Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: Education is ripe for disruption. Less than 3% of total global educational spend is currently allocated to digital resources, but both teachers and students say they value it. Technology may shape the future face of education, hence the emergence of the EdTech sector. Defined as the combination of hardware, software and processes that can help achieve better educational outcomes, the sector could be worth over $300bn by 2025.
Video and artificial intelligence-based learning tools look to be the most promising offerings. If successful, the classroom of the future will be centred around self-paced and personalised learning. Over $6bn of venture capital flowed into EdTech last year. Private businesses from Udemy and Coursera to Duolingo and Grammerly have flourished. There are fewer listed ways of playing EdTech, but Chegg and 2U have developed strong positions.
“Books will soon be obsolete in schools.” At least this was the prediction of the inventor Thomas Edison in 1913. More than a century on, his forecast has still not been borne out, even if much has changed. We first discussed the topic of education in a theme piece issued exactly 100 years after Edison’s initial contention. At the time, ‘EdTech’ was a highly nascent expression; now, it is used with increasing regularity. Put simply, the term is a portmanteau of ‘education’ and ‘technology.’ Practically, consider it as the development and application of tools to promote education. These tools comprise hardware, software and processes; education is being made (more) ready for the 21st Century in ways far beyond what Edison could have conceived.
Education is, arguably, the world’s most precious resource. It plays a crucial role in equipping people with the necessary skills, knowledge and attitudes to allow individuals to thrive both personally and professionally. ‘Quality education’ is the fourth of the Sustainable Development Goals outlined by the United Nations. It is seen by the organisation as enabling upward social mobility and providing a key to escaping poverty. While 9 out of 10 children globally are now enrolled in primary education, just 6 in 10 leave school with minimum proficiency levels in reading and maths (per the UN). Such a poor outcome has lifelong consequences, evident in every economy globally. Latest unemployment data in the US show a headline number of 8.4% out of work. However, there are marked disparities: just 5.3% of those with a bachelor’s degree and higher are unemployed, compared to 12.6% rate high school leavers without a diploma (per the BLS).
In the course of researching this note we spoke with over half a dozen teachers and other stakeholders within education. The most consistent message from these experts was that the mission of education was to strive to create opportunities for as many students as possible. Against this background, the application of technology to the education sector should therefore be seen as a crucial means to an end. Technology can, in general terms, help make scarce resources more plentiful.
Global access to powerful broadband, cloud storage and internet platforms has improved markedly even since 2013, at the same time that costs for all the above have fallen. 1m new people go online everyday while children and young adults comprise one-third of all internet users, making them the most connected age cohort in the world. Some 71% of youths (those aged 15-24) use the internet daily compared to a figure of 48% for the global population (data from the World Economic Forum and UNICEF). Online learning is also becoming increasingly common, at least in the developed world. In the US, around one-third of undergraduates say they have taken at least one class online, while ~15% claim to study entirely online (per the National Centre for Education Statistics).
However, less than 3% of total global education spend is currently allocated to online resources. For context, over $6tr was spent on education globally in 2018 (data from Barclays Investment Research and the OECD respectively). Both students and teachers want more EdTech. The market is therefore currently growing at over a 10% compound annual rate with most consultants forecasting that the sector could be worth at least $300bn by 2025. We have not seen any new projections issued since the COVID-19 pandemic began, but with social distancing set to remain for some time, returning to the classroom may never be quite the same again. The logic for moving more online has only increased, in our view.
When students are asked why they want more EdTech, the answer is simple: using it can act as a clear differentiator, particularly in the context of concerns over job scarcity. The correlation between educational spend and economic returns is compelling. 90% of the fastest-growing jobs in the US economy require a tertiary degree. Meanwhile, a college graduate will, on average earn over $1m more during their career lifetime than someone without such a qualification (per the US Department of Education). Students are generally of the belief that online tools can enhance their flexibility and impose a lower cost burden. Viewed from the opposite perspective, teachers generally say that they favour the use of (more) online tools since they could help free up additional time. Around 25% of teachers in the UK work more than 60 hours a week and while over 90% say they enjoy their jobs, teachers spend less than half their time in the classroom owing to the burdens of administrative work, particularly marking (data from UCL and Ofsted).
