Private equity’s roaring fundraising market hit a roadblock in 2020 thanks to Covid-19, but has rebounded to new heights almost as quickly as it was halted. PE firms had already raised $459bn across the first six months of last year – a record for H1 since 2016, data from Preqin shows. Rather than dipping its toe back into the fundraising waters, it’s fair to say GSV Ventures dived in with both feet, launching not one, but two new funds just a few months apart. That confidence was inevitably boosted by the staggering success of edtech, GSV’s core specialism, throughout the pandemic – but how are things looking in the sector as things return towards normality? Managing partner Deborah Quazzo shared with AltAssets why she is optimistic that the pandemic boom will remain.
When you head over to GSV Ventures’ website, a black banner directly below its masthead acts as a prominent display of its core beliefs.
“Equality should not be a privilege but a right. We stand with the Black and AAPI communities,” it reads – and to managing partner Deboarh Quazzo, this tenet is imbued at the heart of how the firm operates. GSV specializes in edtech investments, which it believes that in addition to causing massive disruption to the $7tn global education market, are crucial in achieving its mission of giving all people equal access to participate in the future.
From the look of it, LPs are buying into this mission. The firm closed GSV Ventures II last March with $180m of investments, almost double the size of its $97m debut fund closed in 2016. But not content with that influx of new capital, GSV headed straight back out with its third flagship fundraise, reaching a $180m first close in December – well above its $100m initial close target.
“We were raising money in Covid for the second fund,” Quazzo recalled. “In fact, we were fundraising in Dubai and were about to fly to Saudi Arabia to close the fundraise when they closed the border, and we had to come back to Chicago. So the Fund II raise was a bit extended because of the Covid situation.”
The extension, together with the huge demand for online learning brought about by the pandemic, resulted in Fund II being fully invested. It was clear to the team that opportunities in the sector still abound, however, and the firm is hoping to reach a $300m final close near the end of Q1 this year in order to keep capital on hand to plough into new investments.
Quazzo said the firm saw a 100% re-up rate from Fund I to Fund II, and is expecting the same for Fund III unless a group has extenuating circumstances. But the latest vehicle has also attracted some new anchor investors from MENA, who made up 15% of the total investments collected. Clearly that disrupted Middle East trip was worth it.
Moving from B.C. to A.D
GSV published a report in 2020 titled “Moving from B.C. to A.D.” – nothing related to the religious meaning of the acronyms, but giving it the new definition – Before Coronavirus to After Disease. In their view, the coronavirus has instantly forced 1.6 billion students and teachers into the deep end of the online learning pool. Some of these new online learners will sink, some will crawl out of the pool and never go back in, but most will get the hang of it, like it, and will no longer be confined to the shore. The firm is now expecting the digital education industry to skyrocket from $160bn in 2019 to $1tn in 2027 with a 26% CAGR, reaching that goal years ahead of what the firm anticipated prior to the impact of the pandemic.
One huge change aiding that transformation is the speed of digitization. “The industry was slow to digitize,” Quazzo said. “The digitization of education began around 2010, many of the companies like Duolingo and Coursera came about in that period. They are the first generation of the large-scale educators that had network effects. Traditionally they have never had network effects.”
The pandemic has accelerated the formation of a digital learning habit. Quazzo recalled pre-pandemic there were still companies resisting to go online, but that has largely changed now. The teachers and students of the K-12 systems are given the wider opportunity to experience online learning or a hybrid model at home, and many are embracing it more.
In the higher education segment, online learning is key to driving equality. Only 30% of the adult workforce in the United States has a college degree, and the proportion for the global workforce is at 15%. Quazzo is confident that online training is the way to close the studying gap, with many workers unable to take time off for study.
“The problem of edtech before was a vicious cycle. It was never properly capitalized,” said Quazzo. “If you don’t have the capital, you don’t attract entrepreneurs, and if you don’t attract entrepreneurs you won’t have great solutions. But now we can see more entrepreneurs coming in and with the new capital in the market, this becomes a virtuous cycle.”
The benefits of a bigger market
With the bigger market and more adaptive customers, edtech companies have the perfect soil to provide febrile growth. Quazzo has observed that businesses started growing across borders during the pandemic, beginning to provide training and courses to customers outside of their own market of origin. As a global investor, GSV plans to deploy up to 50% of Fund III to companies with headquarters outside the US. The proportion for Fund II was 35%, which includes eight investments in India, one in Indonesia and one in South Africa.
She also saw companies putting together offerings that are expanding out of their original sector. She raised the example of India’s Byju’s. The company has made acquisition to expand from K-12 provision to test preps for engineering and medical school. Duolingo also has offerings from pre-K to adults for languages, but is looking to expand into maths and other subjects as well.
“The companies are now getting the opportunity to go out and do acquisitions to extend the life time value of their customers and that makes the businesses more valuable,” Quazzo said. She finds the heated market a positive thing because as a whole the industry can generate a better outcome and with the firm’s own unique expertise, they are confident to trump other players. However, valuation is a risk every one has to face. She said valuations still have to settle a bit, largely due to the impact of inflation.
“Edtech assets in the public market have slumped more than other tech sectors and it still hasn’t quite absorbed into the private market yet,” she said. “It would be quite surprising if it doesn’t get absorbed into the private market in the near term. There are a few companies that are trading below their latest private rounds, and that just has to drive growth stage valuation down in the private market.”
The bigger market also means it is more in the limelight now than ever, which also means more possibilities. GSV had not market any of its funds as an impact fund but is contemplating of doing that for Fund IV.
“When we started, edtech was always viewed as a marginal category. We didn’t want to put an impact fund label on so that people would think that we would be slower to get returns. But actually, we have always believed that the higher return on education would bring higher financial returns,” she said. “The more impact our portfolio companies bring to the market, usually the higher the financial return will be.”
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