What Signals a Smart Investment?
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.
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.
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.
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.
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.
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.