Two recent billion-dollar deals in education captured the investment conversation at an ed-tech conference here last week.
“Private equity loves this sector,” said Susan Wolford, a managing director for BMO Capital Markets, an investment banking business, on a panel for a conference of the Education Technology Industry Network, a division of the Software & Information Industry Network. Growth investors, who invest in companies that appear ready to deliver above-average growth, are particularly enamored with it, she said.
As evidence, she pointed to private equity firm Silver Lake’s acquisition of portions of Weld North Education earlier this year at a valuation of 17.5 times EBITDA—or earnings before interest, taxes, depreciation, and amortization—a measure of profitability.
She called that a “stunning figure,” adding that she believes what Silver Lake was seeking is “Jonathan Grayer and the rest of that management team’s vision of where the classroom is going and how they can buy into it.” Grayer, who launched Weld North after leaving as CEO of the education company Kaplan in 2008, continues to lead Weld North.
Thoma Bravo’s acquisition of Frontline Education, a company that provides software for K-12 school administrative needs, also drew attention on her panel, and another one later in the day, for selling at more than 20 times EBITDA. Ten acquisitions over the past three years boosted Frontline Education’s valuation to over $1 billion. As a result, “a lot of PE firms, from big to small, are looking to build these roll-up platforms,” said Jason Palmer, a general partner in New Markets Venture Partners, referring to the acquisition of one company that creates a platform for buying smaller companies that can be rolled up into it.
Roll-ups are not new to ed-tech, noted Palmer, who led three education businesses as general manager or president at Kaplan and also founded and led the company’s venture capital effort. Kaplan acquired 95 businesses over a 10-year period, he said. “And Pearson acquired even more businesses than Kaplan did at one point,” he said.
At the startup stages of investment, “there is such an intense competition for capital,” said Karina Jhangiani, an investment associate for GSV AcceleraTE, an early stage venture fund.
Entrepreneurs should make sure they “listen to what the market really has to say,” learning from educators when products are in the pilot stage to test their efficacy, implementation, and other issues, she said.
Jhangiani also cautioned that it’s not a good sign when entrepreneurs who are trying to raise their first rounds of funding don’t have a clear sense of what they plan to do with the money they want to raise.
When companies approach Owl Ventures, a fund with $285 million under management that makes investments across the spectrum from early learning to adult learning, the investors look for indications of how well products work for their intended audience, said Ashley Bittner, a principal at the venture capital fund.
Across all education stages and purposes, there is $6 trillion spent globally each year, said Bittner, “and only a small percentage of that is digital.” As this very large market moves to digital delivery of content, it will be the effectiveness or efficacy of products that drive the market, she said. Research to support the value of an ed-tech solution is critical, she said.
Robert Iskander, the managing partner of Croix Ventures LLP, is raising a $150 million fund that will focus on managing 1-to-1 computer initiatives in education in a scalable, sustainable way, he said. Getting a company to grow beyond $10 million in revenues can be “very difficult,” he said.
“More dollars are being deployed in pre-k, university, and workforce [investments] than anything else,” said Rob Lytle, managing director for global education at EY-Parthenon.
As for K-12, Lytle said, “If you want to be a successful business in this space, you have to build products that support the teachers’ workflow.” That means supporting educators working “autonomously in classrooms with the door closed…and limited oversight or supervision.
Wolford recalled private equity’s reticence about investing in ed-tech after the “dot.com” bubble burst nearly 20 years ago—a drag that lasted longer in education than in other areas as technology rebounded. But now she said that kind of wholesale rejection is unlikely if there’s a reversal because the ed-tech sector is sufficiently diversified that a decline in one area would be unlikely to generalize to all of ed-tech.
“When someone says to you, ‘Education is highly regulated,’ make them stop,” she told the entrepreneurs in the audience. “It is politicized. Only the post-secondary sector is what I would call ‘highly regulated.'”
Educating investors about how education works can make a difference in their willingness to listen to pitches for the financing of their companies. “K-12 funding—school district funding—has been around for [maybe] 150 years,” Wolford said.
A recent 50-state scan by the Education Commission of the States shows that funding for early childhood programs, particularly pre-kindergarten, has been increasing over the past two years. This year alone, 38 bills were signed into law in 25 states, although some had more to do with policy and centralizing governance of early childhood initiatives than boosting funding, the Denver-based organization reports.
Funding for preschool programs increased for the second consecutive year, with states introducing new scholarship programs, or re-allocating dollars used for K-12 education, according to an announcement about the study.
Policy analyst Emily Workman wrote the recently released “2013 Legislative Session: P-3 Policies” report, indicating that states are looking for innovative ways to direct funds towards early learning programs, and, as a result, are permitting districts to use revenues in new and creative ways.
Judging from a Markeplace K-12 review of the report, more opportunities for businesses that serve the youngest children may emerge next year, and beyond, in the following areas:
“When government is investing in early childhood, it’s investing in children who are underserved,” Bruce Atchison, director of the Early Learning Institute at the commission, said in a interview. “The private piece is the business community, the philanthropic community, state foundations, and entrepreneurs who see the value in this work, and step up to the plate.”
In May, the Business Roundtable, an association of CEOs interested in influencing public policy, issued a call to action for states and the federal government to provide more early childhood education. “Estimates of the return on investment of high-quality programs for low-income children range from $4 to $7 for every $1 spent. However the research is clear: the return on investment is linked to quality; simply increasing participation without ensuring program quality will not produce positive results.”
Earlier this year, New York-based financial services firm Goldman Sachs and investor J.B. Pritzker agreed to pay for the expansion of an early-childhood program in the 67,000-student Granite, Utah district via a social-impact bond. The so-called “pay-for-success” loan seeks to achieve a positive social outcome, and reduce future costs, by investing in prevention and intervention programs in the public sector.
At the national level, President Barack Obama has called for strengthening early-childhood education, outlining his vision to help states expand prekindergarten to low- and moderate-income 4-year-olds in his State of the Union Address. In November, bipartisan legislation was introduced to help that vision become a reality. Politics K-12 blogger Alyson Klein describes the likely trajectory of that bill.
For more about the commission’s report, or to follow developments in early childhood policymaking, check out Christina Samuels’ Early Years blog.