In the ever-changing education sector, adding value to businesses while making sure they don’t compromise their core mission, is something investors such as ECI can support with. Rory Nath, Investment Director at ECI, recently joined an Education Summit panel looking at what investors can do to support growing education businesses. The fundamentals for ECI are all about backing great management teams and ensuring there is a strong strategic focus at the Board, then providing the hands-on support to execute successfully on the top priorities. He also highlighted three areas that are having a direct impact on valuations:
1. Recognise that growth, profitability, and social impact are interconnected:
One of the reasons I love investing in the education sector is that financial performance and social impact usually go hand in hand. If you have a product or service that can demonstrate a real benefit to learners and educators, your customers rave about it and you nearly always see cross referral that drives demand and reduces customer acquisition cost, which in turn leads to growth with attractive margins.
To compound this, we’re increasingly seeing the financial market reward high-impact businesses with high exit multiples. Often social impact is in the DNA of education businesses, but it isn’t being measured closely enough or communicated crisply. Explicitly bringing social impact to the core of business strategy and ensuring that there are clearly identifiable goals is both the right thing to do and the right way to drive towards an optimal return.
2. M&A is great, if you can find the right strategic and cultural fit:
Lots of the education businesses we meet are proactively looking for acquisition opportunities, and it’s a fantastic way to add value, be it through new geographies, product capabilities or customers. But acquirers need to be crystal clear about why they are making the acquisition and what they can bring to the target. Simply building scale through acquisition without adding value to your customers doesn’t work in education, and potential investors will see right through it.
Cultural fit is always important in M&A; without it, you will never build a truly integrated team and realise the full synergy potential of an acquisition. But it is particularly important in the education sector. This is a very competitive M&A market with many active consolidators and owner/founders who are very mission-led. So, if you can’t demonstrate cultural fit and compatibility with the targets’ core mission, you simply won’t win the opportunity. Simple back-office cost synergies are not that compelling! A platform that can consistently win great M&A opportunities and prove that 1 + 1 = 3 is worth a significant premium in this market.
3. Embrace digital transformation for long-term growth:
We always consider how we can build businesses for the long term, not just our investment period. That is a core component to how we consistently deliver such fantastic exits, as there’s a clear roadmap for future value for the next investor. And if you take a long-term view on the delivery of education, a key element to value creation is often digital transformation.
Investments in digitising operations should be made with a clear business case and a clear view of how pedagogy will evolve around it. It’s important for both investors and management teams to be realistic about timeframes and resource requirements – digital transformation is operationally intensive and the risks of it going wrong is high. Significant investments need to be given adequate focus and done the right way!
But the responsibility for getting it right also falls with the technology solutions that are helping the market to digitise. Top edtech companies have products that fit into staff workflows seamlessly. Digital adoption should be a joy rather than a pain, relieving workloads rather than creating them. The best edtech companies also over-invest in implementation support and customer service. This investment makes returns many times over. As mentioned earlier, happy customers are the most effective sales team and they tend to be incredibly loyal.