Visualizing Consolidation in the K-12 Edtech Industry
In summer 1984, Judi Paul wanted to help her children love reading just as she did.
So Judi began curating lists of books and created multiple choice quizzes to award points for correct answers. From the basement of her Port Edwards, Wisconsin home, Judi launched Read Up! and her initial products debuted in local schools the next year.
Today that company is Renaissance, a global leader in K-12 reading, math, and assessment products. Renaissance employs more than 1,300 people and serves millions of students every year.
What’s the lesson? Beyond a remarkable story of a social entrepreneur, the rise of Renaissance also reflects increased consolidation in the K-12 edtech industry in the last decade.
Mapping K-12 Edtech Consolidation
Since the 1980’s, corporate consolidation has risen sharply; the K-12 edtech market is no exception.
In this post, I’ll analyze how two of the largest K-12 edtech firms — PowerSchool and Renaissance — are vying for share of the ~$20 billion domestic K-12 software market in an increasingly common way: by consolidating smaller edtech companies.
Using Crunchbase data, I visualized M&A activity from PowerSchool and Renaissance over the last decade. The result shows how category leaders were formed through strategic and financial mergers that expanded their product offerings and market share.
You can see the sheer volume of consolidation in the education software space; 42 once-independent edtech products have been rolled up into two over the last 12 years.
42 once-independent edtech products have been rolled up into two over the last 12 years.
You can also see sudden bursts of M&A activity: PowerSchool’s 2016 buying spree after it sold to Vista Equity Partners and Illuminate Education’s 2018 five-way merger backed by Insight Venture Partners before it sold to Renaissance.
Since Vista Equity Partners bought majority ownership in PowerSchool seven years ago, the firm has executed 13 transactions versus only one in the five years preceding; Since Francisco Partners bought majority control of Renaissance four years ago, the company closed 6 transactions, twice as many as the eight years before.
What makes K-12 edtech attractive for M&A?
K-12 software companies can be especially attractive for private equity and M&A deals for several reasons, many that are related to the underlying dynamics and structure of the K-12 marketplace:
Finite Market → Zero Sum Dynamics
As I wrote in Inside the EdTech Hourglass: “There are approximately 97,500 public schools in the U.S., each organized and managed by one of roughly 16,800 districts (and another 32,400 private schools).”
Unlike enterprise SaaS (where customer seats expand and new companies emerge) the K-12 software market is relatively finite. Each software provider competes to serve America’s ~50 million K-12 students; school districts are unlikely to adopt multiple student information systems.
Because winning often involves taking share away from others, firms that build large customer bases, offer a unified platform with interconnected solutions, and get supported by shared central resources (sales, finance, operations, and support), are well-positioned for success.
High Switching Costs
K-12 software houses important, often sensitive student data about thousands of students, teachers, and employees. State and federal regulations mandate consistent annual reporting.
Once a school or district adopts one system, it’s difficult to switch to another. High switching costs allow leading players like PowerSchool and Renaissance to sustain competitive moats.
Low Churn & Long Contract Cycles
School districts typically embrace 3–5 year contracts to ensure high-quality service and to avoid interruptions with established vendors. The financial result of long contract cycles and high switching costs is low churn rates.
While K-12 software is certainly not the largest industry by size (~$20B spent by schools on K-12 edtech compared to ~$125B spent on enterprise SaaS), these underlying market dynamics are attractive to investors.
All together, running an effective M&A playbook can create K-12 software platforms that yield stable cashflows and steady annual returns—two highly desirable outputs for private equity backers.
The Consolidation Curve
In an eponymous 2002 Harvard Business Review article, “the consolidation curve” charts a predictable series of stages by which industries mature. The curve relates the market share of the top 3 industry players over ~25 years.
So where does a product like PowerSchool sit on the curve today? Recent estimates have PowerSchool with ~35% of the K-12 SIS market; competitors Skyward and Infinite Campus each trail at ~15%.
This positions PowerSchool at the “Focus” stage of the curve where companies attempt to enter new markets and turn to megadeals. Just last year, PowerSchool acquired Hobsons Naviance, the leader in college-career advising software, for $320 million. New market? Check. Megadeal? Check.
As category leaders like PowerSchool proceed into more mature stages of the consolidation curve, it begs a number of questions:
- Can you build an enduring business as a “point solution” in K-12 software? Point solutions address a single need for customers, think: behavior management, interactive STEM quizzes, social-emotional learning assessment, or student identity/device management.
- Must you ultimately compete head-on by becoming an SIS, LMS, or assessment platform to reach scale? To misquote Batman, perhaps you either die a “point solution” or you live long enough to become an SIS. As an analog, HubSpot eventually chose to build a CRM to complete head-on with Salesforce for SMB marketshare.
- Who wins out: closed ecosystems or open protocols in K-12 software? Strategic M&A increasingly results in “walled gardens” like PowerSchool’s Unified Classroom. Data interoperability is notoriously difficult between K-12 software systems, and the focus of Digital Promise and the Ed-Fi Alliance. Anecdotally, teachers cite using 4–5 separate logins to access different applications within the same software system.
Perhaps you either die a “point solution” or you live long enough to become an SIS.
Answering these questions sufficiently would require another full post based on disruptive innovation theory. Yet in the years following COVID-19 and mass school closures, perhaps a more consolidated K-12 software space is ripe for disruption.
Looking Out
I write this not as a critique of private equity or industry consolidation. But to me it’s worth noting the seismic shifts in funding and ownership that define which products and services K-12 students use in schools.
After a decade of deal-making, PowerSchool and Renaissance today sit at mature stages of the consolidation curve.
I just wonder what Judi Paul would think of this market, and what a more consolidated edtech space means for the next aspiring entrepreneur.
Ideas and feedback? Reach out via LinkedIn.
