A standardization of curricula across regions, greater broadband penetration and ring-fenced government resources make this a pivotal moment for EdTech development and investments.
Education is a large and important global industry with annual spending figures in the trillions of dollars, and yet the delivery of education remains largely traditional in nature. More recently, many Educational Technology (EdTech) companies have emerged in an attempt to enrich the teaching and learning experience through both hardware and software solutions.
The EdTech sector has historically faced difficulties because many governments were cutting spending on education due to recessionary concerns, investment in education from private equity firms has lagged behind other verticals such as software and healthcare, and companies in the space have had to overcome complex and idiosyncratic regulatory hurdles across geographies as well as prove the effectiveness of their offerings over and above existing systems.
However, recent developments such as standardization of educational curricula across regions, increased fixed line and mobile broadband penetration, and ring-fenced government resources dedicated to education have led to increased interest, activity and investment in EdTech. Market sizes and investment levels are expected to grow significantly in the coming years, making this an exciting time to be operating and investing in the EdTech space!
Defining Educational Technology
While technology has transformed many industries and facets of our daily lives, one large area of society that has up until recently remained relatively untouched by technological advances is Education. The way in which education has traditionally been delivered has not changed for many hundreds of years – using paper-based content and materials in a physical setting with one teacher responsible for small groups of students.
However, in recent years, educational technology (EdTech) has begun to play an increasingly important role in enriching the teaching and learning process. Smart classrooms have been enhanced with advanced technological learning aids such as interactive whiteboards and tablets which increase student interactivity and knowledge retention. Digital content has made learning materials more mobile, current and accessible for a wider audience, rendering textbooks obsolete. Smart software including collaboration, assessment and enterprise resource planning systems are helping teachers to develop better courses and manage classrooms and school more efficiently, while online learning platforms are creating virtual classrooms that allow teachers to reach vastly greater audiences free from geographical and financial constraints.
EdTech is relevant to all areas of Education, from pre-school age, through K-12, which represents school age children from Kindergarten (ages 4-6) through to grade 12 (age 17-19), to higher education as well as corporate and public sector training.
It is estimated that total global spending on education is $3.9tr, of which $1.3tr is in the US (NeXt Knowledge Factbook 2010, Next Up! Research). EdTech penetration in the US is much lower in the K-12 age range (only 0.5% of total spending) compared to post-secondary levels (5.6% of spending), and on a global basis, technology only represents 1.6% of total expenditure on education. This shows that Educational Technology is still an industry in its infancy, and faces many hurdles to adoption, including lack of broadband internet penetration, barriers to entry due to economies of scale, and government education budget cutbacks.
Educational Technology Industry & Key Players
The educational technology space can broadly be categorized into the following hardware and software related sub-sectors:
Hardware: Equipment for teachers and students that improves the classroom experience such as tablets, interactive whiteboards and tables, augmented reality and smart projectors.
Digital Content Providers: Publishers and repositories of electronic learning materials, as well as online learning providers including massive online open courses (MOOCs), platforms that utilize video and interactive distance learning technologies to allow a one-to-many teacher to student learning experience delivered virtually over the Internet.
Instructional Support Systems: Software that helps teachers to collaborate on the creation and distribution of course materials, design and deliver student assessments and collate feedback.
Administrative Software: Specialized Enterprise Resource Planning (ERP) systems for schools, as well as educational data analysis tools.
EdTech Watchlist on DataFox
We've pinpointed the key players in the EdTech space and added them to a DataFox watchlist for further analysis. Here's a quick snapshot of the leaderboard in this sector:
This DataFox watchlist includes revenue estimates, funding rounds, employee numbers and other critical data for analysis. Using our proprietary algorithms each company is assigned a DataFox quality, finance, HR and influence score - making it clear to see the standout firms in the sector.
One comprehensive study, which measured the global market for Smart Education and Learning (which includes hardware, software and services, across a broad spectrum of end-markets encompassing PreK-12, higher education, business education, governments and healthcare )estimated the total market size in 2011 to be worth $73.8bn. The report suggested that this would grow at a CAGR of 20.3% from 2012 to 2017 to a value of $220bn (Smart Education and Learning Market – Markets and Markets, June 2012).
