Throughout the past few years, education faced two tremendous challenges. Firstly, the challenge of reaching populations in developing countries, and secondly, running and maintaining learning activities during the pandemic. Ed-tech companies helped tackle these difficulties. They built and harnessed IT infrastructures to guarantee access to educational resources.
From remote learning, which all students became familiar with last year, to online subscription-based courses aimed at self-paced professional development, most people experienced some sort of tech-enabled learning during the Covid-19 pandemic.
While online learning startups rose to the occasion to deliver quality education, determining ed-tech startup value is the hardest thing.
In this blog, we’ll help you value an ed-tech company and how EdTech valuation multiples work.
Ed-Tech Startup Valuation
The global ed-tech market is expected to grow to $340 billion by 2025. The ed-tech sector has received the highest tech valuations because of the solid underlying market trends. As a result, the publicly traded ed-tech businesses traded at 5.0x to 18x in the next twelve months’ revenue (NTM). However, these valuations dropped significantly in Q4 of 2021 and early 2022. Nonetheless, these valuations are expected to rebound.
It is crucial to note that ed-tech companies are not valued like traditional businesses. Established companies are based on businesses’ free cash flow.
On the other hand, the most used valuation method for ed-tech companies is the Venture Capital technique, which values firms based on the multiples of revenues.
The Venture Capital Method
There are various startup and early-stage valuation techniques. None of them is perfect, but they all try to estimate the valuation of a company based on several quantitative and qualitative factors. The Venture Capital Valuation method is the most commonly used method investors utilize to value ed-tech companies.
The VC method considers market demand, business fundamentals, and investor return on investment factors.
Why Do Investors Use Venture Capital Method?
The Venture Capital Method is a straightforward and simple way to value an early-stage ed-tech business because several factors drive it, which can be grouped into four categories.
Market Demand
If you demonstrate that your ed-tech company is part of a large, highly fragmented market growing at double or triple digits, your startup will be more valuable than other companies in the sector.
Market Fit & Adoption
Investing in your EdTech business will be more valuable if you prove that it has early adopters (market fit) and that people are willing to pay for it (adoption).
Track Record & Management Team
If you can demonstrate that your management team has relevant work experience and a successful track record for growing similar businesses, your ed-tech startup is more likely to be valuable to investors.
Founder’s Negotiating Power & Investor’s Expectations
Lastly, keep in mind that investors are willing to invest in ed-tech startups and early-stage companies because they want a substantial return on their investment. If a company is deemed too expensive, the return on investment is reduced, and they won’t invest in it.
Likewise, the more investors you can pitch to, the more term sheets you receive. Hence, your negotiation position will be better, and the valuation will be higher.
Value Drivers To Value An Ed-Tech Company
Founders and investors can estimate an ed-tech company’s value by inputting three main variables using the VC method.
Investors’ Required IRR
One crucial variable investors look for is the rate of return. An investor’s required IRR (internal rate of return) is dependent on the ed-tech company’s stage, type of investor, and the investment’s perceived risk.
Thus, the more the perceived risk, the higher the required IRR. For instance, an investor needs a higher IRR for a seed money investment in an ed-tech startup than for an investment in an early-stage ed-tech business looking for a Series A or Series B financing round.
Projected Revenues
Typically, projected revenues are based on an integrated financial model, encompassing projected revenue for the next five years.
Moreover, investors will take them with a grain of salt unless hard data and facts support your financial model and assumptions. So, working with an independent, objective financial advisor is crucial. They can help you develop a rock-solid set of projections.
Comparable Industry Valuation Multiples
Investors look at multiples from comparable companies within the same sector and industry. Usually, EV/Revenue (Enterprise Value as a multiple of Revenue) is used.
These multiples fluctuate daily and depend on many variables, including stock market performance, interest rates, M&A activity, IPO results, market demand, etc.
Ed-Tech Startup Valuation: Example
Now that we know the Venture Capital Valuation method, let’s see how to use it to value an ed-tech company wanting to raise Series A.
Prove Market Fit & Adoption
Firstly, you must develop a detailed and integrated financial model incorporating operating metrics and historical economic data. It is vital because your historical performance is proof of your market fit and adoption. In addition, it supports the assumptions you use to generate your projections.
