
How to Value an EdTech Company: Multiples & Example
One of the hardest things to do when building an EdTech business is determining its value. Whether you are seeking growth capital or looking to exit, you need to have a basic idea of what your business is worth. If you value your business too high, investors won’t be willing to speak with you. If you value it too low, you leave money on the table or end up giving away too much equity to raise the growth capital you need. So, how do you calculate a reasonable value for your EdTech company?
Well, the valuation methodology outlined below applies to all EdTech companies, regardless of when you are pre-revenue, established, or looking to exit.
How to Value an Edtech Company: Multiples & Example
The global Edtech industry is expected to reach a market value of over $340 billion by 2025. Because of strong underlying market trends, the Edtech sector has received some of the highest tech valuations, with publicly traded EdTech companies trading at 5.0x to 18x next twelve months’ revenue (NTM)! These valuations dropped significantly in late 2021 and early 2022, but are expected to rebound. See our article on EdTech multiples.
If you are the founder of an EdTech company and are thinking of raising a round of growth capital, you’re at the right place. In this article, I’ll provide a step-by-step guide on valuing any Edtech company.
First and foremost, it’s important to understand that EdTech companies are not valued like traditional businesses. Valuations of conventional businesses are based on the company’s free cash flow. With EdTech companies, the most common valuation method is what’s referred to as the Venture Capital approach, which values companies based on a multiple of revenues.
In this article, we’ll use publicly-traded companies in the Edtech industry for comps so you can follow along and use them to value your EdTech business.
Note: If you need help preparing a pitch book for investors, contact us to learn how we can help you prepare a solid Edtech pitch book that will significantly increase the odds of a successful capital raise.
Venture Capital Edtech Valuation Method
There are several startup and early-stage valuation methodologies. While none of them is perfect, they all try to estimate a valuation for a business based on several qualitative and quantitative factors. The Venture Capital Valuation Method is the most common method investors use to value Edtech companies.
The VC method considers business fundaments, market demand, and investor return on investment factors.
Why Do Investors Use the Venture Capital Method to Value an EdTech Company?
The VC method is a relatively simple and straightforward way to value an early-stage EdTech company because it is driven by several factors that can be grouped into 4 categories.
1. Market Demand
Your EdTech company will be more valuable if you demonstrate that it is part of a large, highly fragmented market that is growing at double or triple digits.
2. Market Fit & Adoption
Your EdTech company will be more valuable to investors if you prove that the business has early adopters or users (market-fit) and that people are willing to pay for your service (adoption.)
3. Management Team & Track Record
Your Edtech company will be more valuable to investors if you demonstrate that your management team has relevant sector experience and a successful track record of growing similar businesses.
4. Investor’s Expectations & Founder’s Negotiating Power
Last but not least, keep in mind that investors are willing to back EdTech startups and early-stage companies because they can earn a substantial return on their investment. If a startup is deemed too expensive, it reduces an investor’s return on investment, and they won’t invest.
At the same time, the more investors you can pitch to and the more term sheets you receive, the better your negotiating position and the higher the valuation.
The Three Value Drivers When Valuing an EdTech Company
The VC method allows founders and investors to estimate an EdTech company’s value by inputting three main variables:
1. Projected Revenues
Projected revenues are usually based on an integrated financial model that includes projected revenue for the next five years. Keep in mind that unless your financial model, and the assumptions that drive it, are supported by facts and hard data, investors will take them with a grain of salt. So it’s important to work with an independent, objective financial advisor who can help you develop a rock-solid set of projections.
2. Comparable Industry Valuation Multiples
Investors rely heavily on valuation multiples from comparable companies within the same industry and sector. The most common multiple used is EV/Revenue, which stands for Enterprise Value as a multiple of Revenue. See below for 2022 public Edtech company valuation multiples.
These multiples change daily and are sensitive to many variables, including interest rates, stock market performance, IPO results, M&A activity, market demand, etc.
