M&A in Higher Ed EdTech: Who's Buying?

Higher Ed EdTech sits in the space between K12 EdTech and enterprise corporate training, and as such carries some of the opportunities and challenges of both areas.

From an opportunities standpoint, the Higher Ed market more closely resembles the enterprise space in that budgets are less tight and more discretionary.

From a challenges standpoint, the total addressable market for universities (like K12 schools and districts) is fairly limited, placing constraints on growth.

Of course, software purchasing patterns saw a massive shift across all EdTech subcategories in the last couple years. That shift was felt in different ways in K12 vs. higher ed EdTech vs. corporate training. Unfortunately, Higher Ed EdTech took the biggest hit as university enrollment dropped dramatically.

That’s not to say there isn’t an opportunity for Higher Ed EdTech. We’ve seen a permanent shift in how higher education happens, particularly as a large portion of university education will continue to occur online instead of in-person. As such, the EdTech companies who either:

• Replace antiquated systems
• Enable remote education
• Improve efficiency

are at an important inflection point and therefore have the strongest attention 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 education publishers who historically have had little experience with acquiring software companies have started to jump on the bandwagon and build out their M&A muscle in the software world. They’ve seen the writing on the wall that tech is a huge opportunity, but that they also are not tech companies, so 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 has kept most financial buyers (i.e. private equity firms) out of the larger EdTech space are concerns over market size.

While these concerns persist, they have diminished given the need for software to enable new educational formats. As such, 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.

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. Specifically, PE-backed strategics look to 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 Higher Ed 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 niche angles to enter the space and build expertise
• 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 demand for Higher Ed EdTech software companies who can support remote enrollment and replace legacy systems, 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.