EdTech funding sinks 75% in Q1; hits a seven-quarter low

The space is now on track to see its first annual decline in years

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Something is happening in EdTech, and it doesn't look good for the future of the space. After at least four years of increases in both dollars and deals, now EdTech is expected to see a steep decline in 2016.

The space is projected to see $1.3 billion invested in 376 deals, according to data out from CB Insights on Monday. That would amount to a fall of 57 percent in dollars, and 23 percent in deals. 

That was after activity EdTech startups hit record highs in 2015, when funding went up 64 percent, to over $3.1 billion, and the number of deals rose nearly 10 percent to 491. Now it is expected to the lowest amount of funding since 2013, and the lowest number of deals since 2012.

Things are looking down on a quarterly basis as well, as the number of dollars fell to their lowest level in seven quarters in Q1. With $361 million invested, the last time there was less funding put into EdTech  companies was in the the second quarter of 2014. 

Funding fell 75 percent quarter-to-quarter, though, to be fair, Q4 was something of an anomoly, with $1.3 billion invested. That was thanks to mega deals in companies like HotChalk , which raised $230 million; Tutor Group, which raised $200 million; HuJiang, which raised $157 million; and Udacity, which raised $105 million. 

In fact, that is the only quarter to ever see more than $1 billion invested. Combine that with the low funding for this past quarter and the dropoff seems more dramatic than it perhaps actually is. This is now the third quarter out of the last four, minus the historic Q4, to see funding drop, so Q1 is more in line with the current trend. 

Compared to Q1 2015, this past quarter saw dollars drop 54 percent,.

Deals remained fairly consistent quarter-to-quarter, though, resulting in a huge drop in the average deal size. It fell 70 percent, from $15.7 million to $4.7 million. Deals fell 26 percent from Q1 2015.

So far, there have been no deals in the EdTech space this year; the largest deal in Q1 was a $75 million round in Indian company Byju, followed by New Oriental Xuncheng Network Technology, which raised 450 million from Tencent.

The steep fall in the number of dollars is confusing in light of how the space is maturing. In both dollars and deals, later stages are beginning to take a larger percentage. 

Series A deals have seen their share decrease going from 20 percent of deals in 2011, to 13 percent in 2015, and just 7 percent in 2016 year-to-date. At the same time, 32 percent of dollars so far in 2016 have goe to Series E deals or above, up from 14 percent in 2015. Series A deals were 7 percent, down from 14 percent in 2015.

Given that later stage deals are larger than early stage deals, it would stand to reason that, even if deals were declining, that dollars would be going up. That simply isn't the case, though. 

(Image source: districtadministration.com)