Under the Hood - Demystifying VC | 0.05
Edtech for higher education
Hi, it’s Tom and Aarzoo from the HEC Paris Alternative Investments Society VC team. Under the Hood is a bi-weekly newsletter about recent developments in the Venture Capital industry, our perspective on key trends, and deep dives into how VC works.
Today, we’re covering the EdTech for Higher Education space with three sections:
Market Spotlight - an overview of the EdTech for higher education space
Deal in the Spotlight - Class for Zoom raised a $30mn Series A round
What we are up to at HEC AIS - a fancy new website, a packed calendar of events, and the launch of a VC case study prep workshop series
🔎 EdTech for Higher Education - A Student’s Perspective
(by Tom Eberle)
As a reader of this newsletter, you might have experienced the reality of today's higher education: staring at a shared-screen for hours, trying to follow the monotone explanation of a professor, while watching, from time to time, the faces of the other few students that dared to switch their webcam on. Luckily, a whole industry is focusing on developing new technologies to improve education: EdTech. In this article, we will try to explore how new education technologies can improve or disrupt higher education as we currently experience it.
Before diving into higher education, let's have a general look at the EdTech market and its dynamics. You can find the full deep dive hosted on Notion HERE.
🛰️ A high-level overview of EdTech
At first, a definition to put everyone on the same page.
"EdTech – education technology – covers not only online learning, but also the whole suite of software, hardware and digital tools and services that can help deliver education." - Credit Suisse.
Key Trends in the EdTech Space:
Education is noticeably under-digitized compared to other industries, with less than 3.6% of global expenditure on technology (representing around $220bn). In comparison, the health industry in Europe spends 7.4% on HealthTech. However, this is changing, and digital spending in education is expected to grow up to 5.2% in 2025, bringing an additional $170bn in expenditures.
From a VC perspective, EdTech has experienced rapid growth in investment in the last years: $16bn have been invested globally in 2020 - twice the amount of 2018. China has positioned itself as a major player, with $27bn of VC funds invested over the last 10 years. Europe, however, has ways to go when it comes to VC investments in EdTech, with just $2.6bn invested. In total, there are 20 EdTech unicorns worldwide (vs. 50 for HealthTech). This is a great time to invest in EdTech as a VC, due to the market timing. The education sector has great potential for value creation through digitization (supported by widespread penetration of mobile and the internet in underserved markets). Moreover, the education industry is massive - valued at $7 trillion+ in 2025 and expects an increase in participation of 2 billion people by 2050 across the board. Digital spend from these players is expected to grow to $404 billion by 2025. Check out Holon IQ’s super interesting research for more details on the topic here.
👩🎓 The impact of EdTech in higher education
EdTech for higher education captured 16% of the total amount invested by VC in 2020 globally (source). Its underlying market, higher education, is expected to grow to around a quarter of the $10 trillion expenditure on education and training in 2030 (source).
An attempt to map the market shows that EdTech for higher education is a fragmented market in itself, with 4 dimensions, 16 domains, and 70+ capabilities.
As mentioned by Erik Torenberg in the Village Global podcast, common critical remarks on higher education include the following:
It is expensive: student debt is at an all-time high and now represents $1.5T in the US alone. Hence, higher education is not accessible to anyone and drives inequalities.
It is monopolistic: low competition, few new entrances. It is dominated by a few elite institutions which have been the same for some time now, inhibiting improvement and innovation.
It does not prepare well for jobs: higher education provides students with theoretical knowledge and a title on the CV, while employees require skills. Companies invest time and resources in upskilling and reskilling graduates so that they have the know-how required to be successful at work, which is not the same that made them successful in a classroom.
It is not a good filter for employers anymore: There are more students who go to university than jobs available at graduation. Study shows that more than 40% of students are working in jobs for which they are over-qualified. Meaning that many graduates accept jobs that are well below their actual qualifications.
And more recently...
Remote learning the old-fashioned way: the pandemic pushed university in-person classes on Zoom, drastically degrading the learning experience for students while keeping costs almost identical. Little has been done to improve the online experience, such as adapting the courses to the digital format.
Student engagement in a remote setting is low: far from campus, it is hard to feel engaged and the online experience is not helping. Many students complain about online classes (or events) consisting of one helpless professor sharing his screen for 1h30 hour, and 60 black Zoom-tiles of students that might, or might not be attentive.
EdTech as a replacement of the current system?
During the last years, EdTech companies have started to capitalize on the weaknesses of the current education system by developing online platforms to distribute MOOCs (Massive Open Online Courses).
