This Week In EdTech with Ben Kornell, 5/20/22

particular is to you. And Chegg ironically, Pearson, appears to be the winner of the bunch, roughly holding value over the last year. When you look at this data, Alex, you know, big picture, what do you make of it?

varying degrees. And, you know, I think Coursera was at 40, something percent of what it was a year ago, some some pretty dismal numbers, and seeing them all, at once, you know, is very sobering. And I think it, it painted a picture that, I think tells us that the public edtech companies are struggling right

now. And there's going to have to be some different strategizing for investors, some different strategizing for these companies that have to say, if not profitable, at least, you know, sustained, then you've thought a lot about this, what are some of the implications of the whole sector going down like this even more than traditional tech? Well,

numbers weren't sustainable. And so the underlying value of the company is likely still there, it just may not be the at the same kind of valuation that we were experiencing in 2020, or 2021. So this is a huge time for counter cyclical investment. That means companies and VCs investing income other companies that are undervalued or are ultimately like trading below

their potential. And so what you're going to see is any of the venture capitalists that have raised huge funds at the peak of Ed Tech mania are now sitting on some powder and they're able to do some really meaningful investments. It also means that m&a is going to heat up as you look at the market who has the powder right now. I would say private equity firms are still pretty loaded with dry powder. That means they've got, you know, billions on the

balance sheet. I'm looking particularly at places like TPG, where they have the rise Fund, which is specifically for private equity, impact related investments. And I'm looking at the biggest player in edtech, which is owl they have a billion dollar fund, and they haven't deployed the majority of that fund. So they're really looking at some great rounds. On the entrepreneur side. You know, down rounds is something that maybe the current generation of startup CEOs aren't familiar

with or haven't seen before. In the past, a down round meant death for your company because when Once you do a down round, it's really hard to convince other investors to get on the cap table. But they can make a lot of sense if part of your value pop was related to COVID. But you still have a good underlying business, I think that there's going to be a flurry of down rounds in the next 12 months. And it's not necessarily the worst thing for

the companies. But on the employee side, what you will see and experience is that companies with any cash are going to conserve cash and or be looking for acquisitions. And so it's just a landscape shift in a pretty dramatic, quick way.

report all their financials. But I would imagine that some of this pain is also being seen by private companies, it's just harder to notice. One of the things that's interesting about to you is that there have been some really interesting articles. And I have to give the disclaimer that we are not a stock show, nothing is financial

advice, of course. But there were some interesting articles about to you because the stock is that, you know, trading at 20, even 10% of its value from the last few years, saying that the fundamentals actually, you know, might be there and valuation might be low, and they might be sort of being punished as they've been outperforming earnings, they might be being punished a little bit more than then would be logical in this

sort of pendulum swing. And I think that leads to the possibility of acquisition targets, which leads to a sort of blockbuster headline and ad tech this week, which is our next story. Ben, do you want to break it? I know you gave a little foreshadowing. Yeah.

portfolio. It would be amazing if they did one of these deals, and the fact that there's even consideration that they might do both, it's just mind boggling. But some of the reporting or article that will link on the podcast is from Bloomberg shows that they've actually been sourcing debt, a billion in debt

to finance these deals. So it looks like by Jews moving, you know, from a, they were a series a series B, Series C, series D. Now they're really moving into more of a, like a private equity phase where they're doing roll ups. They're putting companies together. And the big question is, will this work? What's your take on everything? Alex?

So the idea that to you and of course, recently acquired edX, the idea that to you which is seen as the sort of big acquirer is an acquisition target, not only an acquisition target, but an international acquisition target from a private company. It blows my mind. And you know, when I think of, you know, to you when it bought edX in particular was consolidating its its role as sort of the major leading OPM, online program management company in the in the company made in the country and

maybe even the world. It has partnerships with, you know, 50 plus really high really elite universities. And the idea that a college like Harvard or MIT or Dartmouth would sign up with edX in 2012 2013, only to see edX bought out by to you, only to see to you bought out by basically a mega Indian tutoring conglomerate, it just feels like that the world turns upside down

a little bit. It's hard even to imagine how the reaction would be you know, how somebody would react to that in the halls of some of these Ivy League universities, and let alone within to you I can't even imagine how the how the employees are thinking right now Chegg makes a little bit more sense only because check has been a superstar tech company for quite a while, has had a textbook, you know, basically textbook rental company that did very, very well expanded into tutoring does a number of

different educational services that seem a little more akin to what Bhaiji is, is really about what their sort of core services tend to be. But either of them I mean, they both are really sort of mainstays of the of the public and tech landscape. So it's really feels like a very reversal of fortune in a very strange way. At the same time, it's smart, both of these companies are trading at 20% of what their stock value was a year ago. That is pretty

incredible. So I can imagine that they seem like enormous bargains from an acquisition standpoint. Let's take a quick break.

