In this second interview of our EdTech Outlook 2016 series we talked to Richard Taylor, a seasoned edtech entrepreneur and angel investor based in London.
Richard shares his thoughts on the impact of China on the global edtech market, a possible edtech bubble, promising markets as well as trends, like VR and the maker movement.
Edtech investments surged to record levels in 2015. Do you think that we will see similar interest in 2016, or do you expect a cool down (fewer later stage rounds etc)?
This depends to a degree on the global economy: If the China slowdown becomes a crash then edtech will be hit and probably quite hard in some sectors. I expect the US to grow and elsewhere there may be some growth but this will be offset by a slight deflation in valuations. This had already started at the top (Pearson etal) and will filter down to startups & early stages c/os.
However, outside all the economic stuff I think the valuations of many edtech startups are absurd – £1-2m+ with no real revenue and few if any assets. Part of the problem is that most edtech startups are trying to be “publishers with one book” (their product). Few are sustainable businesses on their own, but the majority keep burning their investors money in the hope that they will be an exception. Another weakness comes from incubators and accelerators, few of which understand edtech; in my view they underinvest in their selection process, overpromise what they do for startups and then push them out to naive investors at wildly over-inflated valuations.
If we take a look at the latest edtech investment data, China takes a huge chunk of the pie. But more and more insiders say that investment rounds in China are far smaller than officially claimed. Could this also have a negative impact on edtech valuation outside of China?
China is interesting as most early stage edtech investors I meet just don’t get what a huge global impact the changes in the Chinese economy are already having globally. This may be because we haven’t seen a crunch in valuations in startups yet, but I suspect we will this year.
Regarding China, I think investors have been sceptical for some time about what gets announced and what the real numbers might be. This isn’t new and some of the stuff I see in the US is more about PR than substance, but you get this in any market where companies are jockeying to raise money (and profile).
If China gets worse it will make it harder to raise money, particularly equity. Debt will also be tough because regulators like the Bank of England’s monetary policy committee keeps hinting at a small rise but I think most regulators will hold off as long as possible in case we find ourselves in another recession (driven by China). If this happens I don’t think many countries can afford (economically or politically) to commit to another round of quantitative easing.
What would be a viable solution to this problem?
The real opportunity in edtech is buy-and-build. – Richard Taylor
I feel a bit like a Cassandra because I have been saying for over a year that the real opportunity in edtech is buy-and-build. Merging startups together is very hard as you have to cut the teams (who are all highly emotionally invested) as well as persuading the investors to that this is realistically the best way forward if they ever want to see a return. It can be done but in the UK we have a unique problem, our EIS and SEIS tax incentive system. These incentives have brought lots of new small (primarily angel) investors into the edtech space. For investors primarily motivated by tax benefits of investing in edtech startups, they can often get a better return in the short term (compared to paying tax or for complex minimisation advice) if the startups fail (as you know it generally takes 5-7 years for an edtech company to succeed).
However, buy-and-build can be done and there are two UK companies who have already started doing this. The most successful is LTG PLC who focus on corporate learning but in K12 the new kid on the block is Big Clever Learning (backed by Root Capital). I think we see more of these this year, but as always this is just my hunch and I am frequently out of step with what everyone else in the market is saying.
In your opinion, what was the most exciting edtech deal (funding, acquisition, IPO) in 2015? Why is it significant? What potential impact do you expect in the respective vertical?
In the UK it’s probably the buy and build strategy of the listed edtech company (mainly corporate training) Learning Technologies Group PLC. They have built a business that is getting to scale and in a sector that isn’t directly tied to government funding.
In Australia it is the float of IDP
In the US it was probably the sale of Amplify, but for all the wrong reasons.
Do you see a bubble in edtech, and if so will it pop in 2016? Why / why not.
Yes, it may as the vast majority of startups are not much beyond products let alone businesses. I frequently see companies who have raised £1m on a £3m valuation and yet they have few products and next to no revenue. Equally, I see other companies with £2m+turnover who are profitable (often just) who are struggling to raise money as what they do is either not sexy or they have more traditional business models.
What region(s) do you find especially exciting to invest in?
Asia (Japan, South Korea, Indonesia, Malaysia), Australia & Europe (major EU nations)
What vertical(s) do you consider the most promising for investors (lifelong learning, higher ed, K-12, …)
Learning outside the classroom at every level especially what I call ‘passion learning’, tutoring & demonstrable skills (General Assembly etc)
What is your take on virtual reality and education? Game changer, hype, or something else.
Loads too much hype. About 90% of PC’s can’t run VR and in many parts of edu we have even worse hardware. Bandwidth may also be a limiting issue as will the cost of hardware and the even greater cost of content development.
Are there other new technologies that you find particularly promising for educational use?
Big data is feared, over hyped and misunderstood in European education. – Richard Taylor
Bandwidth boosters like 100+mg over copper and other tools to boost the pipelines into edu facilities and directly to student devices.
Growth of cloud. After wasting a whole day with Apple’s terrible new El Capitan OS it’s clear to me why ChromeBooks and other low cost cloud connected devices (inc. Windows) will kill off Apple in all but a tiny minority of schools.
Big data is feared, over hyped and misunderstood in European edu but it will become probably the key issue of the next 3 years (in almost all aspects of edtech from product creation and design to content delivery, assessment, personalisation etc etc).
As an aside, I have been wondering whether the Maker Movement may shift from being about learning & doing to being to as much about helping repair and building the mental health of students. Student mental health is a big issue in the US, and I suspect internationally, and I think we will see some interesting things emerging in this area.
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