Earlier this year Nesta held a workshop on how to raise investments in EdTech with guest speakers Lisa Barclay, Investment Director at Nesta Impact Investments and Fergus Davidson, Associate at IBIS, a leading EdTech investment advisory firm. As someone new to the investment world, it was eye-opening. I have summarised a brief overview of trends in post-COVID investing from the event as well as seven practical tips for raising investments in the EdTech arena.
It is not uncommon in the education sector to hear how education hasn’t really changed in the last 100 years and promises about the transformative potential of technology are always just around the corner. Whatever the merits of those claims, we cannot deny the important role that technology has played in helping education systems to adapt during the COVID-19 pandemic. With over 190 country-wide school closures globally in April 2020, Edtech has been propelled to the forefront of the education scene.
"Raising investments can take time, especially if it is your first time. Start thinking about it at least 6-12 months in advance of when you’ll need the investment."
During the pandemic, education systems around the world had to find creative solutions to face the challenges of remote learning. From using national television to deliver school classes in Portugal to South Korea’s high schools using social media such as TikTok to promote microlearning among students, EdTech organisations have experienced huge surges in demand for their technologies (research by Nesta/SchoolDash found a seven-fold rise from pre-COVID levels in usage of online maths learning platforms) and some organisations have benefited from increased investment (global investment in 2020 was $16.1 billion compared to $7 billion in 2019). As Fergus Davidson described it, “for some companies, five to 10 years of growth has been condensed into the space of 10 months”.
However, this acceleration has not been uniform across the sector. This variation is reflected in the nature of the investments made last year. Despite the fact that the total value of investments in the EdTech sector in 2020 doubled since 2019, the number of deals has actually decreased. In essence, this means that more money has gone to fewer businesses.
Fergus Davidson said this could be explained by increased risk-aversion among investors, who, in times of high uncertainty, are more willing to invest in businesses that are already successful, rather than new businesses which may be promising but come with higher levels of risk. Consequently, the Edtech sector is now seeing some “unicorns” - privately held startup companies with a value of over $1 billion - appear.
Finally,although it might be reasonably easy at the earliest stages of the investment lifecycle to raise a small amount of money, fewer EdTech businesses manage to attract greater backing at later stages as investors turn their focus on finding the long-term potential “winners”. This is especially true in times of market uncertainty, when it is even more difficult for investors to predict how the market will develop and who those winners might be.
In this context and in a post-COVID world, what can help new businesses take their first steps in the investment arena? Here are some useful ideas from the investment experts.
There are many different types of investors who can support your business at different stages of its lifecycle and that are interested in different criteria. If you are seeking investments for the first time, you should definitely spend some time understanding who you would like to target. Make sure that your strategy is aligned with your business stage, growth and profile, as well as with management and shareholders’ priorities. Also consider other factors, such as investments schemes - e.g. EIS and SEIS investors benefit from tax breaks to support early-stage high-risk companies.
Investors are looking for businesses with a clear idea of who they are, what they want to achieve and how they want to do it. Make sure you can present this information in a compelling way and as early as possible.
Investors in the EdTech sector are increasingly focused on the pedagogical merit of your tool. In fact, your customer base will be more easily convinced to buy and adopt a product which has strong evidence of this. Ultimately it will be beneficial to your business’ commercial prospects as well. Make sure you think about how to present evidence of your impact in advance and prepare a theory of change or logic model for your tool: what will be the medium-term outcomes of your solution? How about the long-term impact?
At the very early stages it can be easier and faster to only raise money from individual investors such as angels. However, as your investment requirements increase, it is important that your portfolio of investors combines both individuals and institutions. The latter will have deeper pockets from which to fund successive investment rounds, but also more structured processes and stricter criteria.
This is important, as a very high initial valuation can cause problems. Investors want to see your business valuation going up every year, so if you start very high, you will have to work that much harder to prove your worth.
Raising investments is an iterative learning process. Be prepared to take feedback onboard and to tweak your pitch and your slide deck after each presentation. As one of the workshop participants said, “it took us approximately 50 meetings to get the presentation right”. Be patient! Moreover, raising investments can take time, especially if it is your first time. Start thinking about it at least 6-12 months in advance of when you’ll need the investment.
Raising investments is a two-way street and the chemistry between founder and investor is key for a successful long-term relationship. Be as confident as you can be that you and your investor’s objectives are aligned and compatible before embarking on this journey.
Nesta recently launched its new strategy. We want every child to have an equal start in life and so we have set the aim of considerably narrowing the educational attainment gap between children growing up in disadvantage and the national average. To achieve this goal, we are looking to invest in transformational organisations that have the potential to achieve high impact, aligned with our mission goals at the same time as achieving commercial success. If you think your organisation fits these criteria, please get in touch with us.