Exciting times for EdTech

I deliberated putting a question mark at the end of that title. Education Technology is a topic of contradictions, and has a history of hype, so it is clearly bold of me to be asserting This Time It is Different. But, maybe this time it is different.

The recent State of Australian Startup Funding 2023 report showed that EdTech is currently out of favour with local Venture Capital firms and Angel Investors. By the end of 2023, the EdTech/Training category had fallen out of the top 10 most exciting areas to watch, behind Deep Tech, Legaltech, and Design/Publish/Collab solutions (see page 25). Additionally, EdTech startups raised $108m in 2023, again outside of the top 10, a reduction from 2022, and less than was raised by cryptocurrency startups (page 24). Angel investors were perhaps slightly more optimistic about EdTech, with the sector reaching position 10 of the top 10 most exciting sectors for 2024 when male angel investors were polled, and yet female angel investors didn’t have it in their top 10 (page 96).

Despite this lack of interest, Australian EdTech-related startups have been doing pretty well recently. Brisbane-based Go1 aggregates workforce learning and development content, and was valued at $3b last year. In 2021, online training startup A Cloud Guru achieved a $2b exit. While not dedicated to EdTech, SafetyCulture includes a training component, and was valued at $2.7b last year. Similarly, cybersecurity firm Secure Code Warrior includes training, and raised US$50m last year, and international student recruitment platform Adventus.io raised $22m. Outside of startups, ASX-listed international student placement and English language testing company IDP Education is valued at around $5.5b. And while it deserves more than a postscript, it’s worth mentioning the Australia-born learning management system (LMS) Moodle with its 377m users, 45m courses, and is one of the top 5 LMSs in North America.

Education is Australia’s largest services export industry, and the fourth largest export industry overall, behind the resources industries of Coal, Iron Ore and Natural Gas. The sector brought in $36b in the most recent year, already back to the level it was before the Covid pandemic. Australia also has prominence in global University rankings. On the current Times Higher Education world University rankings, Australia has 6 Universities listed in the global 100, which is 1/6th of what the USA has, while having less than 1/10th of its population. It’s also more than any of Canada, France, Japan, or South Korea, despite having a smaller population. (Although, special call-out to Singapore, with 2 listings in the top 100 with only 6m people.) If you look at the current QS Top Universities rankings, Australia does even better, with 9 in the top 100.

So, on one hand Australia is a success story, with an ecosystem able to produce wins in both international EdTech companies and selling education itself, but on the other hand, there is relatively little investor interest in backing emerging EdTech companies at the moment. What might make this change?

While there are ongoing trends that have underpinned interest in EdTech for a while, e.g. see this article from 2001 from Archangel Ventures, I see two near-term demand-side forces and two supply-side forces that will drive the creation of new technology solutions in Education.

On the demand side, there is an urgent need to reskill people into the tech sector. In May 2023, the Tech Council of Australia forecast that around 295,000 people would need to reskill into tech jobs, to meet expected demand for 1.2m Australian tech workers by 2030. To put it in perspective, this is approximately twice the number of people they expect to come into entry level roles in the tech industry via Universities. A traditional University pathway, taking 3 or more years out of the workforce to obtain a qualification, will not work for many people. What is needed are faster, high volume methods of reskilling that companies can rely on to produce capable tech workers in areas like data science/analysis, software engineering and product management.

Another driver of demand is due to the recent rise of Generative AI. Most forms of training and education include an assessment component, and Generative AI has been shown to pass a range of academic tests as well as people do. In early 2023, one study found 89% of adult students had used ChatGPT on their homework. By this point, I expect it’s higher. Previously solid tech tools for detecting students copying work from elsewhere are no longer reliable, and can penalise people who aren’t native speakers. It’s not feasible to have everyone go back to doing assignments in person without access to the Internet, either. There is a pressing need for a better way, or the benefit of having qualifications will quickly erode.

On the supply side, coming out of the Covid pandemic lockdowns, a generation of students has experienced the delivery of education mediated entirely by technology. While for many years, a portion of students have experienced distance/remote education, this time it was the whole cohort. Australia, and in particular the states of NSW and Victoria, had some of the most lengthly and/or restrictive lockdowns in the world. For instance, Victorian lockdowns over 2020 and 2021 covered 262 days, and while it caused many issues for students, parents and teachers (some that are ongoing), it also trained every student and educator on what works and what does not. Those people who were receiving education at the time have been coming into the workforce for the past 3 years. In addition, there are all the educators who had been there and done that. There’s nothing like first-hand experience with a problem to help design good solutions. This set of talent will be invaluable in producing new EdTech startups.