EdTech does not refer to one specific set of tools. It can be everything from (but not restricted to) iPads loaded with programmes for helping children to read, to Wi-Fi for colleges campuses; or, from live online Q&A sessions with remote experts, to quiz- and game-based apps. There is no one-size-fits-all solution and it is important to make a distinction between hardware and software offerings, in- and out- of class learning tools, and the varied target markets (primary, secondary, tertiary and professional). Nonetheless, from our perspective, it is perhaps most relevant to consider the EdTech opportunity as the practical application of different technologies to achieve better learning outcomes. Such technologies may often overlap, but at the same time, be mutually reinforcing. Video and AI appear most promising.
Many education experts are of the view that the classroom of the future will be centred around self-paced and personalised learning. Video and AI are enablers. In a survey of 1400 educators in the US, 98% were of the view that video would be important to education in the future, while 91% believed it would increase student satisfaction and 80% were of the opinion that video would enhance educator collaboration (per Kaltura, a software platform). Multiple online learning platforms have already emerged ranging from Udemy (with over 300m course enrolments since its launch in 2010) to Coursera (which offers 3,000 different courses from over 190 top academic institutions). Outschool is a platform that was launched in 2014 as a marketplace for live student classes. Classes cost $5-15 each, and over 15,000 lessons are currently available. The business makes it money through taking a 30% commission when linking students and teachers. More recently, TikTok said in June that it plans to start commissioning educational content for its platform.
Although still clearly in its infancy, artificial intelligence has huge potential in the educational space. It offers the promise of unprecedented scalability and could be transformative. AI in education generally focuses on identifying what a student does and doesn’t know through diagnostic tools. It can then develop curricula based on each student’s needs, while tracking performance and adjusting the learning programme accordingly. AI can allow for a level of differentiation that would be impossible for teachers to achieve. A wide number of tools are already available. Duolingo claims to be the most widely downloaded education app in the world, with an installed base of over 300m and some 30m monthly active users. It offers 95 courses in 38 different languages, with 7bn exercises completed monthly. Just 34 hours on the app equates to a university semester of language education (per the City University of New York). Meanwhile, Grammerly, an AI-powered writing tutor, has 20m monthly active users. Quizlet and Mathway (recently acquired by Chegg) are other examples.
Lest readers fear the imminent emergence of ‘iTeachers’, it should not be forgotten that technology is no panacea. EdTech tools are complements rather than substitutes. Good traditional teachers are not obsolete and are never likely to be. Importantly, authorities need to hold them to account. It is perhaps best to see EdTech as a set of tools which can help; perhaps by monitoring pupils and teachers alike, assisting the best and making up for the failings of the worst. Outputs, of course, are only as good as inputs. Systems may also introduce or amplify certain biases. A reliance on machines might make bad teachers worse. The future of education is perhaps best thought of as AI-assisted rather than AI-led. As important is to consider the students potentially left behind; the uneven implementation of EdTech tools could exacerbate educational inequalities. Even in the US, 18% of school-aged children lack internet access at home (per the FCC). The logic of increasing online access in schools, libraries and rural areas is high, regardless of how the EdTech industry develops.
Significant sums of venture capital have already flowed into the EdTech sector, equivalent to ~$6.5bn last year. This compares to less than $1bn a decade ago (per PitchBook). Looking forward, this sum is only likely to expand. Education is an industry ripe for innovation; its growth prospects are more secular than cyclical in nature. If anything, individuals typically allocate more discretionary spend to education in periods of economic uncertainty, according to most studies. The uncertain re-opening of many schools due to the COVID-19 pandemic has led to further interest levels in the sector.
From a public equity perspective, there are currently relatively few listed pure-play ways of gaining exposure to the EdTech theme. It is also important to distinguish between different business models: some go direct-to-student, while others partner with existing educational institutions. Further, most are local rather than global models owing to different national education standards, regulatory considerations and language issues (even if many are spoken widely).
Businesses active within the space include Chegg and 2U. The former (listed in the US and capitalised at $8.4bn) defines itself as a student-first learning platform, offering online services backed by human support. It has ~15m unique monthly visitors and more than 375m total content views. Meanwhile, 2U (also US-listed, $2.6bn capitalisation) has taken the opposite approach, partnering with over 70 different universities to offer courses. China perhaps has the most developed EdTech market globally. Leading listed candidates which offer exposure to this market include TAL Education and New Oriental Education. Expect more to flourish. As Chegg’s Chief Financial Officer Andy Brown recently put it when speaking at an investor conference in June, “we are betting on the inevitable.” He may be more right in his prediction than Edison.
Alex Gunz, Fund Manager, Heptagon Capital
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