Right, the UN actually said that Facebook had facilitated a genocide in Myanmar and what happened to them nothing.

like higher ed tutoring. And they do K 12 tutoring at by Jews, or horizontally, integrating, getting going from running your own programs to being a program management partner for existing white labels. So it's I don't think our listeners can appreciate like, how big of a moment this would be in the ad tech space. But it's, it would be totally fundamentally changing the dynamics of from Series A, all the way to going public pipeline for the next two or three years if by juice can pull this off.

And by the way, this is just the news today, imagine what Chegg into you are doing. They're working with their bankers to find other competitive buyers, right to get it up. So this story is far from over. It does, though, come back to a question around OPM model. So our headline number three I'll transition to is a great article from John Katzman from noodle, those of you might have who listened to our postcards from ASU GSV. John was one of our

speakers. And he's also the co founder of to you, at noodle he is doing a similar OPM model. But what he writes about in this article is about the increasing cost of advertising. So many of us have heard more generally that Facebook ads aren't working. And that's largely because of privacy constraints on iPhones, etc. And so many people are shifting back to Google AdWords and search engine

optimization. Well, he points out that most companies that are in the online education space are spending 20 to 30% of tuition on ads, and is only going up. And ultimately, if we imagine a model where students have access through online and there's a world where the best education lives online, we're actually going further away from that, given the cost model, which makes user acquisition the bulk of the spend more money is spent on advertising, then it is actually on program. So he does

have concerns about that. And and he's pushing the government to create regulations around advertising that limits the expenditure or CAPEX expenditure, and then also provides guidelines for search engine optimization that ensures that the quality of a company is taken into account, not their bank account and their SEO strategy, given that you've been living in the OPM world. You know, how have you seen this evolve, Alex? And where do you think it's going? Well,

bought NX. They went out of their way to say that one of the major reasons for it was to lower their customer acquisition costs by tapping into this massive, you know, 40 million plus person edX market and being able to sort of upsell edX, edX learners, which was going to cut their customer acquisition costs because that's such an enormous

cost as well. always been a huge budget item for them and every other OPM, including noodle that John Katzman now runs, it makes a lot of sense that the that in a world where all of the online programs are competing for students all over the world where there's very little regional loyalty, where everybody is just sort of in the same bucket fighting for the same students, then you know, the loudest voice in the most the biggest budget is going to

win. And that means that you have very high customer acquisition costs. That comes, of course, at the expense of potentially academic quality. It actually reminds me of a related story that we wanted to touch on this week, which is that a section four, which is a Scott Galloway is at tech startup that does online business classes, which is, you know, taking some of those classes, that's a really a quality product, just announced, you know, major

layoffs this week. And it actually, I think it's related in that, that is a company that you can tell immediately, by going into their, you know, courses spent more money on quality courses than on marketing, I don't think they did a huge amount of marketing compared to if their budget I think was split the other way. And it's obviously having ramification, they're not able to grow fast enough, they're not able to, you know, to sustain the business quite as much.

Whereas companies like the to use the noodles, the, you know, academic benchmarks are, you know, all of these different, huge companies are really marketing experts. They know digital marketing very, very well, they have very big digital

marketing teams. I think the interesting part to me is that John Katzman sees this as a problem right now, and it probably is based on sort of the idea that now it's such a saturated market, there are many OEMs, there are many programs per OPM, and they're competing with on fully online degrees, that maybe were made by, you

know, by online providers. And I think maybe there's a feeling that this is spinning out of control, that this sort of online program management, you know, hire an external company to do instructional design and to do marketing to sort of put all the pieces together, has now created a globally competitive online world, where the costs are just impossible to constrain. And, you know, he's been around a very long time, and really, really understands this market. Well, so I trust

his opinion on it. But it's just interesting that that he's raising the flag now, because that's really, it's not a new, as far as I know, it's not new that marketing is sort of the biggest line item for companies like that.

the rest of the world. And so this is kind of back to these fundamental questions of what is education for what is the right

delivery model, and so on. And I will just say, the guidance counselor market or the role of some wise arbiter who helps you find the right place to go, that world has really failed to keep up with the amount of choices and even if you look at us, US News and World Report, they're getting criticized left and right, and kind of struggling with how to create rankings that don't lead to some, you know,

optimization from schools. I do think that our user base, especially those who with less access to information, needs more support on choosing the right program for them. Oh, yeah, on top of all of this, I would also just say everyone's now with marketing conditions, the messages conserve cash, but you still need to grow. And the cost of customer acquisition is going up, right. So what gets cut fastest, it's program that gets cut fastest. And it's growth that continues to drive

costs up. So it will be you know, we're gonna just reach a breaking point on cost quality. My hope here is that we get some white knight companies coming in and rolling things up, so that they can bring customer acquisition costs back down into

balance. And maybe that's what this you know, kind of going back to headline number two, maybe that's what this bind us deal enables is actually streamlining some of the mega players so that it's a easier market to navigate and that the instructional quality can hold or even rise. That's an optimistic view. I'm gonna keep watching Alex as as I'm sure you will. What's our next headline?