In addition to talent is a new supply of capital. Dan at Square Peg Capital has written about how startup success breeds startup success. For instance, when an executive or founder at one business has learned the recipe for success, has made some money, then gone on to help form a new startup. One model is that 15% of outstanding shares may be used in compensating top employees, with shares vesting over four years. Atlassian’s IPO made many early employees millionaires, and there have been a bunch of startups formed off the back of this. Similarly, Canva’s secondary share sale, delayed until this year, is expected to make many employees wealthy, and result in new startups being formed in the visual media space. A Cloud Guru’s 2021 exit will have brought wealth to the founders and early employees. While less structured, both Go1 and SafetyCulture appear to support secondary share sales by employees. As capital is put in the hands of people with a passion for EdTech, it will catalyse the EdTech startup ecosystem.

While I didn’t begin with a question, I think I’ve answered it anyway. Australia is being pushed and pulled in the direction of more EdTech startup success, and it’s going to be an exciting ride in the coming years.

Book Review – The Barefoot Investor

The Barefoot Investor

I used to consume pop investment books like candy. Well, maybe it wasn’t that bad, but I did seem to read about one a month, going back a few years now. Then I went through a period of not reading any. I have now broken my pop investment book drought and got myself a copy of The Barefoot Investor.

Apparently millions of people have already trodden this path before me, but this was the first time I have read anything by Scott Pape. I was curious to see why there has been such interest in his investment philosophy. Also, I was staying the weekend in an AirBnb in country Victoria without any Wi-Fi or mobile coverage, and I’d forgotten my Kindle, so it was a good way to pass the time.

Pape is a fun writer. He is a little bit sweary, and sprinkles his text with folksy language. I couldn’t help but enjoy phrases like “alpacca attitude”, “plenty of fish fingers in the sea”, and “call a spade a bloody shovel”.

He appears to be inspired by Great Depression-era approaches to building wealth, where people saved up for things rather than using loans, and where owning your own home outright was the principle objective. This reminds me a bit of those who point back at the Good Old Days of the mid 20th century, and aim to recreate aspects of this era today. This put me off-side a little, as there are also aspects of this era that don’t apply today, e.g. the husband-as-breadwinner assumption.

In any case, there are two key pillars that I see underpinning the Barefoot way and are novel to me: (1) avoiding loans and credit, and (2) develop positive emotions around positive financial practices.

The one exception to avoiding loans is for having a loan to buy a home, but then all efforts are to be put into paying it off as quickly as possible. Otherwise, the message is to have no credit cards, no car loans, and no investment property loans. This last one links to Pape’s disinterest in investment property in general, as without borrowing to buy investment property, it doesn’t produce great returns.

The positive emotions are tied to many aspects of Pape’s model. He urges having a monthly family financial meeting, but emphasises alcohol and dessert be part of this. He gives emotional terms to different bank accounts and payment cards like “smile” and “splurge”. Also, he recommends paying off smaller debts ahead of bigger ones, even if the bigger ones are at higher rate of interest, because of the positive buzz gained earlier from paying off the smaller debts. The upshot should be that financial matters avoid the taint of being a taboo topic, and that it can be discussed in a family setting just as a planned holiday might be discussed.

I can see that the recommended steps in the Barefoot way could work for many people. Especially if they need to develop financial discipline, are living in a stable family situation, and are on the more youthful side of 40. However, the model should be taken with a grain of salt, and might not be the best option for everyone. There is a disclaimer at the start of the book that it is general advice rather than specific advice tailored to an individual’s situation, but sprinkled through the book are statements to the contrary. For example, at one point he says “if you follow the Barefoot Steps that I’ve laid out for you, your success is guaranteed”. That kind of statement is not helpful.

All up, it was as entertaining as it was informative. If this is what it takes for someone to read an investment book, then this is probably the book for them. For those who know they want to get serious about investment and their financial future, I would recommend reading more widely.

Rating: 3.5 stars.

Lies, Damn Lies and Medians

When I first got involved in property investing, I wrote a little program that scoured the real estate websites for details of properties that were in areas interesting to me. One of the stats that it tried to calculate was the average rental yield (the rent divided by the purchase price) for different areas. Unfortunately, the values I was getting back were utter rubbish.

