Education Is an Outlier in Market CapitalizationRobert Hutter
One of the more remarkable aspects of the rise of education, as a focus of mainstream technology venturing, is the degree to which it is largely new territory. No where is this more recognizable than in the sheer absence of market capitalization in the sector.
As the global venture capital firm with one of the largest education technology portfolios in the industry, Learn Capital compared the total worldwide spend, in U.S. dollar terms, in some key reference markets, to the market capitalizations of companies in this space.
In media and entertainment (including Internet companies), the worldwide spend in 2013 was $1.7 trillion in U.S. dollar terms, according to PricewaterhouseCoopers. By comparison, the total market capitalization of publicly traded companies on all stock exchanges in the world totaled $1.4 trillion at the end of the first quarter of 2014 (which is solely accounting for companies with a minimum of $500 million in market cap). From these two data points, we can compute a market-cap to spend-coverage ratio of 81%.
There is logic behind this, however. Market cap is meant to be a data point, representing the collective investor judgment, of the value, of the discounted cash flow that a given company is expected to generate, over a time horizon well into the future. Presumably, the ability for any company to survive – as opposed to going out of business – is dependent on its capacity to satisfy real customer needs, and then turn cash flows they generate by doing this into investment, for future products and services. It’s entirely a sink or swim situation.
The more market cap, the more competitive the company is and, by extension, the greater degree investors expect that company to continue its capacity to satisfy customer needs, well into the future.
In healthcare, on a global basis, there is a significant amount of government payor participation as well as many not-for-profit entities. Nevertheless, healthcare commanded $6.5 trillion of worldwide spend in 2013, and had a corresponding market capitalization sum of $5.2 trillion. That’s also 81%, a remarkably similar figure to media and entertainment.
While healthcare, as a sector, doesn’t precisely invoke an image of efficiency and ideal functioning, it is clear that there is a high degree of competitiveness among many submarkets in the space. It is for good reason that the biotech industry, for instance, is one of the riskiest places to operate a venture capital firm. Most companies fail, but the net result of competitive innovation in this subsector is a near-continuous regimen of experimentation to achieve breakthroughs that can save and prolong human life.
Education, by comparison, is a different story.
In 2013, the world spent a collective $4.6 trillion on education products and services, across all categories, from nursery schools to corporate training to learning English. And yet, the combined market cap of all education companies that are publicly listed, and which possess market caps in excess of $500M, was barely $100 billion, or approximately 2% of the total global spend.
This includes all manifestations of education-related companies, from textbook publishers and marketers — of the new and used kind — from the U.S. to Brazil; to for-profit post-secondary colleges, like the University of Phoenix; to companies that teach the English language to people in Asia, like New Oriental Education. All of these operators combined constitute what is the smallest market capitalization index of any major sector in the economy.
There are many ways to decipher this anomaly. It is not uniquely driven by the presence of the polity in funding streams, nor the fact that people tend to be central to delivery. To cite just two examples, healthcare and retail share many of these characteristics, but both have substantially higher market capitalizations than education.
A number of things have happened, over the past five to seven years, to change the landscape that education has operated within. The smartphone was launched; broadband penetration crossed the 50% mark in many developed nations; social software, as we know it, became mainstream, and even battery life for ultraportable devices doubled and tripled in duration. Economists call these types of things “supply shocks” – most people simply call them “progress.”
The discovery that these changes were sufficient enough in power, and broad enough in reach, that they could be harnessed for education applications began to take hold—and grow nonlinearly—in this same timeframe. The number of education technology startups has soared in the past half decade. Back in 2008, when Learn Capital was formed, there were, perhaps, no more than 50 private edtech startup companies, active with some type of professional investment. By the end of 2013, that number had risen, tenfold, to over 500, and there are hundreds more of these startups backed by angels and founder teams operating throughout the world.
What is occurring now across the private landscape is that many of these companies are growing at rates unprecedented in the sector. They are generating both direct signals (revenues, EBITDA) and indirect signals (user bases, engagement) of economic value, and it is these signals that are compelling ever larger, capital commitments from the venture and, soon, public market universe.
It is important to point out that the space is increasingly competitive, with multiple companies vying for similar roles in the value chain. Suddenly, teachers and learners in every conceivable context find themselves on the receiving end of innovation cycles designed to meet their needs, with alacrity and unprecedented power. At the same time, $4.6 trillion of spend constitutes an extraordinarily wide range of discrete demand functions, many of which have never been precisely targeted. Entrepreneurs have discovered that they can build large, and often greenfield, operations by remixing services and features to address specific types of learner needs.
As this cycle of intensified innovation plays itself out, many of these companies will seek public market exits in the upcoming years. Several prominent edtech startups have already crossed the bellwether $100M revenue mark, and a handful of companies founded within the last decade, in the U.S. and Asia, have recently conducted IPOs. While incumbent education players will absorb some of these new operators, the sheer magnitude of companies that have been formed, and their outsized growth rates, will propel many of these into market listings supported by public growth investors, largely new to education as a category, and capable of supporting valuation profiles more analogous to tech stocks than to education equities.
While we’re unlikely to reach anything near the 80% mark, these companies and others being created now will contribute significantly to the aggregate market capitalization in the sector. In fact, the absolute growth rate in this market value is likely to possess its highest velocity in the next ten years.
The creation of this value isn’t being created by policy changes, or mandates, or decrees. Rather, it is being driven by an increasing supply of innovative approaches to long-standing challenges, as well as new urgencies in diverse endeavors of learning. Delivering these approaches at scale, and delighting participants on an ever-improving basis, is the underlying reason for this new market cap, as it ultimately is in all other sectors.