M&A in K12 EdTech: Who's Buying?

Between 2010-2020, the amount of software an educator purchased paled in comparison to that of enterprises. Education budgets have always been tight, and for an EdTech company to land a new customer, they often had to get access to grants or special program budgets to cover costs.

That challenge came on top of convincing schools and districts that an innovative EdTech platform could improve outcomes for students. These issues made for lengthy and expensive sales cycles.

One potential "in" available to EdTech companies: partnering with the big-name vendors in education (usually publishers) as channel partners. But that path was/is dependent on a partner with limited tech savvy adequately marketing the product, who then would take a healthy markup off the top for successful sales.

In short, no matter how great their product was, before 2020, EdTech companies faced some really challenging obstacles related to sales and marketing.

What implications did that have for M&A/investment opportunities in EdTech? It meant that:

• Many investors shied away from the EdTech market altogether
• Only a few companies in the space had grown large enough to exercise any serious M&A presence
• Most strategic acquirers had a content or services angle, with limited technology experience
• Most transactions never made it north of $100M in enterprise value

Things have since changed.

When the pandemic hit, every teacher, administrator, and parent began rethinking the role that technology would play inside and outside the classroom. Consequently, budgets and decision-making timelines for EdTech software are not the issue they once were.

In short, the market for EdTech saw accelerated growth overnight, and buyers/investors are paying attention.

Given this massive shift, here’s what EdTech founders can now expect from the universe of buyers and investors.

Who’s Buying?

Different categories of buyers introduce different dynamics to a process. Here is what you should expect from public strategic, financial, and PE-backed strategic buyers.

Public Strategic Buyers

Historically, the only formidable players in education were the big publishers and legacy EdTech players, and they were less than great at understanding the ins and outs of acquiring software companies.

But in the past few years, there have been several smaller companies that have grown large enough to go public. Companies like Coursera, 2U, Chegg, and Stride are now operating on the cutting edge of the EdTech space and represent some of the best M&A opportunities for bootstrapped/minimally-funded EdTech founders.

Additionally, the big publishers have started to jump on the bandwagon and build out their M&A muscle in the software world. These behemoths are coming to understand that they can’t value tech companies with the same methodology as they value their own companies. And because they see the writing on the wall that tech is a huge opportunity, but that they also are not tech companies, the preference to buy vs. build is strong.

The main takeaways:

• There are now more big-name EdTech software companies out there looking to acquire
• While still early in their evolution relative to tech acquisitions, big publishers have massive balance sheets and capital and are therefore important parties to include in a process.

Financial Buyers

What kept most financial buyers (i.e. private equity firms) out of the EdTech space were concerns over market size and sales efficiency.

When Edtech companies face 1) limited budgets, 2) lengthy sales cycles, and 3) dependence on channel partners, that’s not an ideal circumstance for an investor looking to grow and exit in a 3-5 year timeline.

These issues have diminished significantly, so investors are opening their eyes to the opportunity EdTech now represents. While a few have classified the EdTech surge as a short-term change, most consider it to be an acceleration of the adoption curve. For them, EdTech is here to stay.

Consequently, we’ve seen a huge acceleration of investment dollars being funneled into the EdTech space, whereas 5-10 years ago it was only a small group of investors who understood the opportunity.

The main takeaway: with more investors vying for a fixed number of EdTech assets, the competition has increased, resulting in better outcomes for founders.

PE-Backed Strategic Buyers

In recent years, a category of buyer who has represented an emerging opportunity for founders has been the private equity-backed strategic.

A PE-backed strategic is a company that a private equity firm has added to their portfolio and to which they apply several types of growth strategies, including growth through acquisition.

In the case of EdTech, the shrink in the adoption curve has enabled these portfolio companies to grow bigger and faster. And because schools, districts, and states have their ears and checkbooks open when it comes to EdTech, these PE-backed strategics are looking for additional solutions to cross-sell and upsell into existing customers to:

• Grow faster
• Expand their average contract value (ACV)

For the private equity firms backing these companies, they’re looking to capitalize on the situation and grow faster to get to the IPO/exit window faster.

In many ways, PE-backed strategics are the "Goldilocks" option for founders because they embody the best of both the private equity universe (speed to acquisition) and the strategic buyer universe (high valuations due to synergies).

What Do K12 EdTech Founders Need to Know?

The buyer/investor universe used to have only a couple dozen investors and a dozen strategic buyers.

Now:

• Almost all private equity investors of reasonable fund size have EdTech exposure
• New-to-the-scene, privately held EdTech companies are looking to acquire smaller players
• Blue-chip public companies are lifting their heads up and realizing how big the EdTech opportunity is
• PE-backed strategics have a strong thesis for making these acquisitions due to synergies, while also having the resources and capital to act quickly

Given these changes, there is broader demand for EdTech software companies, which has made acquiring these assets a highly competitive process. In the M&A and investment world, when demand is high and supply is fixed, founders win.

The views expressed here are my own. There is no guarantee that my views will come to fruition.