriptions, what are some monetization approaches you have seen succeed in B2C edtech?
I would draw a distinction between the business model on which the product is built, with its specific mechanisms and characteristics, and what is monetized in the end. In edtech software products, we rarely see any form of monetization other than subscription models, both in B2C apps and B2B software products.
An exception is likely found in hardware components like toys, which typically involve more transactional revenue. However, some products don’t naturally fit the classic subscription model and so are structured more like a marketplace — for example, content marketplaces where students can upload and consume learning content.
There are some intriguing models like Knowunity or StudySmarter. It’s especially crucial here that both the supply side that’s creating content and the demand side that’s consuming content are sufficiently incentivized and satisfied with the product to ensure the marketplace remains adequately liquid.
Emerging markets arguably need more edtech. Will the solutions to address this need arise locally?
Before joining Earlybird, I worked at German-Kenyan social business EIDU, where I mainly worked on driving their expansion efforts in Africa. EIDU develops a complementary app for preschool education that focuses on promoting applied learning from an early age. I also spent quite some time on-site in Kenya, which was an impactful experience.
Education technology is urgently needed in emerging markets. It can be quite challenging to start a business with sufficient capital to rapidly serve many countries and cities, without solely relying on grants — though crucial and important.
Therefore, I believe a combination of approaches is often necessary. Developing products in isolation without a deep understanding of user needs is both demanding and questionable. In contrast, funding sources, both diluting and non-diluting, are not always readily available or present initial hurdles in developing countries.
So while we should acknowledge the importance of support and assistance from regions like Europe, companies in this space should not solely rely on them.
There’s a market for immediately actionable skills training, including reskilling. On the other hand, from humanities to learner well-being, some areas of edtech still feel underserved. Do you consider these spaces as opportunities ripe for the taking or would you wait and see?
I would say, why not? If the target group is large enough, and they have a problem or urgent need they’re actively seeking a solution for, then I don’t see why these opportunities would not be ripe.
The humanities made waves as early as the 18th century, and people in ancient times already took care of learners’ well-being. So, I believe the time has long been ripe for more edtech applications.
Moreover, there are already some very successful learning apps for subjects like religion (e.g., Glorify or Pray.com), or audio apps like Yuno, which aim to enhance general knowledge in art, history and more.
Which edtech app or platform did you enjoy the most this year?
Most likely the Kindle app, if you can call it an app. Also, I often have the latest apps from edtech startups that I have conversations with. That’s the cool part of my job: being so close to current technological developments and getting to try them out early. Right now, for example, I’m feeding my AI brain with content at Melon.
Masha Bucher, founder and general partner, Day One Ventures
Compared to 2021, did edtech startups lose momentum faster than the broader venture market?
Interest in funding edtech dropped broadly in 2023 compared to 2021. However, these companies demonstrated strong performance in our portfolio, and advancements in AI will provide tailwinds for a boom in edtech in 2024. More individuals will require new job opportunities and re-education to adapt to a paradigm shift.
How was edtech deal activity in 2023? How full is the pipeline of companies you’re looking at?
Although we didn’t see many interesting edtech opportunities within our own deal flow in 2023, the wave of AI-driven unemployment will require re-education on a massive-scale to equip individuals with the necessary skills for this new normal. Consequently, I expect the education sector to experience substantial growth both in the mid-term and long-term.
I predict education will be more like a video game, and gaming developers will venture into the realm of education. Drawing upon their expertise in crafting virtual worlds, these developers will leverage their skills to create engaging and interactive educational content. This shift toward a more immersive learning experience will be further amplified by the (re)emergence of the metaverse.
These trends will give rise to considerable financial innovation in terms of how education is funded and who bears the costs. Traditional models of financing education will be reimagined.
How do you expect M&A activity to pan out in Q1 2024? Will acquirers be looking for bargains, or are they willing to pay top dollar for the right opportunity?
We’ll see plenty of consolidation in the next year. With the news of the Figma deal collapsing, I think we will see more acquisitions done at earlier stages by companies who want to get great technology and teams before triggering antitrust issues. For example, I expect companies like Microsoft, Adobe, Facebook and Google to be acquiring in the few hundred million to a few billion dollar range, rather than waiting until companies get larger and risk the deal falling through because of regulatory action. For the top 0.1% of companies, acquirers will continue to pay top dollar for the right opportunity.
How can edtech startups best leverage AI?
There has always been a massive gap between entertainment and education in technology. Parents want their kids to eat vegetables; kids want to eat candy. Digital products seem to fall in one of those two categories. This is because kids get bored when “fun” games and apps get too educational, and these apps don’t respond to their emotions of boredom.
Now that AI and generative models are so advanced, they’ll be able to create content on the fly that is both educational and entertaining.
For example, EWA, which helps people learn new languages through movies, books and games, is utilizing AI to accelerate the production of adapted literature and lessons. It’s also generating audio books and translating certain texts to different languages, among other use cases.
