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Can the billion-dollar ed-tech industry, flush with funds from venture capital firms, keep up its record-setting investment pace, or is it setting itself up for a massive crash?

It was a question floated at this year’s Education Innovation Summit, the marquee event for ed-tech companies -- startups and established players alike -- to woo investors eyeing the industry. Self-titled “Davos in the Desert,” the event, hosted by Arizona State University and the investment firm GSV Advisors, brings potential business partners together for three days at the Phoenician, a luxury resort in Scottsdale, Ariz.

The summit has swelled from 300 to more than 2,000 attendants in five years, and the ed-tech sector has followed suit. In both 2012 and 2013, ed-tech investments topped $1 billion, and in the first quarter of 2014 alone, companies reaped more than half a billion dollars in venture capital, according to CB Insights.

The meat market nature of the summit led some to speculate that the industry was reaching a fever pitch, and that as the euphoria gave way to the reality of trying to break into higher education, investors previously anticipating a major return on investment would snap their checkbooks shut.

But an analysis of venture capital investments since 2008 reveals no signs that venture capital firms are losing interest in higher education, nor that ed-tech companies receiving funding are more in danger of being financially stranded than they were several years ago.

The analysis looked specifically at higher education ed-tech companies that received significant initial investments -- known as a Series A round -- and when, or if, they received a follow-on deal. Startups normally use Series A funding to take what started as a good idea and build a business model around it. Series B and subsequent follow-on rounds of funding are often used to scale that model.

The analysis was made possible with data provided by PitchBook, a research firm that specializes in private equity and venture capital. 

Since late last decade, the annual number of Series A deals has nearly doubled. Almost eight months into 2014, 17 companies have received a Series A deal, and the number is on track to eclipse last year’s total of 25. The data excludes seed money, which entrepreneurs use to launch their companies.

The number of follow-on deals is more difficult to interpret. Although fewer companies have received a follow-on deal recently, it is too early to call it a trend, as many of the companies are likely to receive investments in the coming years. For instance, one of the companies that raised a Series A round in 2008 didn’t get a follow-on deal until 2013. (Since companies sometimes receive multiple follow-on deals, the analysis only counted the first deal for each company.)

Companies that Received Follow-On Deals (and When)

	Follow-on in 2008	2009	2010	2011	2012	2013	2014	Total
Series A in 2008	1	4	2	0	1	0	0	8
2009		1	6	0	1	0	0	8
2010			1	2	1	0	0	4
2011				0	3	2	1	6
2012					1	4	2	7
2013						2	1	3
2014							0	0

Source: PitchBook

Companies that haven't received a follow-on deal haven't necessarily failed, said Max Woolf, a senior analyst with the consulting firm Eduventures. Some may have found a niche market, meaning they no longer need more funding. Others may have been acquired by competitors. Looking at the class of 2008, in which 8 of the 16 companies receiving Series A deals eventually went on to get a follow-on deal, Woolf said, "I think 50 percent is definitely a good number."

For examples of the money still rushing into the industry, look no further than to last Thursday, when Desire2Learn, the company behind the learning management system BrightSpace, announced an $85 million Series B haul. The Waterloo, Ont.-based company, which was founded in 1999, previously raised $80 million during its Series A round two years ago.

‘Great News for the Ed-Tech Sector’

There are many ways a hypothetical bubble could present itself in the data. For example, the number of follow-on deals could drop, suggesting investors are growing impatient or disillusioned with companies that at one point secured an investment. Or, the number of Series A deals could plummet, indicating investors are becoming less interested in ed-tech companies in the first place.

But neither scenario is manifesting itself in the data, and higher education consultants, market analysts and entrepreneurs say the numbers instead show a market filled with opportunity for vendors and investors alike -- but also uncertainty about which companies and products will emerge from the jumble.

“I think it’s great news for the ed-tech sector,” said Kenneth Hartman, also a senior analyst with Eduventures. “If you have a good product, you’re in a great position to find a funder.”

Hartman and Woolf listed a number of explanations that may be behind the consistent influx of capital into ed-tech companies. In particular, they highlighted the lack of dominant market leaders and ongoing competition over services.

“If you look at the three major ed-tech verticals -- technology in administration, instruction and assessment -- I think it’s safe to say there are no clear winners at this stage of the game,” Hartman said. “No one has a commanding share of the market.”

Investors would obviously love to pick some of those winners (or at least more winners than losers), and may scatter their investments across multiple companies and markets. In fact, Hartman said, “I often hear from the private equity guys that there’s a shortage of firms to invest in.”

Hartman also said some investors may have hesitated to sign checks during the first few years of the Obama administration, preferring to wait and see whether the new president would impose sweeping restrictions on the financial industry in general after the recent crash.

“Now their backs are up against the wall, and they’ve got to spend money,” Hartman said. “If they don’t spend it, they don’t make money.”

Scaling the Wall

Investor fatigue is one way a bubble could form in the market. Another would be if the entrepreneurs themselves lost faith in their ability to make a difference.

“From what I can see, most of the ed-tech entrepreneurs are true believers,” Joshua M. Kim, director of digital learning initiatives at Dartmouth College, said in an email. “They want to change education and improve learning. They think that they can catalyze educational change more quickly by building an ed-tech company rather than working for a college or a university.”

Kim, who blogs about technology and learning for Inside Higher Ed, founded the course material repository LecturesOnline.Org as a visiting faculty member at West Virginia University. He sold the site in 1999 to Britannica.com Education.

“The idea that we are in the middle of an ed-tech bubble is mistaken,” Kim said. “A bubble would occur if founders were looking first to cash out for a quick exit strategy.... Ed-tech founders are largely in it for the long-term.”

But to sell their products to people in academe, the companies have had to scale what Hartman called the “wall of skepticism.” Historically, he said, colleges and universities have picked technology solutions developed internally over products offered by private companies. Now, outside forces such as the federal government’s plans to rate colleges are driving more institutions to outsource services to companies that say they can improve outcomes and reduce costs.

“Ed-tech startups have tried to get over that wall into departments, into meetings with faculty,” Hartman said. “As that wall comes down, many institutions are enabling these companies to get over that wall and at least have the conversation.”

The companies’ ability to develop go-to-market strategies may ultimately set them apart from their competitors, Woolf said. Many good ideas won’t find a profitable path to the market on their own, opening the way for established companies to acquire the startups and, in turn, command a larger share of the market.

Woolf pointed to the Desire2Learn news as an example of market consolidation. After its Series A round, the company went on to acquire several smaller companies, including Degree Compass, Knowillage and Wiggio.

“At the end of the day, there will be consolidations in the future, but I think buyers will continue to get savvier,” Woolf said. “Ultimately what it’s going to come down to is efficacy.”