3. Investors’ Required IRR
The other important variable is the rate of return investors are looking for. An investor’s required IRR (“Internal Rate of Return”) depends on the type of investor, the EdTech company’s stage, and the investment’s perceived risk. The higher the perceived risk, the higher the required IRR. For example, an investor would need a higher IRR for a seed money investment in an EdTech startup than for an investment in an early-stage EdTech company looking for a Series A or Series B round of financing.
Edtech Valuation Example
Now that we’ve covered how the Venture Capital valuation method works let’s see how to use it to value an early-stage Edtech company looking to do a Series A capital raise.
Prove Market Fit & Adoption
The first thing to do is create a detailed, integrated financial model that includes historical financial data and operating metrics. This is important because your historical performance will prove market fit & adoption and support the assumptions you use to create your projections.
Expected Revenues
The next step is to create detailed revenue and expense projections for five years. While the valuation is based on a multiple of revenues, it’s also important to know your operating and growth assumptions to determine how much capital you need to raise to hit your revenue targets.
Need help building an integrated financial model and projections? Contact us for a free, no-obligation consultation.
So, for this example, let’s assume your EdTech company is in the K12 reading sector. You’ve been in business for three years and have been funded by personal funds and friends and family investors. Your business now has 450 subscribers and is generating $250,000 in revenue, and your subscriber base grew by 100% last year. You built an integrated financial model with historical results and projected revenue for the next 5 years. The projections show that next year you expect revenues to be $625K and grow to $4.1 million in Year 5.
Below is a very basic example of projected revenues for the next five years.
Period |
Revenue | Growth Rate |
Base |
250,000 |
|
Year 1 |
625,000 |
250% |
Year 2 |
1,250,000 |
200% |
Year 3 |
2,187,500 |
175% |
Year 4 |
3,281,250 |
150% |
Year 5 |
4,101,563 |
125% |
Total |
11,445,313 |
Public EdTech Valuation Multiples
The next step is determining the right multiple to use to value your business.
Investors track over a dozen publicly traded Edtech companies to gauge the market’s appetite for EdTech investments.
While the multiples vary a lot from company to company, each is based on investors’ assessments of the company’s market demand, business model, management team, growth rate, and profitability.
Below is a sample of some of the public EdTech companies we track. Be sure to read this excellent article from the venture capital group, GSV Ventures regarding the valuation of publicly traded EdTech companies.
Public EdTech Valuation Multiples |
||||||
K-12 & Higher Ed | ||||||
Company | Enterprise Value (MM)* | Revenue | EBITDA | Margin | 3-Yr CAGR | EV/Revenue |
Chegg |
$5,060 |
$776 | $158 | 20.4% | -34% | 6.5 |
Blackbaud |
$4,160 |
$928 | $46 | 5.0% | 3% |
4.5 |
PowerSchool |
$4,060 |
$559 | $81 | 14.5% | 19% |
7.3 |
John Wiley & Sons |
$4,000 |
$2,070 | $345 | 16.7% | 3% |
1.9 |
Instructure |
$3,170 |
$405 | $112 | 27.7% | 25% |
7.8 |
Graham Holdings |
$3,170 |
$3,190 | $349 | 10.9% | 6% |
1.0 |
Adtalem Global Education |
$2,900 |
$1,320 | $270 | 20.5% | -3% |
2.2 |
Coursera |
$2,380 |
$415 | -$139 | -33.5% | 50% |
5.7 |
Stride |
$1,880 |
$1,600 | $166 | 10.4% | 19% |
1.2 |
2U |
$1,760 |
$946 | -$34 | -3.6% | 32% |
1.9 |
Scholastic |
$1,210 |
$1,530 | $106 | 6.9% | -7% |
0.8 |
D2L |
$563 |
$152 | -$73 | -48.0% | 12% |
3.7 |
Perdoceo Education |
$361 |
$693 | $166 | 24.0% | 6% |
0.5 |
Janison Education |
$224 |
$34 | -$7 | -20.6% | 20% |
6.6 |
Tribal Global |
$185 |
$81 | $11 | 13.6% | -5% |