What are some of the more interesting applications of AI you’ve seen edtech startups incorporate in 2023?
You.com is by far the most interesting. It offers students assistance with academic subjects and homework assignments. Its AI product, YouAgent, has multi-step reasoning capabilities, making it a reliable tool for answering mathematical and scientific questions, something that other LLMs have failed to do.
Is the current market more favorable to B2B approaches, where sales cycles are slower, or to B2C models, which can be hard to monetize?
Right now, B2C is harder to monetize. People are trying to save money. B2B is optimal.
Besides subscriptions, what are some monetization approaches you have seen succeed in B2C edtech?
For YouTubers or TikTokers creating edutainment, ads are the traditional monetization approach. I’ve also seen YouTube edutainment creators provide tiered membership programs, where subscribers can pay a monthly fee for early access to videos, perks and community features.
Emerging markets arguably need more edtech. Will the solutions to address this need arise locally?
YouTube is the biggest source of education and anyone in the world can learn anything on it — you can argue it competes with universities like Harvard, Stanford and other prestigious colleges. However, there is little competition to YouTube. I’d be curious to see if alternatives from emerging markets materialize.
A recent report by Google for Education states that over the next 30 years, 80% of the world’s demand for education is projected to be concentrated in Asia and Africa. The formidable challenge for companies eyeing entry into these markets is understanding the cultural norms and intrinsic values of the people they’re trying to teach.
It’s extremely tough for existing Western education systems to internationalize without leveraging local expertise. The best way is for entrepreneurs in each of these emerging sectors to create the next education pathways focused on the needs of their respective populations.
Which edtech app or platform did you personally enjoy this year?
Skye, a company in our portfolio, is a game changer. It matches highly ambitious leaders with coaches who have executive experience at Google, Microsoft, LinkedIn, Lyft, Dropbox and more. For example, Skye can accelerate the growth of founders and execs who want to be better leaders, build a sales org from scratch, and learn from someone who’s done it before, and so on.
Avi Warshavsky, CEO and founder, MindCET
Compared to 2021, did edtech startups lose momentum faster than the broader venture market?
Yes and no. Real data probably will show that edtech lost momentum faster than other industries. We don’t see it as bad as it is because of government money injected into edtech post-COVID.
How was edtech deal activity in 2023? How full is the pipeline of companies you’re looking at?
We primarily engage with pre-seed and seed-stage companies, and our current pipeline is slightly smaller than in previous years by approximately 10%. However, the upside is that the quality of the companies we are encountering is higher, likely attributable to the challenging conditions acting as a filter for mediocre enterprises.
How do you expect M&A activity to pan out in Q1 2024? Will acquirers be looking for bargains, or are they willing to pay top dollar for the right opportunity?
Prospective buyers naturally seek optimal deals, and prevailing market conditions create opportunities to acquire outstanding companies at reduced values. Consequently, there is no justification for buyers to pay more than the minimum.
Having said that, the edtech market has generally demonstrated a measured response even during periods of fluctuation, distinguishing it from other markets. It is anticipated that this moderation will similarly be evident during phases of lower valuations.
How can edtech startups best leverage AI?
AI has achieved what was once considered the “holy grail” of edtech: It has addressed the three key challenges of personalizing the learning process, delivering feedback through spontaneous and unscripted conversations, and automatically generating and adjusting high-quality content.
The advent of generative AI technology has transformed these aspirations into attainable goals, offering the potential to overcome bottlenecks and address weaknesses across various domains within the edtech industry.
What are some of the more interesting applications of AI you’ve seen edtech startups incorporate in 2023?
Choosing among the various projects we encounter is a challenging task, given the prevalent use of generative AI in most initiatives. Within the school-age MindCET ecosystem, we particularly appreciate the meticulous work of Storywizard from Israel.
Storywizard employs artificial intelligence to craft personalized stories for students, ensuring alignment with teachers’ vocabulary requirements and other constraints. Additionally, it integrates a dashboard for tracking student achievements.
In the academic realm, Aveksana from Finland stands out with its remarkable platform. Aveksana allows the creation of research proposals across different academic levels and subjects, using unique technology that diverges from the commonly known major engines.
Is the current market more favorable to B2B approaches, where sales cycles are slower, or to B2C models, which can be hard to monetize?
Generalizing can be challenging, but, for the most part, the current situation aligns with what we know. Usually, B2C demands substantial resources for marketing and proves challenging to monetize effectively, while B2B presents formidable barriers to entry, yet offers a more stable avenue for monetization.
Besides subscriptions, what are some monetization approaches you have seen succeed in B2C edtech?
Occasionally, we come across sponsorship models wherein corporations and other organizations sponsor services for end users, driven primarily by a social impact agenda. Positioned between B2C and B2B, this model typically serves as a supplementary rather than a primary source of income.
