What Investors See in a ‘Highly Fragmented and Under-Teched’ Early...

What Investors See in a ‘Highly Fragmented and Under-Teched’ Early Childhood Education Market

By Tony Wan Mar 11, 2021

This story is part of an EdSurge Research series about early childhood education.

With widespread lockdowns and closures last year, the critical role that schools and child care centers play in supporting children may never have been clearer. As it turns out, society is not as productive when working parents don’t have child care.

That fact is not lost on investors who foresee greater demand for early-education programs and services after society reopens its doors.

“The pandemic has highlighted how important the early years are, and interest in this market is growing as families, communities and governments are paying more attention,” says Matt Glickman, CEO of Promise Venture Studio, a nonprofit that supports startups and other organizations building child care and early education services.

Recent forecasts point to a growing industry. In 2019, total U.S. public and private spending on child care reached an estimated $45 billion, and is projected to grow 4.1 percent annually through 2024, according to investment bank BMO Capital Markets.

Venture capital investments for early childhood edtech startups have been steadily increasing over the past decade, before the pandemic paused the trend. Still, this sector makes up a small fraction of all venture capital that has gone to U.S. edtech startups. Over the past four years, U.S.-based early childhood edtech startups have raised about $372 million in venture capital, based on an EdSurge database of publicly disclosed investments. That’s about 5.7 percent of all venture capital invested in U.S. edtech startups during that span.

Venture capital for U.S. early education edtech startups, 2017-2020

Two sizable funding deals this year suggest that this market is still very much on investors’ radars. In January, Higher Ground Education, an operator of Montessori education and teacher training centers, raised $40 million. Last month, Brightwheel, a child care management software provider, raised $55 million.

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“The early education space is highly fragmented and relatively under-teched,” making the market “fruitful for innovation and investment,” says Rohan Wadhwa, a principal at Lumos Capital Group, an investment firm that has published its outlook in this market.

An ‘Operating System’ for Child Care Operators

Investors like Wadhwa often point to child care providers as one sign of market fragmentation. Aside from a handful of large operators like Bright Horizons, a publicly traded company, most programs are small businesses and home-based operations.

Prior to the pandemic, the number of child care facilities has been declining since 2005, driven largely by fewer home-based providers. From 2005 to 2017, the number of licensed small home-based child care programs dipped by almost half, according to data from the U.S. Department of Health & Human Services. Still, it reported that the number of child care slots increased, driven by increased capacity offered by centers and larger providers.

But that masks the fact that many large providers tend to operate in urban and suburban areas, and rural regions are usually served by home-based programs. And studies suggest that lower-income families and Hispanic and Black households are more likely to use home-based child care programs and may be more impacted more by their decline.

Trends in number of child care centers and homes — Source: U.S. Department of Health & Human Services Office of Child Care

Helping individuals start home-based child care programs has been the stated goal of venture-backed startups like MyVillage and Wonderschool, which offer a service that helps people with the licensing, certification and marketing required to start their own home-based business. In exchange, these companies take a cut of providers’ proceeds. COVID-19 disrupted their operations, though, forcing some programs in their networks to shut down (and, in turn, companies like Wonderschool to lay off staff).

Despite recent widespread childcare program closures, a survey from the Bipartisan Policy Center found that home-based child care programs were the most likely to remain open early during the pandemic, with 28 percent of them staying open (versus just 10 percent for large centers). While the industry has rebounded from the early months of the pandemic, with one survey showing 93 percent of programs remaining open, permanent closures are not unheard of, and open programs still struggle to survive.

Wonderschool CEO Chris Bennett believes the number of home-based providers will expand in the future, especially if there are fewer providers to meet demand. “Child care has never been more important as an enabler of economic mobility in our country—both for working parents and for the owners of small businesses like family and community child care programs. We expect to see a significant increase in our services due to this.”

Should that happen, that may present opportunities for technology providers to help people manage these programs.

Many child care program operators still use paper to manage billing, payroll, communication, scheduling and other logistics of running their business, according to Dave Vasen, founder and CEO of Brightwheel. Sometimes they use a combination of business software, but that can add up to a hefty bill. Pam Melot, executive director of the Creative Learning Preschool, a family-run operation serving about 70 kids in northeast Denver, estimates she used to pay upward of $30,000 for different software subscriptions, or roughly “what we’d spend on a teacher.”

Companies like Brightwheel are trying to help reduce those costs by stitching together many of the administrative backend services involved—including billing and payroll, enrollment and attendance, class scheduling and lesson planning—all on one platform. Vasen says he’s essentially trying to build “a backend operating system” to help operators manage their businesses. About 25,000 preschools and early education centers are currently using it, he adds, many of which are home-based providers serving fewer than 10 children.

Melot, who started using Brightwheel in 2017, says she now pays about $5,000 in total software licenses per year. Plus, “not fussing over paperwork and different software” has given her staff back time to work closely with children and families.

Brightwheel’s latest investment round values the company at more than $600 million, a sign that investors believe demand for its services will grow.

“This is one of the markets that we think is very investable at the growth stage,” says Wadhwa, who points to sizable exits like ProCare, a provider of software similar to Brightwheel’s, which was acquired for $550 million in 2018.

Venture capital for U.S. early education edtech startups by customer and category, 2017-2020

Post-Pandemic Parenting Demands

There’s an old adage that nothing can prepare you for parenthood, despite all the books, apps, parenting websites and workshops available. But that’s not stopping entrepreneurs—many of them new parents—from trying.

With many child care centers closing their doors, parents have found themselves shouldering additional responsibilities, including how and what to teach their kids. As a result, “you’re seeing a lot more parents want to get more involved, and willing to buy more digital and physical services,” says Wadhwa.

The consumer parenting market is replete with products that offer parenting tips and advice, or teach basic skills like the ABCs, shapes and colors. Investors continue to bite at opportunities in businesses like Enuma, which has received more than $13 million to develop games for young children, and Homer, which recently raised $50 million to build digital content for this audience. Physical offerings are in demand, too. Lovevery, which sells parents a subscription that delivers educational play kits, raised $20 million in 2019.

Investors also see an emerging market in the intersection of education and other services in areas of health and home management.

“As I think about early childhood, it’s less about technology for schools, but for families,” says Sara Deshpande, a partner at Maven Ventures, a consumer tech investment firm. She notes that just as companies like Brightwheel are building an “operating system” for child care centers, others are trying to do so for families.

These efforts include Maple, which recently raised $3.5 million to build a “family tech platform” that aims to help parents organize all their childrearing tasks and responsibilities in a given day or week. Another startup, Milo, is working on something similar that includes a digital assistant that curates parenting activities and programs.

“There is a lot more specialized investment capital that understands the opportunity in child care,” says Avni Patel Thompson, CEO and founder of Milo. “COVID brought to the forefront of how essential child care is, and how parents are at the front lines. But if parents cannot manage the minutiae of everyday child care, they cannot think about all the other educational stuff.”

“Health is also a big part of early childhood,” notes Glickman of Promise Venture Studio, who shares that startups are building such tools to give parents better insights into other areas of child development—like sleep. Huckleberry, founded by researchers at University of California Berkeley, recently raised $3.6 million for an AI-powered app to help new parents analyze and improve their child’s sleep behavior.

If effective, these tools may find willing buyers in parents who are more involved in child rearing than perhaps ever before. “Parents now have had more than a year caring for their kids at home,” says Maia Sharpley, co-founder of Juvo Ventures, an education investment firm. “I don’t think they’re going to relinquish having visibility into what’s going on.”