Other more granular estimates from alternative providers of market size within specific subsectors and geographies are provided below:
The total market size for Education Software, Digital Content & Resources in the US PreK-12 market was estimated to be $7.97bn for the 2012 Fiscal Year (July 1st 2011 – June 30th 2012). This represents an increase of 2.7% from Fiscal Year 2011, and 6.4% from Fiscal Year 2010 (2013 U.S. Education Technology Industry Market: PreK-12 Report – Software & Information Industry Association, January 8th 2014)
Educational Hardware Technology, or the “Smart Classroom” sector, was estimated to be around $31.3bn globally in 2013, and is expected to grow quickly at a CAGR of 13.9% over the next 5 years to reach $59.90 billion by the year 2018 (Education Technology and the Smart Classroom Market: Forecasts and Analysis 2013 – 2018, Research and Markets, June 2013)
While North America is currently the largest EdTech market, representing around 60% of total revenues, EMEA and APAC are projected to grow faster between 2012 and 2017 at a CAGR of 24.3% and 26.9% to reach $55.5bn and $42.6bn respectively, compared to a growth rate of only 15.2% in North America, although it will remain the largest market, at $89.9bn in 2017.
Within Software, the largest segment of revenues comes from Content providers at 42%, within which language and mathematics materials were the largest categories. Growth of online courses, part of the Content category, was particularly impressive, with revenues increasing dramatically by 200% in 2011-2012. Instructional Support came a close second at 41% of revenues, consisting mostly of sales of Assessment software. Adminstrative software for the education sector makes up the remaining 17% of the EdTech software market, but this area is shrinking, having dropped by 32% since 2010-2011.
Funding Landscape, Challenges and Opportunities
The EdTech industry in the US faces significant headwinds in terms of recent reductions in sources of government funding, including:
The U.S. Department of Education cut spending by $1.2 billion.
The American Recovery and Reinvestment Act (ARRA), which poured $97.4B into the education system over a two-plus year period starting in the 2009-2010 school year is no longer available with the exception of two programs: Race to the Top and Investing In Innovation.
Title II-D (Enhancing Education through Technology or “E2T2”), the technology component of the No Child Left Behind program, was defunded.
There were 10-15% cuts to Title II Teacher Quality and Perkins Vocational-Technical Career Education.
Additionally, venture capital funding into the education sector has significantly lagged behind that of other industries. Estimates suggest that approximately only $200m of investment was received by education related companies between 2007 and 2011, funding an average of 25 businesses per year (National Venture Capital Association’s Spotlight on Education study). This contrasts with $4.4bn into biotechnology, $3.0bn into medical devices and $4.8bn into software over the same period (Price Waterhouse Coopers National Venture Capital Association MoneyTree Report, 2011).
This relative lack of investment from the VC community reflects the fact that EdTech remains a nascent industry but also that it faces significant challenges in terms of effective development and deployment, namely:
The Procurement Problem - Fragmentation of the market and idiosyncrasies of individual school districts’ curricula requirements even within the US alone, and slow procurement cycles, make the market hard to penetrate with speed and scale.
The Effectiveness Problem - Ineffective evaluation, and hence the lack of credible certification of the increased efficacy of new methods of delivering education, is a serious roadblock to the development of a robust market for educational technology.
Despite these challenges, there have been some recent developments that should increase the speed of EdTech adoption in the US:
First, 45 States plus the District of Columbia have adopted the Common Core State Standards (CoreStandards.org) which will create a more homogeneous market for Educational Technology in the US. The widespread acceptance of these standards represents a major step towards resolving disagreements over learning objectives that have been an obstacle to the development of broadly applicable educational technologies.
Second, the increased penetration of broadband internet access, especially mobile broadband via third and fourth generation cellular networks, should help increase the adoption of educational technologies, many of which are dependent on a reliable and high speed internet connection for their effective delivery.
This is therefore an exciting and pivotal time for the development of the EdTech sector, which has the potential to improve the quality of, and access to, education across the world.
External sources of information:
Below is a list of useful newsletters and resources within the EdTech sector:
New Schools Venture Fund