income students. This feels like you know, we've talked on the show about how schools are sort of, have been becoming looked to to solve many different societal problems beyond education, bike, take care and health and mental health. This feels like a sort of major acceleration in that direction, very purposeful acceleration in that direction. Ben, I know, you know a lot about California Education and about K 12, has shed some light on why they're doing this and what it's going to lead to.

Well, there's

dentist is in on Wednesdays. And on Thursday, there's a women's health clinic, and on Friday, you can go and get nutritious meals for the week, there's this idea of schools as the distribution center and hub has been around for a while. And in our past conversations, we've been talking about that as the strain that schools are experiencing, and what Governor Newsom and select leaders in California are saying, let's actually lean into this, let's think of schools as the delivery

channel. Now, what they're quickly realizing is, all things do not have to be in person. And companies like TelaDoc, or hazel health or other kind of remote service providers can actually be quite helpful, even though you still need a physical space for people to come to. And so they're starting to blend physical and digital in these community schools. And most especially this is the case in

rural. So rural communities in California have less access to all of these goods and services, public services, they tend to show shorter lifespans, and worse health outcomes. And schools are seen as like a community center. And so Governor Newsom is leaning into this, it will essentially, from a brick and mortar standpoint, be billions of dollars into infrastructure. But it's also the Service web. And, you know, when we think about edtech, we

often talk about pure tech. But this is one where we can see a bunch of edtech opportunity in a blended hybrid physical model. And I'm excited to follow it. I will also say the other parts of the 4 billion, the park going to mental health is creating a big controversy, because they have to decide whether that budget goes to the Department of Education, or the Department of

Health. And if it comes through the Department of Health, then it goes to a federated system of counties through health clinics that are already understaffed and overwhelmed. If it goes through schools, then schools don't really have the expertise of running health care enterprises. So it's a big, big debate right now. And it's even though it was approved a year ago, it's actually starting to hit the fan right now. And, you know, what I would say also is k

12. It's becoming clear that K 12 will still be that ecosystem will still be anchored by the physical school, whether it's private charter or or government, there's still a such an important role for that physical school. Whereas in our higher ed segments, this move to digital looks like a much more permanent and binary thing. The K 12. Market is really school facility

very large grant. I think it brings the idea to the fore that companies edtech companies that are providing community services or services that overlap with community service, such as social emotional learning, or nutrition support, or critical thinking or non cognitive skills are all sorts of things that may be supported for teaching meditation for low income children suddenly have this enormous new sort of integrated market to sell into because it's hundreds of schools with the

sort of same mandate. And I would wonder if other states might be looking at this and trying to say, is this you know, the extra funding is maybe a once in a lifetime thing, but starting to say, Well, I wonder how this would work if I wonder if California can untangle the existing bureaucracies of politics between, as you say, you know, the Health Department and the Department of Education and all sorts of different groups, I would almost say it may be a Newsom leaving into

this leads to potentially a re envisioning of what the real role of the CATO school is, it is a physical space, and that physical space can all offer all kinds of services. But if you surround that physical space with a whole suite of meaningful technologically delivered services, then that becomes super scalable, you get economies of scale there, and you can offer a sort of a whole suite of services, ideally,

integrated into an LMS. With easy access, you can sort of imagine the school Tech of the future not being as focused on content and, you know, assessment and being more focused on mental health, on nutrition, support on parenting, you know, support for parents on all sorts of things that we don't traditionally associate with schools. I think that's an exciting future. I agree. But there is going to have to be some rethinking on the government side about how these

things are funded. Because that's just not traditionally been the role of schools. And I think, you know, it's not a surprise that they're hitting some bureaucratic snack foods there. I imagine there will be more, but if they can work their way through it, it might be a moment in which schools really are redefined, even if the physical location still matters. Let's take a quick break. Have you ever wondered how Netflix

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million. That is a company that targets older students that are looking for career transitions, and helps them serve taking standardized tests oil as break into high end fields. So this is for adult learners. And sort of breaking into the coaching space, a company called Ed innovate and innovate, secured some money to series A to rollout pan India expansion. There's also people Grove, which got an undisclosed round from a PE investment firm, to accelerate their adoption of a

career access platform. And then lastly, this is not a pure funding, but I thought it was really interesting and worth noting on the pod is that a company called Animoca, which is a gaming and NFT business out of China, I believe very big business decided it was going to start moving into education and into general education tool. So there's a $5 billion gaming web three company that's starting to dip its fingers in education. We mentioned a few weeks ago how Unity does some of that as well.