2.3 |
Zovio |
$38 | $301 | -$8 | -2.7% | -6% |
0.1 |
Median |
$2,130 |
$735 | $94 | 11% | 6% |
2.2 |
Average |
$2,195 |
$938 | $97 | 4% | 9% |
3.4 |
Corporate & B2C | ||||||
Company | Enterprise Value (M)* | Revenue | EBITDA | Margin | 3-Yr CAGR | EV/Revenue |
Duolingo |
$3,220 |
$251 | -$54 | -21.5% | 55% |
12.8 |
Learning Technologies |
$1,290 |
$151 | $37 | 24.5% | 37% |
8.5 |
Franklin Covey |
$673 |
$237 | $25 | 10.5% | 2% |
2.8 |
HealthStream |
$608 |
$257 | $29 | 11.3% | 4% |
2.4 |
Median |
$982 |
$244 | $27 | 11% | 20% |
5.7 |
Average |
$1,448 |
$224 | $9 | 6% | 24% |
6.6 |
Sector Overview | ||||||
Median |
$1,820 |
$487 | $42 | 11% | 6% |
2.6 |
Average |
$2,046 |
$795 | $79 | 4% | 12% |
4.0 |
*Data and Enterprise Values |
In our example of the VC valuation method, we will use the Sector Average EV/Revenue multiple of 4.0.
Keep in mind that when preparing a valuation of your EdTech company, it’s important to select the comparable companies that are the most like the company you are trying to value. That won’t always be possible, but to support your valuation, you’ll need to explain to investors why you selected the comparable companies you picked rather than others.
Adjusting the Multiple for a Private EdTech Company
Because we started with valuation multiples from public companies, we need to adjust that multiple to reflect that your EdTech company is privately owned. Privately owned companies are less valuable than publicly traded companies because they are much more difficult, time-consuming, and expensive to sell. As a result, investors apply an Illiquidity Discount, also referred to as a Discount for Lack of Marketability, of between 20% and 30%.
Let’s use a 25% discount, which results in an adjusted EV/Revenue multiple of 3.0x.
Determining Your Exit Value
The next step in the VC Method is to calculate your EdTech company’s value when your investors exit. In this example, we assumed the exit would be after five years. This is called the Exit Value.
Exit Value = EV/Revenue x Revenue at exit (Year 5)
Year 5 Revenue = $4.1 million
EV/Revenue Multiple = 3.0x
Exit Value = 3.0x x $4.1 million
Exit Value = $12.3 million
Investors’ Required Rate of Return (IRR)
The next step is determining the return on investment your investors will seek. The internal rate of return (IRR) required by investors will vary depending on the investor, the stage of the EdTech company they’re investing in (early-stage deals require higher returns than later-stage deals), and the industry trends.
Based on our experience, VCs typically look for a 40-60% IRR on the companies they invest in. Over the last few years, venture capital firms, on average, have generated a 19.8% IRR. Keep in mind that this is an average, so it includes their failed deals (the ones that went wrong) as well as their success stories. They look for a 40%-60% IRR because providing venture capital is a high-risk business, and an estimated 80% of the deals they invest in are unsuccessful or don’t live up to expectations.
In this example, I’ll use 40%IRR as a low-end and 60% IRR at the high-end expected rate of return.
Keep in mind that as your EdTech venture becomes more proven and successful, the perceived risk of the investment goes down, so investors will be willing to accept a lower IRR.
Calculating Your Post-Money Valuation
The next step is to calculate your Post-Money value. Let’s assume you are looking to do a Series A capital raise, so we will also assume investors will require a 40-60% IRR over the next five years.
Using these IRR assumptions, we discount the Exit Value back to its present-day value to estimate the post-money valuation of your business. The post-money valuation is your EdTech company’s value after receiving the infusion of capital. In contrast, a pre-money valuation is the value of your EdTech company as it is today, without the injection of capital.