Expected Revenues
Next, produce detailed revenue and expense projections for five years. Although valuation depends on multiples of revenues, knowing your growth and operating assumptions is critical to discern how much capital you must raise to hit your revenue targets.
So, for instance, let’s assume that your ed-tech startup is in the K12 reading sector. You have been doing business for three years and get funding from individual funders, friends, and family investors. Likewise, your company has hit 450 subscribers and is generating a revenue of $250,000. Also, there was a 100% increase in your subscriber base last year.
In addition, you built an integrated financial model with projected revenue and historical results for the next five years. The projections demonstrate that you expect revenue to be around $625K next year and grow to $4.1 million in five years.
Here’s an overview of projected revenues for the next five years.
| Period | Revenue | Growth Rate |
|---|---|---|
| Base | 250,000 | |
| Year 1 | 625,000 | 250% |
| Year 2 | 1,250,000 | 200% |
| Year 3 | 2,187,500 | 175% |
| Year 4 | 3,281,250 | 150% |
| Year 5 | 4,101,563 | 125% |
| Total | 11,445,313 |
Public EdTech Valuation Multiples
Next, you must determine the right multiple to utilize to value your company. Investors gauge the market’s appetite for ed-tech investments by tracking over a dozen publicly traded businesses.
Although the multiples vary from business to business, each is based on investors’ evaluations of the company’s business model, management team, market demand, profitability, and growth rate.
K12 & Higher Ed
| Company | Enterprise Value (MM)* | Revenue | EBITDA | Margin | 3-Yr CAGR | EV/Revenue |
|---|---|---|---|---|---|---|
| Chegg | $5,060 | $776 | $158 | 20.4% | -34% | 6.5 |
| Blackbaud | $4,160 | $928 | $46 | 5.0% | 3% | 4.5 |
| PowerSchool | $4,060 | $559 | $81 | 14.5% | 19% | 7.3 |
| John Wiley & Sons | $4,000 | $2,070 | $345 | 16.7% | 3% | 1.9 |
| Instructure | $3,170 | $405 | $112 | 27.7% | 25% | 7.8 |
| Graham Holdings | $3,170 | $3,190 | $349 | 10.9% | 6% | 1.0 |
| Adtalem Global Education | $2,900 | $1,320 | $270 | 20.5% | -3% | 2.2 |
| Coursera | $2,380 | $415 | -$139 | -33.5% | 50% | 5.7 |
| 2U | $1,760 | $946 | -$34 | -3.6% | 32% | 1.9 |
| Stride | $1,880 | $1,600 | $166 | 10.4% | 19% | 1.2 |
| Scholastic | $1,210 | $1,530 | $106 | 6.9% | -7% | 0.8 |
| Perdoceo Education | $361 | $693 | $166 | 24.0% | 6% | 0.5 |
| D2L | $563 | $152 | -$73 | -48.0% | 12% | 3.7 |
| Janison Education | $224 | $34 | -$7 | -20.6% | 20% | 6.6 |
| Tribal Global | $185 | $81 | $11 | 13.6% | -5% | 2.3 |
| Zovio | $38 | $301 | -$8 | -2.7% | -6% | 0.1 |
| Median | $2,130 | $735 | $94 | 11% | 6% | 2.2 |
| Average | $2,195 | $938 | $97 | 4% | 9% | 3.4 |
Corporate & B2C
| Company | Enterprise Value (MM)* | Revenue | EBITDA | Margin | 3-Yr CAGR | EV/Revenue |
|---|---|---|---|---|---|---|
| Learning Technologies | $1,290 | $151 | $37 | 24.5% | 37% | 8.5 |
| Duolingo | $3,220 | $251 | -$54 | -21.5% | 55% | 12.8 |
| Franklin Covey | $673 | $237 | $25 | 10.5% | 2% | 2.8 |
| HealthStream | $608 | $257 | $29 | 11.3% | 4% | 2.4 |
| Median | $982 | $244 | $27 | 11% | 20% | 5.7 |
| Average | $1,448 | $224 | $9 | 6% | 24% | 6.6 |
Sector Overview
| Enterprise Value (MM)* | Revenue | EBITDA | Margin | 3-Yr CAGR | EV/Revenue | |
|---|---|---|---|---|---|---|
| Median | $1,820 | $487 | $42 | 11% | 6% | 2.6 |
| Average | $2,046 | $795 | $79 | 4% | 12% | 4.0 |
We will use the sector average EV/Revenue multiple of 4.0 in the example of the VC valuation method.
