With Duolingo And PowerSchool, EdTech IPOs Begin To Shift From Chinese- To U.S-Based Companies

In a year when IPO deal volumes are hitting record highs, edtech is in the spotlight — particularly this past week.

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This week saw language-learning platform Duolingo, along with K-12 edtech company PowerSchool go public, following edtech software company Instructure’s IPO last week. Chinese online tutoring platform Zhangmen also had an IPO last month while Coursera’s public debut was back in March. In other words, it’s been a banner year for U.S.-based edtech companies to go public, after China-based edtech companies have dominated the U.S. IPO market in recent years. 

“Many of these companies enjoyed extraordinary growth in 2020 and now they’re looking to raise money based off those grade A results to fuel growth,” said Matt Kennedy, a senior strategist at IPO research firm Renaissance Capital.

Duolingo went public Wednesday, raising $521 million through its IPO and closing out its first day of trading up 36 percent. Its first-day closing price of $139.01 per share gave the Pittsburgh-based company a valuation of around $5 billion. The company had raised at least $183 million in funding as a private company and its IPO marks a significant milestone for Pittsburgh’s startup scene. 

“I think the underlying business drivers in a lot of these businesses have been really strong for a long time, and we’ve seen several of these businesses reach scale, where it makes sense for them to be public companies,” said Laela Sturdy, a general partner at CapitalG and an investor in Duolingo.

Edtech companies going public isn’t new — Blackboard went public in 2004 and companies like Chegg, 2U and Pluralsight have gone public in the past decade, and Udemy is another edtech company rumored to be eyeing an IPO this year. But in recent years, many of the edtech companies to go public in the United States have been companies based in China, where online education and distance learning has been popular for some time. 

The COVID-19 pandemic has boosted the profile — and growth — of edtech companies, as schools have turned to distance learning and people stuck at home have turned to online learning tools to fill their time. Venture-backed companies in the edtech and education sectors have raised more than $9.5 billion so far this year after raising more than $12.4 billion last year, according to Crunchbase data. 

“I think this is a long-term trend in distance learning,” Kennedy said. “The growth in 2020 is going to be hard to repeat, but it may have accelerated that long-term trend by a few years. I don’t think it’s just going to go away, which is a risk with a company like Duolingo. They may have had their best year, and it’ll be hard to replicate that growth, as with many companies that saw pandemic-related tailwinds. We just don’t know how that’s going to shake out.”

The high valuations of edtech companies especially leave little room for error when it comes to performance, according to Josef Schuster, founder of IPOX Schuster LLC, which offers financial services related to new listings. 

“The margin for error if you don’t meet or beat those numbers, for Duolingo for example, it’s very narrow,” Schuster said. “If they do miss them, you see significant downside.”

The pressure from the Chinese government on Chinese edtech companies that have gone public in the United States could throw their stock prices for a loop, he noted. He pointed to ridesharing giant Didi Chuxing’s poor post-IPO performance after the Chinese government began investigating the company and blocked it from adding more users. Didi is reportedly now considering going private, The Wall Street Journal reported. 

Over the weekend, Chinese regulators banned tutoring companies from being for-profit entities, which brought down share prices of Chinese edtech companies. That could cause a slowdown in Chinese edtech companies going public in the future, whereas for U.S-based edtech companies it seems to be picking up, Kennedy said.

“I think the pipeline for IPOs, technology IPOs across tech and other categories, is really robust,” Sturdy said. “So I think we will continue to see a lot of companies go public. It’s a really great time to raise capital and a lot of these businesses are at a scale that they weren’t at before.”

Illustration: Dom Guzman