Best in class: Exploring the causes behind increasing edtech M&A activity

Forget the ABCs – today’s edtechs are mastering M&A.

In the heady days of 2021 and 2022, the exit path for ambitious entrepreneurs was clear. For most, the goal was IPO and a chance to grow into soaring valuations.

However, thanks to the pandemic and difficult market conditions since, many have turned to M&A as an alternative.

It’s a shift that is very clear within edtech, where there’s a new school of thought that M&A might just be the way forward: US-based Classover’s recent merger with Battery Future Acquisition is a perfect example¹. With 49 global M&A transactions already recorded this year², and a marked increase in activity in Q2 of 2024, it appears investor confidence may be returning to pre-pandemic levels.

To learn the invaluable lessons this pattern presents, it’s important to understand what’s driving this deal flow. Does it stem from a broad investor appetite for tech-enabled solutions, or is AI the new teacher’s pet? And how have market conditions affected this activity?

Lessons learned: The ongoing impact of COVID-19

There’s no doubt repeated lockdowns and remote work have had an impact on the education sector.

With workspaces doubling up as home classrooms, and tasks like compliance training and HR systems moving online, demand for innovative educational experiences grew exponentially between 2019 and 2022.

Although the pandemic has eased, the way we live and work has undoubtedly changed, and the demand for innovative ways to learn remains high. This is particularly true in markets like the UK which faces sustained productivity and skills shortages. Data from the CIPD showing up to nine in 10 UK employees will need to reskill by 2030³. Both innovators and investors have recognised the opportunity that this growing need for continuous education presents.

If the pandemic highlighted the need for new ways to learn, AI has supercharged our ability to do that.

The impact of AI: Accelerating Innovation

Intensive investment into generative AI has the potential to transform every industry, including education.

In fact, machine learning and large language models are already being used to improve existing digital products to great effect. Listed edtech Duolingo is a prime example. They have partnered with OpenAI⁴, and are using GPT-4 to create an AI persona for students to interact with and receive feedback from, a decision that saw the revenue increase in Q3 2023.

While it’s true that corporates and investors are competing for quality assets that leverage AI, I believe there’s more to the increase in deal activity.

It’s not all academic: The importance of market fundamentals

Although growing demand and the arrival of AI have put edtech into the spotlight, education businesses with strong financials have long been recognised as good investments.

Tech companies in education may be particularly attractive because of high entry barriers (large upfront development costs) and the promise of ongoing returns from SaaS models. Customers also tend to stay with the same provider for a long time as topics take time to master.

And then there’s the sector’s global appeal. Education is a truly universal need, which gives businesses a strong case to expand into new markets and build a global customer base.

These qualities, coupled with falling interest rates, means that many who chose to wait for the “right” conditions are now well placed to take advantage of better borrowing rates.

The current level of activity we’re seeing would likely not be as strong as it is were it not for healthy businesses or favourable market conditions.

What’s next? Edtech’s end-of-year exams

The increase in deal activity in Q2 could signal the start of a new growth phase for edtech.

In 2023 a larger number of smaller deals took place compared with pre-pandemic levels, which is both interesting and encouraging for founders and startups. The data shows there’s strong investor appetite in the sector which could provide an alternative for down rounds.

Looking ahead, this interest is set to continue for the rest of the year. With a vibrant market and healthy demand, founders in education could enjoy opportunities to exit or secure investment on favourable terms.