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VC investment in edtech picks up amid COVID-19, but buyout activity still slow

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VC investment in edtech picks up amid COVID-19, but buyout activity still slow

The surge of online learning prompted by school closures during the coronavirus pandemic is helping accelerate venture capital investment in education technology businesses, but it remains to be seen whether buyout activity in the industry will increase.

Making the grade

In 2020, the favorable dynamics of the edtech market led venture capital firms to more than double investments globally to $16.1 billion from $7.0 billion in 2019, according to a report from education intelligence platform HolonIQ.

Since the beginning of 2021, more than a hundred education technology and service companies worldwide have attracted venture capital, raising a total of roughly $1.9 billion in funding rounds as of April 23, according to S&P Global Market Intelligence data.

The U.S. accounted for the bulk of global venture capital poured into the edtech market, raising $875.7 million, followed by the Asia-Pacific region at $528.3 million. Europe and emerging markets pulled in $342.3 million and $178.9 million, respectively.

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Beijing Smart Walnut Education Technology Co. Ltd., a children's edtech startup in China also known as Hetao101, secured the biggest venture capital globally year-to-date. The company in March raised $200.0 million in a series C funding round that saw participation from KKR & Co. Inc. and Hillhouse Capital Management Ltd.

In April, California-based upskilling platform company Degreed Inc. obtained $153.0 million in a series D round at a valuation of $1.4 billion, while Paris-based online driving platform provider Ornikar SAS pulled in €100 million in series C financing.

Sapphire Ventures LLC and Riverwood Capital LLC co-led Degreed's funding round, while KKR led the round for Ornikar through KKR Next Generation Technology Growth Fund LP.

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Learning curve

Despite the growth in VC investment, education is still not attracting sufficient private capital to support necessary innovation, contributing to its slow pace of digital technology adoption relative to other sectors, according to the HolonIQ report.

The education market is "grossly underdigitized," with technology spend amounting to just $227 billion, or under 4% of the sector's global expenditure in 2020, although that could increase by nearly twofold to $404 billion by 2025, which is still seen as conservative, HolonIQ said.

"The knowledge economy and future skills require massive digital transformation, and, while accelerated through COVID-19, there is still far to go," the report said.

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On the M&A front, edtech has always had some interest from private equity firms, given the typically higher margins and less competition seen in vertical-specific software companies in general than in software companies with a larger addressable market, said Scott Denne, a senior research analyst at 451 Research.

However, private equity firms acquired just 42 education-related technology companies in 2020, the lowest number since 2017, Denne said, citing 451's M&A KnowledgeBase data. The meager budget allocated by educational institutions to digital technologies is a possible reason for the slowdown in M&A activity in 2020, as this potentially limits the total addressable market, or the revenue opportunity available.

In 2021, buyout activity in the education technology and service market appears to be picking up, with more than a dozen deals announced since Jan. 1, Market Intelligence data shows.

In January, an investor group including General Atlantic Service Co. LP acquired a stake in India-based online learning platform provider Sorting Hat Technologies Pvt. Ltd. for $50.0 million.

Other notable M&A deals year-to-date are Francisco Partners Management LP's planned acquisitions of e-textbook delivery platform company Vital Source Technologies Inc. in a deal set to close in the summer and legal education provider Barbri Inc. in a transaction that could be finalized in the second quarter.

Welsh Carson Anderson & Stowe also agreed earlier in April to buy learning technology company Absorb Software Inc. from Silversmith Management LP, and the deal is scheduled to close in the second quarter.

451 Research is part of S&P Global Market Intelligence.