So lots of funding round, but relatively small compared to some of the ones we've been reporting on prior weeks. How about mergers and acquisitions then on the

Cornerstone is a longtime player, they're owned by Clear Lake. They do Future Ready workforce with HR solutions. So, Cornerstone is kind of like an LMS for HR compliance. And then they built out a bunch of training modules. edcast is essentially an employee talent management experience where your goal is to grow employees careers and skills over time. And this combination could be a really big push in the

workforce, and HR space. And then lastly, habitat learn, acquired Timur to offer computerized notetaking for students habitats based in Toronto, and they're focused on removing learning barriers and Timur is computerized note taking company. And, you know, this is essentially people that have developed things for students with learning differences coming together and building tech plus adaptive solutions, and then providing

that actually for all users. So it's a really interesting week for m&a, some pretty powerful combinations, especially with our headline news, some pretty powerful ones that are potentially coming soon.

interesting moment. In some late breaking news, we have one more major ed tech acquisition, amplify the Brooklyn based edtech company that does online games and curriculum for schools just bought the curriculum arm of Desmos, the math ed tech leader, apparently, the Desmos calculator will still stay open

and free for users. But the Desmos math curriculum, which is a really innovative mathematics curriculum that's been used for a number of years and developed by that team was bought by AMPLIFi for an undisclosed sum. So for our game, today, we're going to play a game of Is it a sign of the apocalypse or a sign to put down your betting chips? Meaning from the headlines that

are happening this week? Is this something that forebodes Some very negative news ahead, or something very exciting that we all want to double down on and get out are betting tips on? What do you think, Ben, let's start with our first headline. So then first headline is that this week, online MBAs overtook residential MBA programs for the first time in history, there are more people taking their MBAs online than in person, sign of the apocalypse or sign up the bedding chips.

date. And you know, the article talks about it but in light of the rapid changes in technology capacity over the last five years we need to do plan t shirt do so side of the betting chips. I hope they figure out some great new ideas about you Ben.

Standardized testing has been sort of getting more and more out of fashion for a number of years. But if the standardized test scores are going down, that there's a, there's some kind of signal there. And that signal is

totally lost. If people are only looking at grade transcripts, everybody's transcripts are going up and up and up, I think it becomes harder and harder for students have particular, you know, abilities to stand out from the crowd, because there's no, you know, people just don't care about standardized testing. I think that's probably why the AC T is putting out this report to make people rethink the value of standardized testing. But I kind of tend to be a standardized test fan at the end

of the day. I know that's such a strange stance, but I think there is a value in having a universal benchmark in for certain kinds of things. So I would say that the idea that grades just keep going up, even though test scores go down, didn't feel quite right to me. So I'm gonna say it's a minor sign of the apocalypse, even though I agree with you at heart that grades shouldn't be the determiner of a student's life. Should we do one more?

Is this going to be a political backlash? If we forgive people who tend to, you know, people with student loans tend to actually have more income? Or is it is it going to be, you know, considered a really positive thing for to sort of help those who are really struggling under

the debt of lungs. So this particular article was really interesting, because it's basically coming down on the side of look, we have really failed student loan borrowers in this country between, you know, the slow increase in Pell Grants between the referring to Fannie Mae and all the different just the world that we've created for them, where they have to borrow huge amounts to get to college, and basically even have a chance and entering the middle class, we really should sort of feel

quite bad about what we've done to this entire generation. I really do agree with that pretty strongly. I thought this was a really a good tutorial. And I think it's good that we are having this conversation about student loans and the sort of promise of higher ed that comes through that particular lens being flawed in a pretty deep way, outside of the idea of what Biden himself should do. I think it's a positive thing, that we're having this discussion in a really thoughtful way and not

just thinking about politics. So I'm gonna say this is a sign of the veteran chips. I hope this conversation keeps going far beyond whatever the Biden administration does in the next few weeks. What do you think then pro or con Apocalypse are betting tips?

schools. And so if you continue to create systems where the government has to step in and bail people and institutions out, you're ultimately going to get to some pretty dark days, and I think the dark days are ahead for higher ed in general. And on that note, on that note, I will wrap today, it's been so great to have everybody joining the show. We will have a guest next week. Unfortunately, our guests had to step out due to health concerns. So we are so excited for everything going on

in ed tech. Don't let the EdTech Apocalypse get you down. Come and listen to Ed Tech Insider weaken ed tech, because if it happens in ed tech, you'll hear about it on weekend Ed Tech.