Emerging markets arguably need more edtech. Will the solutions to address this need arise locally?
In the long-term, understanding the culture, value chain and distinct challenges is crucial for proposing appropriate solutions. As organizers of the GESAwards, we’ve noticed that approximately 17% of the applications are from Africa. Interestingly, the innovation angle they present often differs significantly from that of U.S. or European companies.
There’s a market for immediately actionable skills training, including reskilling. On the other hand, from humanities to learner well-being, some areas of edtech still feel underserved. Do you consider these spaces as opportunities ripe for the taking or would you wait and see?
My academic foundation lies in the humanities, and I strongly believe in its significance both as a guide for our moral conduct and as a domain that encompasses crucial skills for our time. I am confident that, as we navigate the evolving landscape of professional skills in the wake of the AI revolution, these aspects will eventually align more closely with business perspectives. Although currently a bit distant, I anticipate a convergence in the future.
Which edtech app or platform did you personally enjoy this year?
I hold great admiration for Jotit, a startup in which we have invested. Jotit provides a learning experience that effectively leverages the benefits of the digital realm while safeguarding against potential drawbacks like attention issues and the erosion of fundamental skills. The platform offers a unique blend that incorporates the advantages of traditional learning with a physical notebook and pen, coupled with data and automation driven by AI.
Jan Lynn-Matern, founder and partner, Emerge
Compared to 2021, did edtech startups lose momentum faster than the broader venture market?
Yes, the drop in global edtech investment was steeper than the drop in global VC. While the impact was felt more strongly across all stages, it was most pronounced in later-stage deals. Drops in funding for early-stage deals, especially pre-seed, were almost equivalent across edtech and general VC.
How was edtech deal activity in 2023? How full is the pipeline of companies you’re looking at?
As a pure pre-seed investor, deal activity in 2023 was almost unaffected.
How do you expect M&A activity to pan out in Q1 2024? Will acquirers be looking for bargains, or are they willing to pay top dollar for the right opportunity?
Edtech M&A activity will remain limited in Q1, but I am seeing acqui-hires of AI teams happen across edtech subsectors.
How do you think edtech startups can best leverage AI?
We analyzed 700 projects that apply AI to education problems and have categorized them into eight subtrends:
- Roboteachers: Two-way conversational interfaces that replace expensive one-on-one teaching, across academics, work, self-improvement, and learning languages.
- Simulation-based learning: Taking simulation-based learning to the next level by making it fully interactive, unlocking “flight simulator for interpersonal skills.”
- Hyper-personalized content: The next generation of edutainment will provide highly personalized learning experiences to kids and casual learners.
- Always-on feedback: Providing personalized, in-the-flow-of-work feedback based on observed behavior (work product, interactions).
- Democratized authorship: Giving learners the power to create and manipulate learning materials to suit their needs.
- Educator co-pilots: Tools that enable learning designers and educators to create learning materials and manage learners, at scale.
- AI-enabled knowledge graphs: Enabling individuals and organizations to capture unstructured data, dynamically categorize it, and handle complex retrieval queries.
- Automated assessment: Improving the accuracy and cost-efficiency of assessment processes across academic studies, hiring and career progression.
What are some of the more interesting applications of AI you’ve seen edtech startups incorporate in 2023?
- Roboteachers: Foondamate is an AI study buddy that helps more than 3 million students in emerging markets with their exams and homework.
- Hyper-personalized content: It’s inevitable that we will see a company like character.ai focused on kids. We’ve come across multiple early-stage teams trying to build this.
- Always-on feedback: Chess.com is my favorite example of a learning platform that uses AI to its full advantage. After every game, players receive an AI-powered, blow-by-blow analysis of their moves, along with course and drill recommendations to improve on their mistakes.
- Democratized authorship: Algor is a study platform that transforms text, audio files and images into concept maps to help students quickly grasp a subject before they dive in.
- Educator co-pilots: Colossyan helps learning and development professionals create AI videos from text, and it can translate the content into dozens of languages, too.
Is today’s market more favorable to B2B approaches, where sales cycles are slower, or are B2C models faring better?
It’s much tougher in this environment to raise capital for B2C companies.
Besides subscriptions, what are some monetization approaches you have seen succeed in B2C edtech?
E-commerce/retail and in-app purchases.
Emerging markets arguably need more edtech. Will the solutions to address this need arise locally?
Absolutely. The local reality of emerging markets is reflected in the different levels of willingness to pay as well as different needs. It’s nigh impossible to build a solution without knowing the local context in education.
There’s a market for immediately actionable skills training, including reskilling. On the other hand, from humanities to learner well-being, some areas of edtech still feel underserved. Do you consider these spaces as opportunities ripe for the taking or would you wait and see?
AI unlocks upskilling for soft skills, which have traditionally been overlooked, but represent some of the most valuable sets of skills. I expect to see lots of new activity in this area.