Back in 2019, I was lucky enough to get an inside look at Go1, one of Australia’s few ed-tech unicorns, in a pivotal moment of their growth journey. Two things happened after that:

1) the start-up bug well and truly bit me and I knew I had to figure out some way to get back into the space. But I had the luxury of patience for the right opportunity given I had an incredible home at Bain for 6 years. 2) I also knew I wanted to continue to focus on education and what technology could do to meaningfully transform that sector.

The right opportunity came along in July this year – the opportunity to join Square Peg as a Principal in the Melbourne office! I was eager to crack on with James Tynan (Principal in our Sydney office and Khan Academy alum) to scan the Australia and New Zealand market and find some truly exceptional ed-tech founders. On a more personal note, I also want more diversity in this space – one of the astounding statistics I read was that women-led start-ups received 2.3% of VC funding in 2020. That has to change and a more diverse VC landscape is an important part of that.

The education bubble

In the last 20 years, the cost of higher education has dramatically increased – in the US for example the price increase has been ~145% above inflation, exceeded only by healthcare.

Peter Thiel, former Paypal founder, calls this an “education bubble” in that bubbles are characterised by 1) things costing more than they are worth and 2) intense psychosocial dynamics that make it hard for people to acknowledge point 1 as they don’t know what the alternatives could be.

The perpetuation of this bubble comes down to human nature – our need to cling on to traditional education and what it signifies even when our environment has changed and demand new solutions. To borrow from political science, this is the root of “institutional decay”.

“Human beings are rule-following animals…and they entrench those rules with often transcendent meaning and value. When the surrounding environment changes…there is often a disjunction between existing institutions and present needs. Those institutions are supported by legions of entrenched stakeholders who oppose any fundamental change.” (Francis Fukuyama, The Origin of Political Order)

From the early 2010s, massive open online courses (“MOOCs”) tried to disrupt the status quo by solving two issues with traditional education: cost and access. MOOCs enabled anybody with a computer or a phone to access educational content via platforms like Coursera, EdX, Udemy (to name a few).

But completion rates were low, hovering under 5%. While MOOCs were a supplement to traditional education, it wasn’t the replacement that could get rid of the need for degrees forever. Those degrees still served a purpose: an insurance policy for companies, students and parents to signal that whoever had a degree was an employable candidate with marketable skills.

Key challenges

Education has to date been a digital laggard, with only 3.6% of the $7 trillion dollars global educational spend being digital. The COVID-19 pandemic has hit the accelerator on digital education spend, which is now forecast to double in the next 5 years.

In addition to this step change in digital penetration, people’s jobs are increasingly facing disruption from proliferation of AI, automation and the rapid updating of technology skills. This will exacerbate the key challenges with the traditional education model:

a) One size fits all (standardised curriculum, 1 teacher to many). For centuries, we have used a crude measure to group people together for learning purposes: age. If you’re roughly the same age, you learn roughly the same things from K-12. Once you get to higher education, you’re grouped together based on subject matter that you’ve chosen but the content is no more sophisticated in terms of being personalised to your learning needs. You learn what others learn, at the pace that the curriculum dictates. But why should a degree take 3-5 years when bootcamps can teach hard skills like coding in a fraction of the time? And why should people of the same age learn the same things when our proficiencies across subjects are so different?

b) Increasing inequality as top-tier education further raises costs and limits access. Getting a higher education is often a cost-benefit analysis that rests on imperfect information to the buyer. Students and parents overestimate the return they will get, underestimate the actual cost, and lack of transparent pricing makes it difficult to compare costs.

c) Increasing mismatch between the skills a graduate comes out with vs. what an employer needs. A sceptic’s view of higher education would assert that the main purpose is to give employers a proxy to judge you have a decent IQ and the conscientiousness to finish a 3-5 year degree. But how well is it preparing us for the demands of a modern job? Skills today update so rapidly (e.g. blockchain, growth marketing, data science) that learning can’t be separated from doing anymore.

New solutions

James Tynan, Katherine Han and I put our heads together earlier last week to try and articulate our hypotheses for the future of education and what it means for different players.

Students

• Community is becoming more important than content. With so much access to information at our fingertips, content is increasingly a commodity. For schools and universities, a big differentiator has always been the access they provide to peers, mentors, teachers and alumni but platforms like Handshake are now able to provide this at scale.

• The existing business model for higher ed is broken, and we’re now seeing new business models emerge. One example has been the study now pay later model from Lambda School. Other models could be employer pay and government pay e.g. Amazon recently announcing it would pay college fees for 750,000 US staff.

Parents

• Parents are becoming more involved in their children’s learning (largely COVID-driven), which is leading to the realisation that home schooling > classrooms. Primer delivers a home schooling experience that allows kids to create online spaces to hang out with their friends, explore and solve problems together. In some ways, it is an extension of what Roblox and Fortnite have done – bringing learning and play together.

Employers

• What counts as a ‘credential’ is broadening. This was one of the hardest problems for ed-techs to solve as building a widely accepted, reputable credential requires brand building that can take a long time. But this is starting to change – Duolingo English tests are starting to become accepted in place of IELTS and TOEFL.

• The way we traditionally learn in classrooms and lecture halls no longer meet the demands of the modern job – learning and work are integrating. Modern jobs require constant updating of knowledge. Going back to university to refresh your knowledge just isn’t practical in most scenarios. Some companies have taken matters into their own hands like Salesforce providing their own certifications and maintenance exams. Others have risen to fill the gaps like A Cloud Guru providing niche content to teach practical Cloud skills.

Content creators

• Content continues to unbundle. Even high cost, prestige-based programs like the MBA can’t escape – Section4 has taken the 2 year program and broken it down into 2-3 week “sprints” taught by those same professors from Harvard, Stanford and the like.

• Marketplaces are enabling education content creators an easier path to monetisation and distribution. In the same way that Patreon allowed YouTube creators a better way to make a living, platforms like GoStudent have allowed tutors to monetise and scale distribution quickly.

Exciting times ahead

With Australia having already produced a few of our own ed-tech unicorns (A Cloud Guru, Go1, Secure Code Warrior), I’m excited to get to know the builders of the next generation of ed-tech companies. Square Peg’s purpose is to empower the exceptional – our style of investing is heavily focused on the founder and the vision. What I personally love in a founder is someone who has keenly felt the problem themselves and is so determined to fix it, they had to build their own solution. If you’re a founder or an operator in this space, hit me up – I’d love to learn more about what you’re building.

And if you enjoyed this article or have any feedback or thoughts on ed-tech, I’d love to hear from you as well! Always open to new ideas. My email's lucy@squarepegcap.com

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