Academic endeavours: online education set to explode

In 2012, the number of transactions in the education sector nearly hit the 2010 peak, according to unquote" data. Notable deals in the sector this year include HIG's investment in St Gilgen, an Austrian boarding school with a view to create a global education platform, and Sovereign Capital's sale of World Class Learning to Nord Anglia Education, generating a 5.3x money multiple and a 70% IRR for the vendor.

But investor appetite is increasingly breaking the boundaries of bricks and mortar institutions. After a prolonged global financial crisis, soaring unemployment figures and the rising cost of tuition fees, today's discerning learner is looking online for education, and investors are following.

This year, online language learning firm Babbel raised $10m in its second fundraising round, welcoming Reed Elsevier Ventures into its shareholding alongside existing backers IBB Beteiligungsgesellschaft, Nokia Growth Partners and Kizoo. 

The sector has attracted an increasing share of investment over the last 12 months

"This is a huge market," says Rayk Reitenbach, investment manager at IBB. "Of course, there is competition from more old-school competitors, but they have a more offline approach. There is certainly enough space left for a new player. The future of education is partly online. There will always be a certain part of the market offline, but there are huge opportunities with the internet, which will play a much larger role in the future."

But it is to the arena of free education that investors have really flocked. In the last year, massive open online courses (MOOC) have burst onto the education landscape. MOOCs offer pupils free video lectures, peer-graded assessments and progress quizzes, with some offering accredited certification for the completion of several courses.

The MOOC movement is spearheaded by US-based pioneer Coursera, which has accrued 17,000,000 enrolled students since its launch in 2012. And the local VC community is smitten. Launched by former tenured Stanford professors, the company has raised a colossal $65m to date across three rounds and counts Kleiner Perkins Caufield & Byers' venture capital veteran John Doerr – who has backed Amazon, Google and Zynga – among its board members.

"For the first time in the history of the internet, there is a digital product that people are willing to pay for," says Markus Riecke, CEO of European MOOC Iversity, backed by bmp Media Investors, BFB Frühphasenfonds Brandenburg and T-Venture, the VC arm of Deutsche Telekom. "The internet has a long history of industries with digitizable products that people are just not willing to pay for. Think of the music industry, think of journalism. The only way to advance oneself in life is to get an education. Spending money on advancing one's capability is something that people will do."

The Berlin-based start-up launched its MOOCs on 15 October this year, with more than 100,000 students and 24 courses. "People are looking for affordable ways to pay for a good education of an acceptable level," explains Jens Spyrka, partner at bmp. "If I could choose between a course taught by an excellent professor delivered digitally, or a more expensive and not so good direct participation course at university, I would choose the first option. Some German universities are so overcrowded, there aren't even enough spaces."

Academic appeal
The problem is not confined to Germany alone. The number of students in China and India looking for higher education has risen sharply in recent years, placing enormous pressure on each nation's infrastructure, which is not large enough to accommodate either the students nor the university buildings. Figures released by Ucas this year show a 9.9% increase in the number of students applying to UK higher education alone and a 19.3% increase on those applying from India. 

"We believe this sector will continue to attract venture capital as it is one of the largest markets in the word," says Scott Sage, partner at DJ Esprit. "It is one of the last markets to go digital, it's global and there are more people coming online than ever before. In a few years, there could be more than 2 billion people with mobile phones. Imagine the impact this could have for people who have never had access to great content or educators. We still have many more years to back highly disruptive companies."

Though Sage is biding his time, many investors have already poured into MOOC investment, though they are yet to see how these platforms will monetise and reap returns. "We feel this is something that will really change the education market. It's disruptive in the sense it will open university up to far more people – but it won't replace university. If you're interested in one particular area, you can take a course; people in countries without the opportunity of going to university can take a course; or you can take a course as part of your normal studies," says Spyrka. "Even if we're not fully sure how we can monetise, there will be several opportunities if the marketplace becomes big enough."

And MOOC champions are confident that growth will come. "I think VCs have been sufficiently bold and smart to trade early monetisation for early traction. With platform businesses you have to get some critical mass," says Riecke, who is also a former vice president of eBay Europe. "I am firmly convinced that this is going to be as big as any of the hype from the internet over the last few years. I think this will dwarf Facebook. The social significance of education is just so much higher."

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