The edtech industry is no stranger to turbulence, and the current macro trends in education are sobering: across early childhood, K12, higher ed, and workforce learning, we are still seeing belt-tightening and budget freezes. Even the edtech startups that are managing to grow users effectively are simultaneously slashing expenses, laying off employees, and taking every step possible to extend their runway.
After 24+ months of this edtech winter, it seems that we may be reaching the next phase in the process of industry wide re-calibration: the era of cram down financing.
What's a Cram Down?
Even with preventative measures, sometimes a company’s runway runs out. When this happens, startups have few options but to turn to their existing investors for a life line. What ensues isn't pretty: a recapitalization often known as a "cram down” where a new lower valuation is set for the company and the cap table is reset. In this scenario, all existing investors need to “pay to play” in order to keep their share of equity in the company. This process is typically led by the existing lead investor, but occasionally an outside investor can lead this process which often entails even more strife and tension.
Cram downs in edtech have been relatively rare over the past 5 years. In the past, teams would raise a "bridge round" at a flat valuation if they ran out of runway, but those days seem to be over. Prior round valuations are no longer tenable and VCs are facing their own constraints as the LP market tightens.
The Dilemma: Invest or Lose It All
The current edtech ecosystem puts both founders and VCs in a precarious position. Founders have to confront the competing priorities of their investors and board members. They also may have to let go of significant equity themselves in order to keep their company afloat. On top of this, with overall valuations going down, employee stock options are often underwater, which leads to decreased morale and a harder time hiring.
Meanwhile, VCs have to allocate scarce capital to investments that no longer have the glow of up-and-to-the-right momentum. Partners that lead the cram downs can become more like operating partners than pure investors, as they must often take a more active role in managing the operations and cash flow of their portfolio company. For those that don’t invest at their pro rata, they have to mark down the investment as a loss and explain to LPs why their investment has soured.
Impact on Edtech: A Shifting Ecosystem
Cram downs are just one more step in the recalibration of the edtech ecosystem that we have been witnessing over the past couple years. With public market valuations for education companies at an all-time low, a halving of the existing “unicorns” in the sector, and a troubling economic environment, real questions are surfacing around the viability of venture in the education space.
For many, seed and series A funding rounds continue to offer meaningful returns, but the economics of series B and C funding rounds are looking far more tenuous. Meanwhile the AI revolution offers potential paths for companies to scale without massive capital burn, so why take the dilution? This existential dilemma is for another newsletter post, but for now and for most, it is all about living to fight another day!
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Edtech Insiders Live Events
Bay Area Edtech Happy Hour
Our next Bay Area Edtech Happy Hour will be held at the Salesforce Park in San Francisco on May 9! Join Edtech Insiders, Reach Capital, and Tuck Advisorsto connect, collaborate, and enjoy a drink together!
We’d love to see you there, please RSVP if you plan to attend!
Join us for an evening of beer, sunsets, and bringing the best people working in edtech innovation together! This event is hosted collaboratively by FOHE, Edtech Insiders, Fine Tune, and NYEdTech Meetup!
We’ll send out an RSVP link soon, and in the meantime mark your calendars!
Edtech Night with the Oakland B's
Join Gold Talent, Workshop Ventures, and Edtech Insiders for a special evening celebrating the inaugural season of the Oakland B's, co-founded by edtech legend Paul Freedman! Let's come together to show our appreciation for Paul's dedication to both our industry and the Oakland community!
On June 12 at 5:35 PM, the Oakland B's will take on the Rocky Mountain Vibes at the historic Raimondi Park in Oakland. This event is an opportunity for the local edtech community to gather, network, and enjoy an exciting baseball game.
The Edtech Ticket Package, priced at $100, includes:
Tickets to the game
On-the-field access to meet and greet the team
Food and drinks
Your choice of an Oakland B's hat or shirt
Space is limited, so please RSVP soon to secure your spot if you’d like to join us! Bringing kids and family along is highly encouraged!
We’ve been working with our friends at the AI education startup Wisdolia to generate summaries of sessions from the recent ASU+GSV Summit (which many of us who were parked in the lobby missed entirely). Here’s the first in the series. If you’re interested in more of these, fill out the poll after to let us know if you’d like to see more in the newsletter!
In this session, Reid Hoffman, a prominent figure in the technology industry, shared his perspectives on the role and impact of AI. He sees AI as a powerful tool that can amplify humanity and help us become more human, rather than a threat to replace or destroy us. Themes from the session included:
Amplifying Humanity through AI
Hoffman believes that AI can be a huge amplifier of how we can become more human and effectively take action in our lives.
He argues that the general discourse around AI tends to focus on the negative aspects, such as AI damaging democracy or taking away jobs, but instead, he sees AI as a way to enhance and empower humanity.
AI and Trust
Hoffman emphasizes the importance of rebuilding trust in institutions, media, and education, and he believes AI can play a role in this.
However, he cautions that if AI is used to produce confirmation bias, vaccine denialism, or election denialism, it will not help in rebuilding trust.
He advocates for using AI to provide access to expert information and diverse perspectives to help people make more informed decisions.
AI and Techno-Optimism
Hoffman's views align with the "techno-optimist" perspective, which sees technology, including AI, as a force for progress and improvement.
He contrasts this with the "techno-pessimist" view, which sees technology as a threat that should be constrained or controlled.
AI Regulation and Governance
Hoffman acknowledges the need for clear lines of regulation and ensuring that technology, including AI, is "subservient to humans," as argued by his friend Mustafa Suleyman.
He recognizes the debate around the theoretical outcomes of AI and the need for regulation and governance to ensure AI is developed and deployed responsibly.
