Video interviews
Following are interviews of Jeff Fromm (left),Partner at Dorsey and Whitney Law firm and member of the Kidron private equity fund and John Shea (right), Chief Operating Officer of Berkery Noyes Investment Bankers. These interviews were conducted at the SIIA Ed Tech Business Forum in New York on December 2, 2008. In each five minute interview, they talk about:
- What types of companies can be financed or sold today?
- How has this changed over last year?
- How would you weigh starting a company versus finding a company you can help grow?
Notes from the SIIA Ed Tech Business Forum, December 2008
What is happening in education in the UK?
Robin Warner from the van Tullekin group pointed out that trends in UK education often lead those in the US by about 18 months. Here are the trends she thought we should be aware of:
- Specifications for adoptions require that all products and services include professional development; if your product does not include professional development as part of implementation, it will not make the adoption list.
- There is more flexibility in government technology grants. In the past UK government grants have been targeted for content only, they are now broader; any technology product is eligible.
- Technology budgets are increasing, but software is declining by 5%. More money is going into systems.
- Vocational schools and enrollments are growing, both in secondary and post-secondary.
- There is a growing backlash against testing, although little action yet.
Robin Warner's data on K12 education in the US
- 74% of educaiton technology spending is in post-secondary, while 36% is K12.
- Technology spending in educating is increasing at 5% per year.
- There were only 4 M&A deals by mid-level education companies in 2008.
- There is a qualitative change in the types of deals being discussed. In 2007, deals were all cash, now there are more contingencies such as earn outs, equity, and assumption of liabilities.
- The hot areas: mobile learning, blended learning, online assessment, distance learning, student-teacher-admin-parent portals, online collaboration, 24/7 access and extending the school day, professional development, interactive content for white boards, and games for education.
Vivek Kamath's data on post-secondary
Vivek Kamath is a director at Berkery Noyes specializing in education and training.
- For profit institutions had 8% of enrollment in 2007, 9% in 2008, and are expected to have 13% by 2013.
- The number of students enrolled in online classes has been growing by 24% per year over the last four years. They were 2% of enrollments in 2001, and are now 12%.
- Higher Education companies are near their 12-month highs on the stock market, pointing out their counter-cyclicality, and that investors use investments in higher-ed as a hedge.
- While postsecondary companies could be sold for about 3.5 times revenue in 2007, today the multiple is closer to 2.
Michael Marchesano summary
Michael Marchesano is Managing Director at The Jordan, Edmiston Group, which consults on mergers and acquistions.
- Strong companies can still be sold (strong recurring revenue, market leadership)
- Because of the high uncertainty of today's economy, financial buyers are likely to give lower valuations than strategic buyers, since they know less about the market.
- In June, 31 states predicted budget gaps, and that has increased. Arizona led the pack, with a 20% gap in their budget. The question is how much, not whether, they will all cut education spending.
Chris Curran summary
Chris Curran is a managing director at Berkery Noyes.
- M&A deals are down 1/3 from last year, which was the best year ever.
- Private Equity (PE) firms have raised one-third more capital this year than last year.
- More capital was raised than used, which puts pressure on funds to find investmants, as most funds have a window, after which they must be returned.
- PE firms are generally looking at companies with $15 million sales ($5 million EBITDA) as a minimum.
- There are a lot of education companies in the $5M to $10M sales range. The difficulty for these companies to get to the level to attract PE, is that to grow to the $20M+ level generally requires 50% of revenue devoted to sales and marketing, and the firms usually do not have the cash flow for that level of commitment.
Frank Bonsal summary
Brank Bonsal is a partner in New Markets Venture Partners
- If you are going to look for money today, look for a small amount, but from people with deep pockets, investors who can continue to fund you after you have reached the next stage and a higher valuation.
- The stigma of a down round is so great that you should be willing to accept a lower valuation for your first round of investment in your company.
Kevin Custer summary on Angel Investors in education
Kevin Custer is a Founding Principal with ARC Capital Development
- Angel investors are out there. They need a place to invest outside of the stock market and real estate.
- Deals with angel investors will usually be a note with interest that is convertible into stock at a later round.
- Rather than valuing the company at the time the Angel's invest, value their investment as a premium to the next round, postponing valuation until the company has customers and a working product.