Wave 1: MOOCs to learn skills
EdTech unicorns such as Udemy ($3.3bn) or Coursera ($2.5bn) fix a major problem of higher education: they offer skills rather than knowledge, at a low cost. For example, Udemy's best-selling courses give the opportunity to learn Python, Web Development, Advanced Excel or Financial Analysis from scratch for less than $30 per course. When compared to classic higher education courses, MOOCs are easily scalable and accessible. For instance, Google has started to offer professional career certificates to learn 'job-ready skills'. What they offer is simple: you can learn to be a data scientist, UX designer, or project manager in three to six months, for free. In terms of quality, they tap into large datasets of usage data to improve classes and drive engagement up on a continuous basis.
The limitation of standalone MOOCs
However, although some MOOCs platforms did become EdTech unicorns, they did not replace the classic higher education system. As expected, they also have their limitations. Some key limitations include:
Completion rates are low: students feel no accountability to finish the course, maybe induced by the low price.
Credentials are not as credible: hard to compare a university degree with known evaluation methods, to an online certificate with shady automated grading.
Wave 2: MOOC-based degrees
As a solution to these problems, MOOC platforms, and higher education institutions together started to offer fully-accredited online degrees. When compared to in-person degrees, they seem to be a perfect choice as they are:
Less expensive (but not cheap): for example, the tuition fees for a Boston University MBA are $24k for the online experience and $57k on-campus.
More flexible: students are not forced to take a certain number of credits per semester, and only pay for the courses they take, alleviating the financial burden.
Stackable: students can collect certifications while completing their courses, and thus prove their skills even if they didn't finish their degree.
Today, around 55 MOOCs based degrees are available worldwide. Still, I find it hard to imagine that MOOCs based degrees are the only future of higher education.
What is missing?
In theory, MOOCs based degrees seem to be the perfect alternative to old-school in-person degrees. In practice, they are missing an important aspect: the campus experience. The campus experience facilitates social interactions with other students, fosters the feeling of community, helps to develop lifelong friendships, emotional intelligence, and networking skills.
For this reason, it is hard to believe that EdTech MOOCs unicorns will replace higher education institutions as we know them once students return to campus. In-person education has a clear added value when compared to online learning. Nonetheless, without the introduction of new technologies in universities to improve the learning experience, the incredible price gap is no longer justified.
EdTech as a boost to higher education institutions
Learning from MOOCs, I believe higher education can address some of its critics with the help of EdTech in the coming years.
Improving remote learning and cutting costs - At first, to cut costs and improve the remote learning experience, higher education institutions can rely on next-generation Learning Management Systems (LMSs) and examination tools.
Learning Management Systems (where course content is hosted). From my student perspective, established LMSs (Blackboard, Canvas, Brightspace, and Moodle) still have limited capabilities. The experience is far from what can be found on MOOCs, with interactive videos, instantaneous grading, and peer-to-peer feedback.
With better pedagogical tools, higher education should be able to compete with the low costs and quality of MOOCs. For instance, by developing engaging online content for repetitive learning tasks, and proposing face-to-face interactions when it is most needed. For an illustration of the possibilities, check out Wizeprep.
Furthermore, when compared to MOOCs, LMSs appear to be short of AI-driven analytics and automation and, therefore, lack a sufficiently personalized learning experience. Some EdTech companies such as Anthology or Intelliboard are working on bringing those capabilities to already established LMSs. This could open up new opportunities such as adapting the learning material to each individual student based on behavior or helping a student in danger of abandoning her studies and facilitate an early intervention.
Examination and proctoring. After two exam sessions during a pandemic, I can report that current solutions are far from being perfect. Luckily, some EdTech startups have better tools for proctoring and examination in the works: Proctorio, EvalBox, Evalmee. In the long run, this will allow higher education institutions to reduce human effort and expenses in the assessment of students.
Engaging students
Further, EdTech solutions could help to address the low engagement of students in remote classes and improve campus life (the added value when compared to MOOCs).
Interactions in online classes. I believe video-conferencing is not engaging enough for remote learning. Zoom is a stop-gap at best - the specific needs of students can’t be adequately addressed when you develop for the more lucrative corporate market. Luckily, new tools already exist to complement the learning experience and improve remote engagement. Prominent ones include Kahoot!, a game-based learning platform that proposes live quizzes to add interaction during classes, or Liveboard.online and Miro (although not only for education) which simulates whiteboards and allows online collaboration.
