The edtech startup funding slowdown may be hitting the ‘bottom of the market’

• Edtech venture capital funding in 2023 may be on pace for its lowest annual total since 2016.
• VCs told Insider they don’t expect the slowdown to let up anytime soon.
• The one exception to this edtech funding dropoff is in AI tools for education and upskilling.

Back-to-school season has already begun in some parts of the country, but investors may still be on vacation when it comes to edtech startup funding.

“There aren’t a lot of education rounds happening,” said Vinny Pujji, managing partner at Left Lane Capital, an early-stage venture fund that invests in consumer tech startups.

That’s because generalist funds that dabbled in edtech during the pandemic years are now pulling back, particularly from funding startups whose main customers are school districts, rather than those focused on upskilling workers, according to Iynna Halilou, a former edtech founder and now an investment partner at the MBA Fund. As a result of this pullback, edtech specialist investors have emerged as the primary dealmakers in the space.

“There’s a perception that edtech isn’t really venture bankable,” Halilou said, “but rather venture philanthropy.” She believes that startups that integrate education into other types of enterprise companies, such as gamifying onboarding at workplaces, are more appealing to generalist investors than stand-alone edtech.

Global edtech venture deals have been steadily declining since their pandemic highs in 2021, which coincided with venture capital’s record-breaking funding year. Following a difficult 2022, global edtech funding has only reached $1.8 billion in the first half of 2023, less than half of what it was at this time in 2022, which was $4.5 billion. according to a report published by data firm HolonIQ. According to HolonIQ, the estimated total funding for 2023 is only $3.5 billion, the lowest annual total since 2016.

Furthermore, with the exception of the Indian edtech unicorn Byju’s $250 million fundraise this spring, there has not been a single edtech “mega round,” or a startup funding round valued at more than $100 million, since 2022. According to Bloomberg, the company’s round was excluded from the HolonIQ report due to ongoing government investigations into its financials.

“I think there was an element of ‘Covid-market fit’ that made a lot of sense when we were locked down and now maybe makes less sense,” Leeor Mushin, a principal investor at Floodgate, said.

This year’s AI boom has led some investors to believe that there will be an increase in funding for edtech companies that use AI in novel and interesting ways, and some deals are still in the early stages, according to Avalanche’s Katelyn Donnelly. Pujji and Mushin also stated that AI edtech deals were the exception during this period of slowdown.

Popular AI tools, such as OpenAI’s ChatGPT, have also harmed existing edtech players, according to Pujji, because they have quickly become the dominant assistant for teachers, students, and professional learners. “ChatGPT is completely destroying Stack Overflow in its usage right now,” he said, referring to the software developer knowledge sharing platform.

Existing edtech public companies, such as Chegg’s soon-to-be-released AI tutor Cheggmate and Khan Academy’s new AI tutoring integration with Instructure, the company that owns Canvas, are beginning to incorporate these tools into their product lines to increase efficiency and cut costs. These decisions may increase productivity for educators and students, but they may not help new edtech startups attract new customers and grow, according to Pujji.

“Anytime you have a wave, you’re either going to surf it or you’re going to get crushed by it,” Pujji explained.