Are Edtech Investors Getting *Schooled* on Valuations?

Photo by Tim Gouw on Unsplash
  • 61 mega funding rounds ($100M+)
  • 17 new unicorns and 5 IPOs

If 2021 was a party, 2022 is the hangover

In 2022, and for a couple of months at the end of 2021, countries had started to fully open up, despite the omicron scare. Large-scale vaccine drives were successfully launched, schools and offices reopened, and mortality rates fell — signaling towards (dare we say it) a future which wasn’t dictated by COVID. To “normalcy”.

*As of Feb 5, 2022

Extrinsic influence

Take the case of Coursera:

  • Whilst “Back to school” is inevitable and probably on the horizon, this does not mean that online education will disappear from our lives. It could play out the opposite way: it will probably become a greater part of our lives, accompanying us not only during school or university but throughout our whole life. Lifelong learning will become mainstream, and an important aspect of the careers of most individuals
  • General sell-off of growth stocks: Growth stocks in general, across major exchanges have taken a beating in recent times. In India, too, the likes of Zomato, Nykaa, PolicyBazaar, and Paytm have fallen considerably. Generally speaking, growth stocks are nearly trading at 40–50% of their peak value
  • Investor risk appetite has reduced given the changing scenario of the pandemic, wherein they are being wary of the high valuations that prevailed in 2020 and 2021H1
  • Tightening monetary policy: Economies were in the need of liquidity at the peak of the pandemic — governments reduced interest rates to historic lows, and the US even handed out free money in the form of COVID relief cheques. But, there’s no free money. Inflation, as a result of the liquidity infusion, rose to record highs, especially in the US, where it has reached a 40-year record high of 7.5%. Such liquidity and low interest rates also drove public markets to record highs
  • In order to bring inflation under control, the Fed is expected to raise interest rates soon. There’s speculation that the Fed is going to hike interest rates by up to 175 bps, in a staggered manner across 2022. And this fear of rising interest rates has been reflected in the stock market. Investors have started moving from growth stocks — which typically represent high valuations, and thus risky investments — to value stocks

Impact on the private capital market for edtech

  • Mirroring public market Valuations: Valuations across private and public markets are directly correlated — with private markets following the trend of the public markets. Public market valuations are used as the basis of deriving valuations by private market investors — essentially following the investing adage of “the (public) market is always right”. Therefore, valuations have gone down in the private markets as well
  • Growing consolidation: Given relatively more grounded valuations, M&A has become an extremely attractive option for scaled edtech companies to grow quickly, and founders/investors to liquidate in an increasingly competitive market. We can expect to see a larger proportion of M&A deals this year, as compared to previous years

Outlook

Whilst the negotiation dynamics might keep changing based on public market valuations, one thing remains unchanged — the promise of edtech to be transformational. Growth is still expected to be in double-digit percentages going forward, as edtech will continue to enhance learning alongside physical classrooms.

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LoEstro Advisors

LoEstro Advisors

Advisory firm with sharp focus on Fundraise, M&A, and Strategic Consulting.