Nov 29, 2020 9:00 AM

VCs Are Pouring Money Into the Wrong Education Startups

The pandemic has proven the need for new technologies that can radically change online learning models. But investors are more interested in existing platforms.

a technical integration support specialist cleans Chromebooks while preparing for the start of school.

The Covid-19 pandemic has compelled students, teachers, and parents across the globe to embrace relatively new forms of education technology (edtech) quickly and on an unprecedented scale. At a glance, it would appear that edtech startups and their venture capital backers have responded swiftly and emphatically to meet this exceptional challenge. But a closer look also suggests some cause for serious concerns, particularly with respect to our most educationally vulnerable students.

Though the pandemic brought about a sharp and sudden economic contraction, overall VC investments have remained surprisingly robust. This is likely the result of both the push of low interest rates as well as the pull of new challenges in fields such as health, climate change, and education. Education technology is a particularly striking example. Since the onset of the pandemic, VC investments in education technology have increased dramatically. My calculations indicate that, though the year is not yet complete, VC investments in education technology during 2020 are already at $9.7 billion, more than twice the amount in all of 2019.

This striking increase suggests that investors see enticing opportunities in the education landscape that will endure beyond the pandemic. But a more reliable assessment requires a closer look at the nature of these new investments. Do they suggest that investors see, in the wake of Covid-19, new opportunities for radical changes in education?

In a word, no. A closer look at recent venture capital activity indicates that early-stage investments—those more likely to target risky and innovative startups—have actually declined since the onset of the pandemic. Instead, venture capital's focus on education technology is entirely concentrated in later-stage investments that support relatively mature companies. This pattern suggests that VCs are responding to Covid-19 by accelerating existing technologies that are poised to engage substantial numbers of new users during the crisis, rather than seeking blue-sky investments in new, riskier innovations. A recent survey of venture capitalists reinforces this view, finding that they are primarily focused on supporting their existing portfolio companies through the challenges and reliably lucrative market opportunities created by Covid-19.

The exceptionally active third quarter of this year illustrates this vividly. Out of 159 edtech deals, the top seven all involved companies that provide broadly targeted online learning platforms. Together, just these seven third-quarter investments accounted for nearly 30 percent of the VC investments in education technology in all of 2020 to date. These startups include Yuanfudao, Unacademy, BYJU’s, and Coursera—mature and large-scale operations that have already established “unicorn” valuations. The financial support concentrated among these firms allows them to refine their already existing capacities at a time when unprecedented numbers of students across the globe have been turning to online learning. For example, the India-based startup BYJU’s made its services free during the pandemic and saw its user base quickly grow by 25 million. Similarly, the MOOC provider Coursera made its catalog freely available and quickly had 5 million new user registrations and 10 million course enrollments, a 644 percent increase from the prior year.

For ambitious, late-stage edtech startups and their VC investors, the pandemic-inspired rush to engage the massive number of students forced into online learning is undoubtedly a good business decision. And the nimble capacity of these startups and venture capitalists to pivot quickly in response to this demand is also likely to have meaningful social benefits. In particular, the rapid scale-up of learning platforms and resources during shutdowns has likely served as a helpful backstop to the Covid19 “learning loss” that is poised to become a major and enduring policy challenge of our time.

But there is also some cause for longer-term concern about these trends. The recent focus on supporting the rapid scale-up of mature startups has meant a decline in the funding available to early-stage edtech startups—the types of firms where transformative innovations are more common. Recent economic research suggests this is a systemic issue with venture capital during recessions: Early-stage VC investments decline and the ventures that are funded tend to be less impactful.

At a time when the shortcomings of current online and hybrid learning models have become so stark, such a reduction in funding for early-stage shops is unfortunate. Emerging evidence from schools and parents indicates that students are experiencing high levels of anxiety, depression, and isolation in their current online learning environments. Elementary and secondary teachers in the US also report that students are less prepared to participate in grade-level work now that most are in wholly or partially remote instruction. At the same time, teachers now say they work longer hours, experience higher levels of burnout, and lack the support and training needed for effective remote instruction. In short, despite a massive infusion of cash, our existing virtual learning tools are failing us.

The transition to remote instruction has been particularly dire for some of our most educationally vulnerable students, like those with learning disabilities, English learners, homeless students, and those in foster care. In part, this involves questions of access both to digital devices and the internet and to stable and supportive home environments in which to use them. One recent report estimates that 3 million vulnerable students in the US have not experienced any formal education since March. When important subgroups of students do engage in remote and hybrid learning (e.g., English learners and students with disabilities), they find digital environments and resources that are poorly aligned to their distinctive learning needs.

Covid-19 and the sudden shift to remote learning has also placed extraordinary stress on parents, many of whom have had to spend a large amount of their time managing their children’s remote-learning schedules. Despite all of this, a solid majority of parents, particularly Black parents, still express a strong enthusiasm for “reimagining” education (e.g., hybrid models of face-to-face and digitally mediated instruction) rather than simply returning to pre-pandemic practices.

But a successful reimagining of education will require funding edtech that differs dramatically from what is currently in broad use. For example, the social and emotional learning that occurs in face-to-face classrooms is important both for sustaining students’ academic motivation and for promoting their long-run human development. Edtech needs to find better ways to nurture these critical dimensions of our children’s educational success and psychological health. Scaling up a more effective tech-infused system of education also requires well-supported and thoughtfully designed roles for both teachers and parents as well as strategies for meeting the distinctive needs of students who face unique learning barriers.

Focused innovations in edtech have the capacity to meet this diverse set of challenges and aspirations. However, that will require edtech startups and venture capital funders who can look beyond funding the current race to scale and directly address the deficiencies that schooling in the time of Covid-19 has painfully revealed.

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