After looking closer at the data, I realised that I’d fallen for a classic beginner’s mistake: I had tried to compare median values.

The median is an “average” measure of a set of values where there are just as many values smaller than it as there are larger than it. If there are five houses worth $100k, $120k, $125k, $190k and $250k, then the median house value is $125k (the middle one).

Medians are widely used by real estate agents because they are easy to calculate, aren’t skewed by the effect of a really expensive or really cheap property coming onto the market, and provide a simple message to buyers. They state how affordable an area is – if you can afford the median, then you can afford the majority of homes for sale in an area.

However, my mistake was comparing two median values in an area: 1) the median rent  and 2) the median sales price. The set of properties available for rent was composed of completely different dwellings to the set of properties available for sale. For example, the median rent might have come from a 2 bedroom unit, while the median sale might have come from a 3 bedroom unit. As a result, the yields being calculated were much too low.

My mistake in comparing medians is repeated by many in the media every week in calculating property growth by comparing the median from one period with the median from another period. To be fair, it’s not entirely their fault, as they get their data from real estate agents.

Statisticians are aware of the problems with using the median for calculating growth rates and have come up with three improvements. Christopher Joye has written a detailed overview, but I’ll provide my potted summary.

Stratified Median

The Australian Bureau of Statistics (ABS) and Australian Property Monitors (APM) both use an approach of grouping properties into related sets (stratifying the data) prior to computing medians. If the groupings are done properly, then any skewing in one group will not affect another group too much, so data from different periods should be more comparable. However, it doesn’t eliminate the problem that properties sold in different periods might not be comparable in the first place.

Repeat Sales

The main approach used by Residex is based on calculating the growth rate of properties sold in a given period based on how much they sold for last time. Comparing a property with itself clearly doesn’t have the same level of issue as comparing medians. However, a property might have been renovated (or even completely demolished and rebuilt) since its last sale, which adds a wrinkle to the calculation. Also, sales of new buildings cannot be included since there isn’t a prior sale to compare them with.

Hedonic Method

The hedonic method is less interesting than it sounds, but is the main approach used by RP Data. In this method, sale data is combined with data on the nature of each property, e.g. precise location, land size, number of bedrooms, number of bathrooms, etc. In this way, like can really be compared with like, and more accurate growth rates can be calculated for properties in different areas. However, this approach is only as good as its data, and we need to trust that the statisticians at RP Data have gotten the good stuff. Also, historical data for all of these additional details are hard to find, so it’s not possible to do comparisons as far back as with the other approaches.

In conclusion, it is clear that the three improved approaches all have their strengths and weaknesses, but all are superior to the plain median. I was never able to update my little property stats program to collect enough data to make proper comparisons, but at least I learned the pitfalls of comparing medians.

Superannuation’s Legislative Risk

I recently got back from a short holiday in Canberra, our nation’s capital. Amongst other touristy things, we visited Old Parliament House, where there is an Australian Democracy Museum. One of the displays is on the past Prime Ministers, and when you see them all together, you realise that we’ve had a lot of them, in the century and a bit that we’ve run our own parliament.

In fact, from 1901 to 2010, we’ve had 31 changes of government. For those not doing the math as we go along, that’s one every three and a half years.

And for someone who is, say, 35 years old, and facing 25 years before they can get access to the money in their superannuation, there’s an expected 7 or so new governments that will have a chance to meddle with it in the mean time.

The risk of current and future governments impacting the performance of an investment through passing laws is called Legislative Risk. Unfortunately, laws that affect superannuation have been prime candidates in the past for government fiddling. In the future, given the rumours about the Henry Tax Review, it will almost certainly get further tweaking still.

If you’re an employee, participation in superannuation is compulsory, where 9% of the total salary package (or thereabouts) is locked away in the system. Unless employees are willing to go to the expense and effort of setting up a Self Managed Super Fund, their money is generally invested in Australian stocks and bonds. So, if you want to invest in say fine art, residential property, a family company or venture-capital backed start ups, you aren’t going to get any joy with super.

Despite the limited investment options and the long period that you can’t directly benefit from it, an investment in your superannuation gets beneficial tax treatment. This is its key advantage, and the very thing that is vulnerable to legislative risk – a risk that is real, based on past actions and rumoured future actions of our governments.

I think that most Australians would benefit from having some level of investment outside of superannuation (even if it’s just their home), in order to reduce their exposure to this risk.