In-person or remote campus life. While living on campus, it is always hard to find your way through the ocean of information. Many institutions still push tons of emails to inform about administrative tasks, classes, events, associations, exams - you get the point. Some startups, such as Beecome, propose tools to align communication on-campus. Others, such as ReadyEducation, Involvio, or Stucomm, provide campus-apps as a service to centralize information for students.
🔭 Conclusion
All in all, EdTech appears to be a trending and growing market, well stimulated by the pandemic. The emergence of MOOC unicorns definitely challenged the current higher education system and addresses some of its weaknesses. The battle, however, is probably not lost yet as MOOCs are not the perfect substitute: they cannot replace the campus experience. On the other hand, many solutions have been developed to support higher education institutions to bring their teaching to the 21st century and start justifiying soaring tuition fees.
However, more likely than not, universities will need more than fancy tools to live up to expectations. Some initiatives, such as Stanford 2025, demonstrate that a profound change in the classic system inherited from the Bologna Process is required to achieve this.
In the meantime, there are lots of opportunities for the next EdTech unicorn-to-be in boosting the current university experience.
🔦 Deal in the spotlight
(by Aarzoo Sharma)
Class raised a $30mn Series A round co-led by Insight Partners and Owl Ventures.
Key facts about Class and the deal:
Value Proposition: Class integrates exclusively with Zoom to provide teachers and students a ‘real classroom experience’ through customized features such as attendance, live quizzes, and one-on-one chats
Founded: 2020 / HQ: Washington, USA
Latest Funding Round: Series A | Funding: $30mn (total $46.8mn)
Estimated ARR: pre-revenue (running pilots with ~60 customers)
Notable Investors: Insight Partners, Owl Ventures, Emergence Capital, Bill Tai (first-check investor in Zoom), GSV Ventures
Class was founded by the co-founder of Blackboard, Michael Chasen, and aims to develop a specialized tool for online teaching on top of Zoom. The company has been backed by several Zoom investors and has raised significant Seed ($16mn, September 2020) and Series A ($30mn, February 2021) rounds despite being pre-launch and just under a year old.
🚀 Why you should really care about this deal:
Class already has significant funding and traction - The demand for the solution is high, with more than 6k institutions from USA, Dubai, Japan and Europe across the K-12, Higher Education and corporate training segments on its waiting list. Class also has a short sales cycle (~1 month as opposed to ~9 months for Blackboard), which is symptomatic of a widespread understanding of the problem statement among customers. In my view, the company has done a great job of segmenting the classroom learning experience and solving for each block with a thoughtfully designed feature - some examples include integration with CMS (content management systems) and interaction design changes that make teachers the center of attention.
Source: Class’ website
Their focus on Zoom also opens up a realistic exit option for the investors through an acquisition by Zoom. Zoom’s heavy focus on scale caused them to drop the ball on building more intricate features over the past months for different use cases (the rise of Hopin in the virtual events space is a testimony to that) and if Class gets significant traction then an acquisition would be almost a no-brainer in our opinion.
🤔 What you would need to believe in:
Class can turn their reliance on Zoom into an asset - The company has no current plans to integrate with Teams or WebEx, and relies heavily on the Zoom SDK. This creates significant platform risk for Class, and they would have to figure out sometime down the line how they can de-risk the relationship. At the same time, however, being built on top of Zoom (and being funded by Zoom’s backers) lends it a sense of credibility among potential customers. It would be interesting to see how Class fares in the post-pandemic world where courses return to being largely offline. I foresee a potential pivot in the company’s future - developing solutions for MOOC-based hybrid teaching formats with universities (as described in our Market Spotlight) or complementing LMS for B2B customers, for instance.
Class can sufficiently alleviate data privacy concerns among customers - Safety issues were widespread with Zoom among consumers, and Class for Zoom has some controversial features such as attention tracking which would involve providing the company access to students’ laptops. Concerns around data privacy and access to minors (via Zoom) could be a deterrent to adoption and the company will have to be airtight in terms of cybersecurity. Targeting teachers and parents as the key customer persona for the purpose of sales could also be a part of the solution (for K-12 students).
📰 On our own behalf
We officially launched our website last week! Check it out HERE
Registration open: On February 15, we will host Dr. Hans Volckens, Head of Real Estate and Asset Management of KPMG EMEA, at AIS. Register HERE if you are an HEC student
We are launching a workshop series to aid students in preparing for their first VC analyst positions and are looking for mentors that have recently made that step! Reach out to us at AIS VC if you’d like to participate and provide your perspective!
Thank you for reading! Don’t hesitate to write to us at tom.eberle@hec.edu or aarzoo.sharma@hec.edu to share feedback, resources, or to submit requests for future deep-dives!