Inside the Mind of an Ed-Tech Investor

Image credit: iStockphoto/Benjavisa

In 2021, Lucy Tan had meetings with around 40 companies in the Australian and New Zealand Education Technology (Ed-Tech) space to discuss investing. In the end, she only invested in one.

Tan is a Melbourne-based Principal at venture capital firm Square Peg, which is active in funding startups in Australia, Southeast Asia and Israel. After six years with major consulting firm Bain, Tan was inspired to pursue a move into venture capital by a 2019 “externship” at professional learning and development platform Go1, one of Australia’s few ed-tech unicorns to date, and then moved into the role at Square Peg.

Of the 40 companies, Square Peg ended up investing in saasguru, another professional development learning platform which offers courses on Salesforce and cloud skills accreditation.

After scanning the ed-tech landscape, Tan’s view was that although there was a demand for innovation in the K-12 education space for primary and secondary school students, there were many challenges in this area for companies wanting to penetrate at scale.

“Selling to schools and universities is like selling to many government organizations,” she says.

“There are very long sales cycles, a lot of trials that don’t lead anywhere and sadly, this can be a place where a lot of ed-techs go to die. That’s not to say there haven’t been successes in this space — Kami in New Zealand has done an amazing job of capitalizing on COVID tailwinds and grew virally through US schools.”

Corporate focus

For now, Square Peg’s interest is in the corporate market, where there is a skills gap with platforms such as Salesforce. They are looking for startups creating additional courses and training that are easy to access and recognized by the industry.

Despite USD80 billion spent on corporate learning each year, the skills gap is growing faster than ever. Only 12% of employees apply skills learned from Learning and Development to their jobs, while 75% of managers remain unhappy with their company’s L&D. This has created opportunities for third-party providers to grow.

“They are focused on the skills gap in a skill set which is not necessarily being produced out of universities,” says Tan.

“Third-party providers have come in and filled that gap, which is a very particular niche, and some have done it really well.”

“There are very long sales cycles, a lot of trials that don’t lead anywhere, and sadly this can be a place where a lot of ed-techs go to die”

This is not to say that there is a lack of good ideas in the K-12 space, but there is a “very high bar” to gaining traction and success. One example Tan gave around what could take off in this space is “digitized worksheets” for teachers, which can automatically be distributed to students.

“This is really embedded into the day-to-day of the job, and there doesn’t seem to be much of a change from the current existing process,” she says.

“And then we came across an Israeli startup which was doing this, so these are the types of companies that get you excited because they are working with the teacher as opposed to telling the teacher here’s what you need to do differently,” she adds.

“If a tool genuinely adds value to the teacher, then it has a chance to find its way into the classroom, but it takes time and a laser focus to break through.”

Meeting founders

As a venture capitalist, Tan welcomes contact with many startups and founders, and there are multiple channels through which the introductions are made.

Her industry research aims to keep track of all the ed-tech companies “which fall in the areas we are really excited about.”

“Then we are pretty systematic about meeting the founders, and then over time, we maintain those relationships and understand their progress.

“But at the same time, we continue to write blog posts and put them out there because we are trying to attract founders and get them to come to us and hit us up.”

Once they invest, Square Peg doesn’t like to take a majority stake because they want the founders to retain significant equity. But they do become closely involved in each investment.

“We make very targeted high conviction investments,” says Tan, who describes Square Peg as “patient capital.”

“It’s not like we’re spraying and then praying. And because we put a lot of money into the things we choose, they are aligned with our interests, and we help them as much as we can. So that means being on the board at an early stage, or at least having very frequent contact with the founders and helping them with talent, fundraising and strategy.”

Square Peg is not one of the VCs that plans an exit at the IPO stage. The firm has a publicly listed equities fund called the Global Tech Fund, which invests in tech stocks, allowing Square Peg to hold onto investments through the full cycle.

“We know that when a company IPOs that it isn’t necessarily the end of their growth journey, so we like to continue to maintain our interest and grow with them,” says Tan.

Lachlan Colquhoun is the Australia and New Zealand correspondent for CDOTrends and the NextGenConnectivity editor. He remains fascinated with how businesses reinvent themselves through digital technology to solve existing issues and change their entire business models. You can reach him at [email protected].

Image credit: iStockphoto/Benjavisa