Investment Criteria

What Signals a Smart Investment?

The true measure of return on investment (ROI) is sales and revenue—at least for most industries.

But it's not as clear-cut for the K-12 edtech investment community because there's significantly more on the line than dollars. Eight years ago, investors in K-12 edtech often used the number of users as a proxy for predicting whether a company would have future sales and revenue, and companies sought to reach large user numbers by championing freemium business models (e.g., free for teachers, selling premium offerings to educators, schools and districts). As a result, investors often poured capital into companies with a large user base, hoping they would be able to convert their free customers into paying customers. But that didn't happen. Since 2016, investors have shifted their attention toward a few overlapping key criteria for what signals a potential return on investment, and many of them are considering learning outcomes as a measure of success when it comes to returns—but providing evidence of efficacy takes time.

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Investors say they are increasingly looking to fund products that show evidence of impact on learning outcomes—in addition to revenue.

This shift is largely driven by the implementation of the 2015 Every Student Succeeds Act (ESSA) and its promise to provide schools with federal funding to purchase products that have been shown to move the needle when it comes to student learning. With this expanding definition of ROI, which includes not only financial profit but also improved learning outcomes for students, investors have greater incentive to bet on companies that can demonstrate product efficacy.

Investors say that product efficacy is core to their K-12 edtech decision making. When asked to indicate their top three investment criteria, three-fifths (60 percent) of survey respondents viewed "evidence that demonstrates product efficacy" as a key criterion for potential K-12 edtech investments.

Top 3 criteria that survey respondents use to make US K-12 investment decisions

70%

Founder/leadership team I believe in

60%

Evidence that demonstrates product efficacy

95%

of respondents who selected "evidence that demonstrates product efficacy" as a key investment criteria described it as improved learning outcomes

43%

Large addressable market

While investors claim to value companies that can demonstrate how their products align to ESSA’s evidence-based tiers, investors are willing to accept less rigorous evidence of impact. When survey respondents were asked to rate the level of importance for each tier, they gave preference to less stringent evidence—products that are grounded in research or exhibit strong correlations between usage and outcome data. But investors increasingly expect companies to demonstrate stronger evidence of impact via quasi-experimental studies and randomized control trials as they grow and mature.

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The freemium model—once a highly sought after business model in the industry—has yielded minimal returns for investors.

Now, investors are skittish when the term "freemium" appears in a pitch deck. Instead, their confidence is shifting toward the institutional business model in which companies sell directly to schools and districts, especially for curriculum products. Companies today are typically more mature before they raise their first round of capital, so they have often already demonstrated institutional sales, which puts investors at ease. Investors are also open to products with a unique sales pathway as long as companies can demonstrate how they intend to move toward an institutional business model down the road.

A Company's Journey to Revenue

Freckle

In 2013, Freckle (then Front Row Education) launched as a supplementary math tool for students in grades K-8 and used adaptive technology to adjust the difficulty of questions based on a student’s previous response. The tool was free for teachers.

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In 2013, Freckle (then Front Row Education) launched as a supplementary math tool for students in grades K-8 and used adaptive technology to adjust the difficulty of questions based on a student’s previous response. The tool was free for teachers.

Entrenched in schools and districts by 2015, Freckle received a $5.3M Series A investment and was able to develop a core curriculum product to sell directly to schools and districts.

In 2019, Freckle was acquired by Renaissance Learning for an undisclosed amount.

Mystery Science

In 2014, Mystery Science started as a supplementary tool, offering inquiry-based science lessons targeted toward third graders. Teachers were able to get one free lesson, but had to pay for additional lessons themselves.

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In 2014, Mystery Science started as a supplementary tool, offering inquiry-based science lessons targeted toward third graders. Teachers were able to get one free lesson, but had to pay for additional lessons themselves. The company received a $500K seed round from a slew of investors.

In 2017, Mystery Science received a larger seed investment to the tune of $2M. By this time, the company built out their lessons to include K through 5th grades, which helped make science more accessible for teachers without a background in science. At the same time, this created a curriculum that could be sold directly to schools and districts.

Epic!

Founded in 2014, Epic! offered children age 12 and under (and their parents) unlimited access to books, videos and quizzes for a monthly subscription of $4.99; the app was free for educators.

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Founded in 2014, Epic! offered children age 12 and under (and their parents) unlimited access to books, videos and quizzes for a monthly subscription of $4.99; the app was free for educators. The company received two investments in their inaugural year—a $1.4M seed round and a $4.1M Series A round.

In 2015, Epic! scored an $8M Series B round for access to over 10,000 books, with personalized content recommendations.

By 2017, Epic! expanded to over 25,000 book titles and grabbed another $8M in capital for a Series C round to continue growing their digital library.

As of 2018, Epic! closed a $30M Series D round, expanded access to over 35,000 books and increased their subscription fee to $7.99 per month. How? With self-reported usage in 91 percent of U.S. elementary schools, Epic! has been able to transcend the school setting and sell directly to parents to continue learning at home.

When eyeing new opportunities for investment in curriculum products, investors claim that products with institutional business models are a top priority. Our data starts to tell that story.

When we look at the amount of dollars invested, curriculum products with a combination of business models have typically received the greatest funding year-over-year compared to products with single-strategy business models.

From 2016 through 2018, there were 21 investments in curriculum products that used more than one business model. Of those 21 investments, 16 sold directly to schools and districts, which suggests that investors were more inclined to fund products with multiple business models because they included an institutional selling component.

Percentage of Dollars Invested by Business Model, 2016 - 2018
Curriculum Products

When we look at the number of deals made year-over-year, curriculum products with a consumer business model outperform products with other business models. But, the number of deals for curriculum products with an institutional business model has grown from 20 percent in 2016 to 24 percent in 2018.

Percentage of Deals by Business Model, 2016 - 2018
Curriculum Products

Future of K-12 Edtech

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