Post-money valuation = Exit Value / (1 + IRR)^5
Post-Money Value = $12.3 million/(1 + 40%)^5 = $2,287,865
This is the high end of the post-money valuation range, based on the lowest expected rate of return.
To calculate the low end of the post-money valuation range, use the highest expected rate of return.
Post-Money Value = $12.3 million/(1 + 60%)^5 = $1,173,466
This means the post money value of your early-stage EdTech company is between $2.3 million to $1.2 million.
It’s interesting to note that while we calculated the Exit Value using a 4.6x multiple (from the publicly traded EdTech companies), the EV/Revenue multiple for your early-stage EdTech company is much higher and between 4.7 and 9.2 times your current revenues of $250,000.
Getting the Best Terms
Finally, remember that the post-money valuation arrived at above is for 100% of your business. When doing a capital raise, it’s important to raise as much capital as possible while giving up as little equity as possible in exchange.
To get the best terms from potential investors without giving up all your equity, your integrated financial model must include an accurate estimate of your operating expenses so you can figure out exactly how much capital you need.
If your projections show that you need $1 million in growth capital, you may be able to raise the capital you need and only give up 44% of the equity in your company ($1M/$2.3M=44%) in exchange.
The other important this you can do to limit the amount of equity you give to investors is to work with an experienced investment banker. An investment banker who knows the education space can help you build a compelling investment deck, create an integrated financial model backed by solid assumptions, and introduce you to more investors. The more investors you speak with and the more term sheets you receive, the better terms you’ll get.
About the Author and Jackim Woods & Co.
Rich Jackim is an education industry investment banker and educational industry entrepreneur, and former mergers and acquisitions attorney.
For the last 25 years, Rich has been providing boutique investment banking services to middle-market companies in the education sector.
Rich also founded a successful training and certification company called the Exit Planning Institute which he sold to a private equity group in 2012.
Rich is also the author of the critically acclaimed book, The $10 Trillion Dollar Opportunity: Designing Successful Exit Strategies for Middle Market Businesses.
Jackim Woods & Co offers skilled mergers and acquisitions advisory services to privately owned schools, colleges, and EdTech companies in both sell-side and buy-side transactions. Jackim Woods & Co has arranged over 100 successful transactions, ranging from less than one million to more than eighty million dollars in value.
If you own an education-related business and are interested in exploring your options, I would welcome an opportunity to speak with you. Feel free to contact me at 224-513-5142 or rjackim@jackimwoods.com.
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5 Ways to Maximize the Value of Your Vocational School
If you own a vocational school, it’s important to understand the ways you can maximize the value of your school when you sell.
Over the last 12 months, there has been a lot of mergers & acquisitions (M&A) activity in the education sector. COVID forced schools to adopt distance learning, which has completely changed the operating model for well-run schools. Schools are now able to deliver high-quality educational outcomes without geographic restrictions or needing to invest in expensive brick and motor classrooms. This has allowed vocational schools to increase revenues while decreasing costs.
Strategic buyers dominated education sector M&A activity in 2020 and early 2021, but private equity groups and sophisticated investors are now seeing vocational schools with distance learning platforms as a new technology-enabled service platform, like EdTech.
If you own a vocational school and are thinking of selling, now may be a good time to explore your options. Unfortunately, many owners miss out on maximizing the value of their schools because they are unfamiliar with what buyers look for. Here are five things you can do to help you ensure you receive top dollar for your vocational school when you decide to sell.
Understand Who the Most Likely Buyers Are for Your School
Buyers of businesses with revenues of $1 million or less tend to be individuals who live within a 50-mile radius of the company they are interested in. However, as the size of your school increases, strategic buyers become more interested —and these buyers are typically not local. For vocational schools with revenues of $5 million and up, financial buyers, like private equity groups, as well as strategic buyers become interested.