Remember that when you are prepping to value your ed-tech company, select the comparable companies that are the most similar to the company you are striving to value. Of course, it might not always be possible, but to back your valuation, you must explain to investors why you chose a certain comparable company rather than the others. Check the reasons why EdTech startups fail.
Private EdTech Company Multiple Adjustment
We began with EdTech valuation multiples from public companies. Now, we will adjust that multiple to show that your business is privately owned. Publicly traded companies are more valuable than privately owned companies. Private companies are less valuable because they are much more difficult, expensive to sell, and time-consuming. Consequently, investors apply Illiquidity Discount, also known as a Discount for Lack of Marketability, of between 20% and 30%.
Let’s utilize a 25% discount, with the adjusted EV/Revenue multiple of 3.0x.
Determining Your Exit Value
Then, calculate the ed-tech company’s value when your investors exit. In this case, we are assuming the exit happens after five years. Hence, it’s called the Exit Value.
Exit Value = EV/Revenue x Revenue at exit (Year 5)
Year 5 Revenue = $4.1 million
EV/Revenue Multiple = 3.0x
Exit Value = 3.0x x $4.1 million
Exit Value = $12.3 million
Investors’ Required Rate of Return (IRR)
The next step is to calculate the return on investments investors are seeking. The internal rate of return (IRR) fluctuates depending on the stage of the company investors are investing in (early-stage deals demand higher returns than later-stage deals), investors, and industry trends.
Usually, VCs demand a 40% to 60% IRR on the companies they intend to invest in. Over the past few years, venture capital firms have produced a 19.8% IRR on average. Remember that this is an average, including failed deals and success stories.
Moreover, VCs seek a 40-60% return because offering venture capital is risky. Most of the time, 80% of deals they invest in are unsuccessful or fail to meet expectations.
We will use 40% IRR at the low end and 60% at the high-end expected return rate in the current example.
Also, it is vital to note that as ed-tech ventures become more successful and proven, the perceived investment risk reduces, and investors will be ready to accept a lower IRR. In this regard, the EdTech startup organizational structure plays a vital role.
Determining Post-Money Valuation
Next, you need to determine the Post-Money value. Let’s consider you want to do a Series A capital raise, so we’ll assume that investors are looking for 40-60% IRR over the next five years.
Considering these IRR assumptions, to estimate the post-money valuation of your company, discount the exit value back to its present-day value. After receiving the capital infusion, the post-money valuation is your ed-tech business’ value. Whereas, without the injection of capital, a pre-money valuation is the value of your ed-tech company today.
Post-money valuation = Exit Value / (1 + IRR)^5
Post-Money Value = $12.3 million/(1 + 40%)^5 = $2,287,865
Based on the lowest expected return rate, this is the post-money valuation range’s high-end.
To discern the post-money valuation range’s low end, utilize the highest expected return rate.
Post-Money Value = $12.3 million/(1 + 60%)^5 = $1,173,466
So, the post-money value of your ed-tech firm is between $2.3 million to $1.2 million.
Interestingly, we evaluated the exit value using a 4.6x multiple (from the publicly traded ed-tech firms), your early-stage ed-tech business’ EV/Revenue multiple is much higher and lies between 4.7 to 9.2 times your current revenues of 250,000 dollars.
Final Thoughts!
At last, keep in mind that the post-money valuation came at above is for 100 percent of your company. When you raise capital, try to raise as much capital as possible and give up as little equity as possible in exchange.
To acquire the best terms from your potential investors without losing all your equity, you must include an accurate estimate of operating expenses in your integrated financial model so you know exactly how much capital you require.
If your projections demonstrate that you require $1 million in growth capital, you might raise the capital you need by only giving up 44% of the equity in your business ($ 1M/$ 2.3M=44 %) in exchange.
