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This blog post was written by Chris Nyren, Founder of Educated Ventures and a Startup Education Weekend Community Leader from Chicago. It was originally posted on the Educelerate Channel on EdReach.

Following upon Educelerate’s November post The First Crack of the EdTech Hype Bubble of 2011-2013,

I wanted to step back and take a longer term view over the past three investment cycles of 1998-2014 and assess what might be learned about those edtech startups to successfully scale, or at least achieve outsized liquidity events.  In so doing, I have borrowed upon Aileen Lee’s Unicorn Club post from Techcrunch.  Speaking of TechCrunch, a blogger there recently sought to rebut our “First Crack” post in citing Knewton’s massive raise, however, we could just as easily point to more recent firesales of notable start-ups like Bain Capital Venture’s MyEdu or reactionary pivots from Bessemer’s Flatworld and Andreessen Horowitz’s Udacity.

And still, with massive raises from Knewton and Coursera bringing their respective valuations to $400 million and $200 million (or, nearly 200x revenue) and 2U filing for a $100mm IPO which should value the company at $400 million (at least), the level of investment momentum in the education markets is undeniable and merits further study.  Yet, with the education “sector” only recently exceeding $1 billion in annual investment flow, the data set on exits and average deal size greatly lags that of the original “Unicorn Club”: indeed, just 11 EdTech start-ups founded since 1996 have achieved $1 billion valuations (and for several of those, it was a brief achievement).  Therefore, I have reached back all the way to the 1960s (Datatel, Plato, SCT) while also lowering the valuation threshold to $300 million in cash or $500 million on paper (public or private).  (Also, it should go without saying, but I have excluded non-Tech paper publishing and classroom-based instruction models here.)

While none of the above mentioned “hot” start-ups (2U, Knewton, Coursera) qualify yet, the US IPO and M&A markets have managed to spawn 50 of these so-defined “EdTech Unicorns”, of which 28 crawled up through the public markets, 14 through mergers and 8 through private valuations.  Laid out along the investment cycles, we can better gauge the lean years of 2001-2008 with just 6 scaled public companies and 3 acquisitions, while the more exuberant current five year period starting in 2008 has already brought 16 scaled exits through the public markets and 9 through M&A.  Of course, exits are also the product of investment cycles at founding and the education industry requires a far greater gestation period as fully two-thirds of these companies were established before 1996 (40% before 1990 even!) while just 12 were founded in the 1996 – 2000 dotCom Bubble and only 3 after 2001 (and it could be argued that one of those, Grand Canyon, was actually founded in 1949 and its basketball team might disqualify it as “edtech”).  EdTech Unicorns have taken a median of 14 years from their founding to achieve scaled exits.  An historical timeline of these exits is presented below:

EdTech Unicorns Over Time

EdTech Unicorns Timeline
  1. Most of the IPO valuations above did not occur in the IPO itself, but subsequently as a public company, while many of these companies achieved higher valuations later still as acquisition targets (i.e., Blackboard, NCS, TLC, Skillsoft); conversely, certain M&A exits were already public, but only exceeded threshold valuations through a buyout (i.e., eCollege, Edmentum).
  2. There have actually been over 60 edtech IPOs since 1994, however, the IPO markets were very different before the dotCom fallout and Sarbanes Oxley.  Indeed, 1996-2000 saw such unforgettable IPOs as Click2Learn.com, Learn2.com, N2H2, ProsoftTraining.com, SmarterKids.com YouthStream Media, VCampus (University Online) and ZapMe!
EdTech Unicorns by Model

EdTech Unicorns by Business Model

As a further line of taxonomy, I have analyzed the EdTech Unicorns by business model and place.  It should come as no surprise to readers of this blog that over two thirds (67%) of these businesses rely on B2B marketing, with just one-third based upon B2C models.  Moreover, half of these B2C models are actually Online Schools with just a quarter representing educational software sold direct to consumers (Davidson / The Learning Co., Leapfrog, and Rosetta Stone) and another quarter from online consumer marketplaces (Answers.com, Chegg, Quora, School Specialty).  While neither Answers.com nor Quora are really EdTech, I have included them to illustrate the strong investor interest today in capital efficient, ad-driven Web 2.0 models.  Additionally, while there were other proprietary schools that created well in excess of  $500mm in stock value over the 2000s from their online divisions (e.g., CEC, Strayer), these predominantly ground-based classroom businesses have been excluded here.

EdTech Unicorns by Geography

EdTech Unicorns by Market

In tracking these exits by geography, we can now unequivocally state toTom Van der Ark that the leading hotspot for scaling in edtech is the Bay — the Chesapeake Bay (9 scaled companies).  Furthermore, this analysis confirms my long-argued thesis that EdTech “hotspots” Silicon Valley and New York (not to mention, New England) are over-hyped related to the over-looked markets of the Midwest (namely, the Twin Cities with 5.5 and Chicago with 4) and Southern California (5), coincidentally all markets served by Educelerate.  While its 7 EdTech Unicorns are nothing to dismiss, the vast majority of these Silicon Valley companies of scale were formerly high-flying dotCom era start-ups (DigitalThink, Saba, SumTotal) or more recent under-performing stocks (Chegg, Quin Street).  By broader region, it appears that the Midwest is Best with 13.5 EdTech Unicorns, followed by California, the Mid-Atlantic, the Rockies (through Phoenix) and the “SXSE” region of Texas through Florida, by way of Nashville.

Most interestingly, and despite claiming the vast majority of the $1 billion invested into this sector annually, the lesser Bay (i.e., Silicon Valley) has been unable to spin investor gold into scaled EdTech exits.  This is covered further in a separate post, but I believe this is because preferred business models and practices favored by investors and entrepreneurs in Silicon Valley (as well as Silicon Alley in NY) run counter to the demands of education, namely: 1) the lack of applicability / acceptability for B2C ad-supported and freemium social web apps; 2) an over-reliance upon often over-engineered product and a general disdain for services;  and 3) Enterprise SaaS likely outdraws talent from Corporate eLearning SaaS (an area of relative success for the Valley in the last Bubble).

Notes: given data limitations, the above analysis likely understates the number of EdTech Unicorns created on “paper” under parent companies (see Discovery Education, Hobsons, Ingram, etc.) or private investors.  This is especially the case for the 1998-2000 dotCom Bubble, however, the author’s long memory and research has turned up such historical “Paper Unicorns” as DigitalThink (public market), Lightspan (public), UNext (private), NetLibrary (private), Provant (public), and Saba (public).  Depending upon current market trends, 2U, Knewton, Lynda and OpenEnglish are likely to join the ranks of EdTech Unicorns (at least, on paper).

A full report is available from the author.  This is the second in a three part series on education technology investment markets: part 1 “The First Crack of the EdTech Hype Bubble of 2011-2013″ can be accessed here, while Part 3 “Where to Invest: EdTech Building Blocks” is available from the author.