What does this mean for you? If you own a vocational school with $1 million or less in revenues, your buyers—besides being local—will likely be first-time business owners, who are essentially looking to buy a job. As a result, your marketing materials and sales pitch should address the concerns these buyers have.
However, owners of larger businesses should be prepared to address the concerns of more sophisticated, financially-driven buyers. That means to maximize your sales price for your school, you will need to develop an offering package, including a pitch book, a financial model, and set up a virtual data room, complete with detailed historical financial statements and other information these buyers will ask for.
Understand the Value of Your Vocational School from a Buyer’s Perspective
Did you know that 80% of privately-owned companies that are listed for sale, don’t sell? The number one reason most schools don’t sell is that the seller has an unrealistic expectation of value.
As a result, one of the most important things you can do before starting the sales process is talk with an M&A advisor who has extensive experience selling vocational schools. They can provide you with an objective, third-party opinion of value using the same methodologies that buyers use. An M&A advisor who is active in the education sector can also give you advice and guidance on pricing trends in the industry and value drivers.
The more educated you are about the M&A market and vocational school valuation principles, the more likely you are to be successful when you sell your vocational school.
Set Personal and Financial Goals
An essential step in ensuring a successful exit is to have a clear idea about how much money you need to meet your financial goals. While this number is not related to the value of your school, it will help you evaluate opportunities and make the right decision.
For example, if you know you need $3 million, after-tax, to retire, and your school is valued at $2 million, it may not make sense to sell now. It may make more sense to spend the next 2-3 years preparing your school for sale so you can increase its value and meet your financial goals. Have an honest conversation with your financial advisor or wealth manager and do some retirement planning to figure out what you need to retire before you decide to sell your school.
Use the Right Process to Maximize the Value of Your School
The best process to use to sell your school depends on its size and market appeal. If your school has less than $2 million in revenue, the best process is the traditional business brokerage approach that includes listing the company on multiple M&A websites and responding to buyers when they request additional information.
However, for companies with over $2 million in revenues, it may make sense to run a controlled auction process. In this case, your M&A advisor will put together a targeted list of financial and strategic buyers that may have an interest in your company.
He will contact them directly and send them with a teaser that provides an overview of your school, but without disclosing its name or other identifying information. If buyers are interested, the broker will have them sign a nondisclosure agreement and send them a formal offering package.
A typical marketing program for a vocational school might involve contacting 100-200 potential buyers simultaneously. The goal here is to get as many buyers as possible looking at your company at the same time and to make them aware they are in a competitive process.
This has several advantages. First, it speeds up the transaction timeline, ensuring a faster and more efficient closing. Second, it ensures buyers put their best offers on the table first because they know other buyers are also bidding. Last, it provides you with negotiating leverage because you will most likely have multiple offers to choose from at the end of the process.
Don’t Take Your Eye Off the Ball, Get Help
Regardless of the size of your vocational school, the most important thing you can do is work with an M&A advisor to run the sales process. Running a sell-side process is time-consuming and you don’t want anything to distract you from the day-to-day operation of your school because a dip in revenues or net income during the sales process can have a big impact on the value of your business.
Selling a vocational school may be the single most important decision in your lifetime, so make sure you work with someone who is an expert in the process and can coach you along the way.
By Rich Jackim, Managing Partner at Jackim Woods & Co.
Jackim Woods & Co. is a leading mergers & acquisitions advisor focused on providing senior-level attention and flawless execution to clients in the education sector nationwide.
Rich Jackim is an experienced mergers and acquisitions advisor and a retired mergers and acquisitions attorney. He has over 20 years of experience advising owners of middle-market companies and their boards of directors on mergers, acquisitions, and divestitures. During his career, Rich has been involved in over 70 mergers or acquisitions of middle-market companies worth over $2 billion. Rich is also the author of the critically acclaimed book, The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners.
To arrange a free, confidential conversation about your options, please contact Rich Jackim at (224) 513-5142 or rjackim@jackimwoods.com.
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