Uncovering the Tech Crash : Why It’s Time for EdTech to Benefit from its Conservative Valuations

2 years ago, when we started Supercharger Ventures, we had a thesis: that EdTech was the newFinTech. Whilst the FinTech opportunity sparked after the financial crisis, the EdTech momentum took off during Covid-19. What we encountered in 2010 in finance, has happened almost 10 years later in the EdTech sector.‍

The EdTech ecosystem has been robust, with thousands of startups adding value to the sector, but it has not been fully thriving due to a limited number of VCs and buyers that actually had the conviction that education could really benefit from technology. Yet, this was also the case inFinTech until 2018.

In the last quarter, there has not been a single week without significant news of a fintech company, whether listed or not, that saw its valuation decrease by up to 90%. From “buy now pay later” Klarna, to crypto-exchange Coinbase... the list goes on. What was at fault? An overly optimistic funding environment, where startups could raise at 40-50 times their revenues, without any questions being asked. However, today, concerns are finally being voiced whilst valuations are adjusted, often with dramatic consequences.

If EdTech is the new FinTech, then what do we think in terms of startup valuations? ShouldEdTech founders be fearful, just like their FinTech peers? Our answer.... is “no”. The opportunities presented by the EdTech sector are still ahead of us, both in terms of market demand but also in terms of investment potential. But, before we go into more detail regarding what SuperCharger has seen, let’s take a step back.‍

The Nasdaq Composite Index, which contains most of the world’s most ‘valuable’ tech companies, at the halfway point of this year has already fallen by 30%. The tech industry is correcting rapidly. But, will this really affect early-stage startups in the ways that are being suggested? Is it the beginning of the end for these companies, or is this valuation crash being dramatised by media platforms in a disproportionate manner to its actual effect?

In reality, stock market commentators have long been trying to alert the sector that the tech industry has been maintaining some very unrealistic valuations. Whilst it might be exciting for founders to watch the company that they’ve built from scratch reach soaring valuations and climbin to unicorn territory, it comes with more risks than might be expected. That of setting unrealistic expectations is an apparent one, as, if valuation is to differ too starkly from reality due to its multiple inflation, investors will be expecting unobtainable returns. Taking more capital than is actually needed is also a risk, as Chris Barbin, a Venture Partner with GGV Capital, states that,“Too much capital is like too much champagne: the bubbles go to your head and you end up making short-term decisions you’ll regret in the long run.”

The valuation drop in the startup world has been the most prominent in FinTech, as data collected by the well known VC, Andreessen Horowitz, indicates that this is the Tech sector that has been the most affected by valuation drops and are having to undergo quite mortifying revaluations.

Revolut is one example that we might focus on, as it was valued at $5.5 billion in early 2020, then sky-rocketing to a valuation of $33 billion in 2021 after their funding round. But this sudden drastic increase in valuations is always at a cost, as expenditure becomes frivolous in the assumption that money is unlimited. But the EdTech sector has always had much more conservative valuations, and therefore doesn’t have the same downside risks, as a more conservative investment framework is less likely to lead to gross capital misallocation, representing more of a safe harbour throughout this storm.

EdTech valuations have never skyrocketed to unjustifiable levels, thus they should not have the same downside risks.

In the graphic above, from Education Technology Insight, we can see that the EdTech sector is more defensive against valuation drops, as, despite the current market climate, valuation projections are not at all drastically lower.

At SuperCharger Ventures, we accelerate early-stage EdTech startups which have always had conservative valuations. Vygo, a startup designed to assist universities in imparting peer-to-peer tutoring and one of our portfolio startups, is a public company with a total funding amount of$2.3 million. Despite these crashes in the tech industry, Vygo’s valuation has had an impressive 50% increase in the past 6 months. Whilst Fintech became over saturated and extreme as theworld chased its tail, EdTech is still in a relatively earlier stage in its journey.

We’re still on the ground floor in the EdTech sector, and investing in the new apps and the VCs in the industry offers a nice alternative to catching a falling knife in other areas of tech investment, such as FinTech.

Perhaps it’s time to start appreciating conservative valuations, valuations that you can find in theEdTech industry.