A Dominant Question in Today’s Ed-Tech Market: Build or Buy?
As venture capital investments in ed tech plummet from recent highs, and concerns persist about an economic downturn, many companies are reassessing a familiar question about strategic growth: Build or buy?
The decline in M&A activity in the market, the drop in many organizations’ valuations, and shifting market conditions have changed the calculus for buyers and sellers, making the question of whether to acquire a company, build new capabilities internally, or look to be acquired even more complex.
Investors and company leaders shared their thought processes in deciding whether to build, buy, or sell, and the biggest trends they see in ed-tech M&A during a panel discussion at the ASU+GSV Summit in San Diego last week. Here are takeaways from their discussion:
It’s Not 2021, But Capital Is Available
There’s no question M&A levels are down from their peaks two years ago, but it’s important to remember 2021 was an anomaly driven in part by unprecedented fiscal stimulus and ed-tech adoption during the pandemic, said Jason Brein, a partner at Francisco Partners.
Just because activity levels are returning to pre-pandemic levels, that doesn’t mean the contraction is a sign the education market is facing a precipitous decline.
“It doesn’t mean companies aren’t healthy. As investors, we’re absolutely looking to deploy money today,” Brein said. “I don’t believe anybody here would say we’re in a particularly poor market for capital deployment. It’s just not the market that existed 12 to eight months back.”
Asia-Based Companies Are Getting More Comfortable With M&A
While large companies in the education market have been turning to M&A as a lever for growth since well before the pandemic, companies that are based in Asia or focused on Asian markets were mostly chasing organic growth, said Pranjal Kumar, CFO and head of corporate development for Emeritus, which offers online higher ed courses globally.
The Covid-19 pandemic and subsequent increase in liquidity as governments and investors poured cash into remote-learning efforts gave these companies the “capital to experiment with M&A,” Kumar said.
“Even very Asian-centered players are now very comfortable with M&A as being part of their core strategy, which [wasn’t the case] two to three years back,” he said.
Ed-Tech Platforms Are Becoming Bigger Buyers
Anthony Showalter, director of corporate development at GoGuardian, said one recent shift he’s seen is that ed-tech companies that were once considered smaller players have grown to the size where they’re now driving conversations and shaking up markets with their M&A.
“There have always been curriculum giants like McGraw Hill and Pearson in the space, but now we’re starting to see some really large platform companies that have executed both organic and inorganic growth. At GoGuardian, we see ourselves in that model as well,” he said.
Showalter joined GoGuardian after the startup he co-founded, Pear Deck, merged with the other company in November of 2020.
Since 2018, GoGuardian has been backed by Sumeru Equity Partners, a tech-focused private equity firm that hadn’t been traditionally focused on the K-12 education space.
The growth of ed-tech platforms in recent years has been driven by the influx of new capital in the market from investors who hadn’t previously focused on the space, like Sumeru.
“It’s larger and larger funds that are entering, driving this consolidation, and putting more money to work to build larger ed-tech platforms,” he said.
Consolidation Is Not a Foregone Conclusion
Most markets and sectors that have been driven by advances in technology go through the rapid growth and consolidation periods, said Brein of Francisco Partners.
In the education space, he believes the market is still in the rapid growth period.
There are some parts of it, such as K-12 tools and digital content, that may consolidate more quickly just because they’ve grown so quickly in recent years, but that’s not the case for the majority of companies.
“There are lots and lots and lots of other parts of this [sector] which are so early [in their development]. This is not a mature industry,” Brein said. “There would not be 7,000 people [at the ASU/GSV Summit] if this industry was all ready to consolidate. There’d be 47 private equity guys like me and it would be really boring.”
Acquisition Decisions Are Being Driven by Time Pressures, Internal Limitations
One of the driving forces behind GoGuardian’s decisions on whether to develop a new offering internally or acquire a company that already has specific capabilities was how much time the company had to develop it while still meeting market demand, Showalter said.
When remote learning became districts’ primary focus during the pandemic, GoGuardian wanted to move as quickly as possible to serve their needs. So when it wanted to add product offerings that were a high priority but would take significant investment to develop, it opted for acquisitions, buying formative assessment platform Edulastic in 2021 and tutoring platform TutorMe last year.
However, when the organization feels well-equipped to handle development of a new product that fills a specific niche, it will invest the time to do so, Showalter said.
For the past two years, for example, the company’s had a secret skunkworks project in the works to develop a gamified practice tool. It launched the tool, Giant Steps, in February. Skunkworks projects generally involve a small internal team working quietly on innovative R&D.
“In that case, we were really focused on creating something unique that the market hadn’t seen and is really plugged into our existing portfolio,” he said.
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