AI in Public Discourse
Hoffman sees the current debate around AI in Silicon Valley as a "religious schism," with some arguing that AI will destroy us and others advocating for unfettered technological advancement.
He aims to provide a more balanced and nuanced perspective, highlighting the potential benefits of AI while also acknowledging the need for responsible development and deployment.
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Top Edtech Headlines
1. US Newspapers Sue OpenAI
A group of newspapers, including the New York Daily News and Chicago Tribune, sued Microsoft and OpenAI in New York federal court on Tuesday. They are accused of misusing reporters' work to train their AI models.
2. Botched FAFSA Continues to Block College Enrollment
The new FAFSA system continues to move slowly and cause problems for student applicants, leaving students without the financial information they need to confidently enroll in the upcoming school year. Experts are concerned that there will be a huge dip in overall college enrollment this year due to FAFSA failings, particularly for low-income and minority students.
3. The Southern Regional Education Board (SREB) Commission on Artificial Intelligence in Education
As AI implementation is still an open question, various boards and commissions continue to pop up to address this ongoing issue.
The latest is the Southern Regional Education Board (SREB) Commission on Artificial Intelligence in Education. Comprising policymakers, education leaders, business leaders, and education stakeholders from 16 states, the commission’s goal is to tackle AI’s role in education from kindergarten through postsecondary programs, focusing on AI skill readiness and policy development.
We have had some amazing guests on The Edtech Insiders Podcast in the last few weeks. One of our stand-out interviews from this past week is with Danny King: the CEO and Co-Founder of Accredible, a global digital credentialing platform that serves certificates and badges on behalf of MIT, Harvard, Google, Skillsoft, IEEE, GMAC, McGraw Hill and over 1,000 others.
During our time together, Danny King highlighted the transformative potential of digital credentialing in the education sector, underlining its impact on personal and professional development. His insights suggest a shift towards more personalized, data-driven education and employment pathways, signaling significant future advancements in how skills and achievements are assessed and valued.
Here are a few of the topics we covered with Danny:
The Inception and Evolution of Accredible
Danny King discussed the inspiration behind founding Accredible, originating from personal experiences with the rigid academic assessment and admission systems. He emphasized the need for a more holistic evaluation of skills and qualifications, which led to creating a platform that offers verifiable digital credentials.
Impact of Digital Credentialing on Users
Danny provided several examples of how Accredible's digital credentials have transformed lives by enabling individuals to pursue and showcase their skills beyond traditional academic pathways. He also mentioned a webinar featuring a student who benefited significantly from these credentials.
Challenges in the Credentialing Landscape
Danny addressed challenges within the credentialing ecosystem, particularly the integration of traditional and new-age credentials in the hiring processes and how digital credentials can be made more comprehensible and acceptable to employers.
Future of Credentialing
Danny speculated on the future of credentialing, emphasizing the role of AI and data in personalizing education pathways and improving job matching systems, potentially transforming how educational achievements are perceived and utilized.
Curious to Learn More?
You can listen to our full interview with Danny King, as well as interviews with many other edtech founders, investors, and thought leaders at The Edtech Insiders Podcast! Check it out, and as always, we’d love to hear what you think!
Our latest reporting on funding, mergers, and acquisitions comes from Matt Tower’s publication EdTech Thoughts. Matt does an incredible job of covering the latest funding, news, industry updates, and more! If you love Edtech Insiders, be sure to subscribe to Matt’s newsletter as well.
Ben - this is so insightful and so true. Twain said "history doesn't repeat itself, but it often rhymes". I've lived through three of these cycles now - the S&L crisis in '90-93, the dot com and telecom winter from '01 to '04, and then Global Financial Crisis from '08-'11. Every time we go through the same cycle. When a bubble bursts, during the first year people believe that a recovery is right around the corner. It'll be fine! The second year, they realize this may take a while longer and that they need to start cutting costs to extend the runway and avoid exposing themselves to "market pricing discovery". When they run out of moves, they reach the capitulation stage and that's when the dreaded "inside down round" happens. People start to read the deal docs and understand how weighted average anti-dilution provisions really work, what discounts on notes and SAFEs really do to founder economics, and how pay to play provisions work. It's ugly. The companies that get through this phase quickly, or even better proactively in the first two years, are well positioned to be acquirors of both market share and weaker competitors. These cycles typically last 4 years and we're about 18-24 months into this one.
I'm very optimistic about the future. We're seeing strong revenue growth in our portfolio and the long term trends underlying the digitation of education and alternative ways to upskill the workforce are very much intact. It just takes time, but anyone who's been around education for a long time knows that everything takes time in our business.
Ben - this is so insightful and so true. Twain said "history doesn't repeat itself, but it often rhymes". I've lived through three of these cycles now - the S&L crisis in '90-93, the dot com and telecom winter from '01 to '04, and then Global Financial Crisis from '08-'11. Every time we go through the same cycle. When a bubble bursts, during the first year people believe that a recovery is right around the corner. It'll be fine! The second year, they realize this may take a while longer and that they need to start cutting costs to extend the runway and avoid exposing themselves to "market pricing discovery". When they run out of moves, they reach the capitulation stage and that's when the dreaded "inside down round" happens. People start to read the deal docs and understand how weighted average anti-dilution provisions really work, what discounts on notes and SAFEs really do to founder economics, and how pay to play provisions work. It's ugly. The companies that get through this phase quickly, or even better proactively in the first two years, are well positioned to be acquirors of both market share and weaker competitors. These cycles typically last 4 years and we're about 18-24 months into this one.
I'm very optimistic about the future. We're seeing strong revenue growth in our portfolio and the long term trends underlying the digitation of education and alternative ways to upskill the workforce are very much intact. It just takes time, but anyone who's been around education for a long time knows that everything takes time in our business.