EdTech: 2023 Valuation Multiples

Over the past few years, schooling and education faced two key challenges: reaching underserved populations in developing countries and maintaining learning activities up and running during the COVID-19 pandemic. Companies in the EdTech sector helped tackle these challenges by building and harnessing IT infrastructures to guarantee access to learning resources.

From distance learning—which kids and parents became familiar with during lockdowns—to online subscription-based courses focused on self-paced professional development, most of us experienced some form of tech-enabled education since the COVID-19 pandemic.

Of course, the skyrocketing adoption of EdTech solutions during COVID meant a huge influx of investment into the sector, with companies growing and hiring aggressively and valuations and multiples on a steady upwards trajectory. However, once the pandemic was over, both the economic macro environment and this sector in particular faced completely different challenges, having to navigate a bearish market where funding is a lot more scarce.

As reported by Forbes at the end of last year, there are two main challenges in the post-pandemic EdTech sector. The first is the lack of training for teachers and educators making remote learning solutions a less appealing alternative to traditional in-person classes, to which students and parents were very happy to return as soon as healthcare concerns made it possible. The second, and perhaps more long-term, is the theme of equality and democratisation of education, which was considered one of the key selling points for most EdTech companies but has since faced the same barriers as many other tech verticals: how does one guarantee equal access to education resources when these rely on expensive tech infrastructure?

These challenges, along with an impending recession and an increasingly conservative investment market resulted in a string of layoffs from some of the companies that grew the quickest during the pandemic. After laying off a quarter of its workforce, EdTech unicorn Outschool cited in their email to employees that “The funding atmosphere has been dramatically impacted by the anticipation of a recession, higher interest rates and an increased need to show [ROI] to investors.”

In order to understand the trends reflecting the changing investor sentiment about companies in this space, we used The Global X Education ETF (EDUT), a fund managed by Mirae Asset Financial Group.

The fund “seeks to invest in companies providing products and services that facilitate education, including online learning and publishing educational content, as well as those involved in early childhood education, higher education, and professional education.”

Using financial data aggregator YCharts, we calculated distribution metrics for the funds’ companies’ valuations based on their revenue and profit metrics.

EdTech Valuation Multiples

Looking at revenue valuation multiples, we can see how—as a result of the pandemic—valuations for EdTech companies rose throughout 2020 and then faced a correction throughout 2021, before finally plummeting to about half their pre-pandemic levels by mid-2022.

Starting at 2.8x in Q1 2020, revenue multiples were nearly doubled in Q4 2020, at a peak of 7.3x. However, as schools reopened in most countries and the momentum around the sector came to an end, median revenue multiples fell all the way down to 1.4x by the third quarter of 2022. The median revenue multiple for EdTech companies in Q4 2022 was 1.7x.

We can see similar trends for other sectors that were initially boosted by the pandemic but then struggled to maintain momentum in the past year.

Source: YCharts

The distribution chart below shows just how widespread the crisis has been in the EdTech sector, with the entirety of the sample faring below peak median levels, showing that even EdTech’s top player took a major hit in terms of their multiples and valuations.

Source: YCharts In the chart above, the lines indicate the range of EV/Revenue multiples in our cohorts, while the boxes highlight the Interquartile Range (IQR), which is where the median 50% of the cohort ranks based on their valuation multiple.

The trend for median EBITDA multiples—which track how valuations vary in relation to profit—is rather similar, although not as extreme. After peaking at 29.1x in Q3 2021, EBITDA multiples fell by over 50% n the following three quarters, before picking up slightly at the end of last year. The median EV/EBITDA multiple for EdTech companies in Q4 2022 was 17.3x.

While drastically lower than pandemic levels, this is still a rather healthy figure for EBITDA multiples, indicating that investors still value companies that managed to maintain profit margins throughout and after the pandemic, although there is evidence that these profits have been slashed across the board.

Source: YCharts

Differently from revenue multiples, some companies in EdTech managed to maintain relatively high profit multiples all throughout 2022, with the top 25% of the sample recording EBITDA multiples between 30x and 150x at the end of last year. However, the remaining 75% of the sample is still well below the sector’s median at its peak.

Source: YCharts In the chart above, the lines indicate the range of EV/EBITDA multiples in our cohorts, while the boxes highlight the Interquartile Range (IQR), which is where the median 50% of the cohort ranks based on their valuation multiple.