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Funds and Property

I’ve written about it before (“I am not a nutter” and “That’s not a Housing Affordability Crisis”), and I’m about to write about it again. Today I received a letter from my accountant (who, admittedly, is more savvy than the average accountant when it comes to property) confirming, and even encouraging purchase of geared property in a super fund. I quote:

If you have over $120,000 sitting in Superannuation you can now buy property through your superannuation fund … the SMSF makes the first installment of 20% deposit plus stamp duty/ legal costs plus the first year’s interest repayment.

And I have also come across a company called the Quantum Group that is setting up a similar structure for superannuation funds, calling them property warrants. So, there’s also an option for people whose accountants aren’t quite as savvy.

The residential property market has been performing quite well recently. For example, the average annual growth of median residential property prices in Melbourne over the last ten years has been 10.65% (according to this article, reporting Residex figures). If a property purchased at $450,000 (the current Melbourne median property price) grows at the average figure of 10.65% annually, and is purchased at a gearing level of 80% (as in the example from my accountant), then the growth is considerably higher. Ignoring tax, rents and interest payments, the $90,000 invested would become equity of around $880,000 after ten years – that’s about 25% annual growth. Not bad, and will be hard for super fund investors to ignore.

I would expect that once superannuation funds start investing directly in residential property, the big players in Australian superannuation will want to address the demand by packaging up property so that it is easy to invest in, i.e. indirect investment in residential property, or funds of geared residential property which a SMSF can buy units in. The catch will be that while the SMSF area is regulated by the ATO, the wider superannuation funds industry is regulated by APRA, and they are not going to want to see superannuation funds gearing up and putting people’s pensions at risk. The gearing cat is already out of the bag, so perhaps all they can do is cap it at a more conservative level, of say 60% (this would have produced a return of around 18% in the example above).

It is worth considering what sort of property funds the industry would be looking to set up. Generally they look to the blue-chip end of the market, so in property this would be houses or whole apartment blocks (rather than individual apartments) and in well-established suburbs such as Hawthorn, Toorak and South Yarra in Melbourne, and their equivalents in Sydney and possibly Brisbane. Such property typically goes for multiple millions of dollars, but I would expect that people living in such houses would prefer not to rent it. I don’t really know – I’ve never been in that position myself! Innovation in rental / purchase contracts will probably be required to give residents in such houses the certainty, control, or capital gains that they require. However, where there’s money, there’s incentive to fix such problems.

So, initially, I expect to see the big funds going after apartment blocks, then eventually houses, then when supply is exhausted in the blue-chip areas, moving into neighbouring areas or the other cities in Australia. A side-effect of this staggered buy-up is that these funds may not be particularly diversified. There could be a “Toorak houses” fund, or a “South Yarra apartments” fund. It may not be a bad thing – it doesn’t matter if a particular fund is not diversified as long as someone’s overall portfolio is diversified. And it could enable people buying that type of property in that type of area to invest in something that tracked the investment performance of their dwelling without having to invest in (i.e. renovate) the dwelling itself.

Is this complete speculation, or have similar things happened overseas? Well, to be honest, no. Real-estate Investment Trusts (REITs), as they are often known overseas, tend to invest in hotels, office blocks, shopping centres, and sometimes apartment blocks. Although I’m no expert, I’m not aware of big REITs buying up houses. So, this is all in the realm of speculation. But the fact that it hasn’t happened overseas should not be an indicator that it won’t happen here, as Australia tends to lead the world when it comes to putting real estate into retail funds. According to Wikipedia, the first real-estate trust was launched in Australia in 1971.

Anyway, for the everyday investor, who can’t pony-up a few million to buy a house in Toorak, the impact of competition for real-estate from the major fund managers is likely to be limited. You’re more likely to be bidding against someone running a SMSF. Unfortunately, the number of SMSFs is growing rapidly.

Finally, one thing to watch out for will be unscrupulous operators. There are already dodgey property marketers who prey upon interstate investors, e.g. Perth people buying overpriced property in Melbourne, or Melbourne people buying overpriced property in Brisbane. This will give them one more tool to exploit: that vulnerable people can invest their super into a dodgey scheme, and possibly not realise for many years that the property that they’ve bought was massively overpriced because the whole thing is so hands-off. Hopefully people know not to invest in something they don’t fully understand. It’s a vain hope, I know.