“EDTECH ACTS AS SCAFFOLDING FOR YOUNG LEARNERS TO BUILD ON CONCEPTS AND CAN PRODUCE LONG-TERM LEARNING GAINS.”
Interview with Victor Hu, Managing Partner, Lumos Capital Group, United States
Studies show clearly that high-quality early childhood education improves social and academic outcomes, making it all the more important that children in low-income areas are able to benefit. For investors, this market offers both the possibility of generating returns and of having a positive development impact. As Victor Hu, Managing Partner and Co-Founder of Lumos Capital Group, explained in an interview with IFC, innovations in educational technology are helping boost the quality of early childhood education. Combined with nurturing environments, said Hu, early childhood education technology has the power to level the playing field for disadvantaged children.
What is fueling demand for early childhood education technology?
There are three factors driving demand for this market. First, there is a growing global awareness of the value of early childhood education. The long-term gains associated with early exposure to concepts like reading and math have been increasingly accepted as common knowledge, even compared to a decade ago. Second, COVID has had a devastating impact on childcare capacity, from large facilities to home-based centers. Widespread closures left parents, teachers, and care providers scrambling to supplement and replace lost services. Lastly, technology solutions in this sector have just gotten better over time. A flood of new entrants in the early childhood learning market has increased competition, choice, and quality.
Can you give us a sense of the type of companies that operate in the early childhood education sector?
There are essentially five categories in this sector. There are vertically integrated early childhood care providers—the companies that offer the entire suite of education and care services that typically occur outside the home. The second category is early childhood-focused digital content companies, which design applications that can be used on mobile devices and the web. The third type comprises companies that blend hardware and software to create products targeting young children, often with a combined education and entertainment use case. Some have screens; some don't. Others may connect tactile experiences with conceptual learning. The fourth category is made up of software solutions that help childcare centers of all sizes run their businesses better. They provide backend support with administrative tasks like communicating with parents, payments, and logistics. The final category includes miscellaneous other technologies and services that serve this market segment, such as marketplaces that bring online services offline, connect parents with other parents, or help families search for childcare.
Are you seeing the same popularity of technology-based early childhood education products in emerging markets as you see in the U.S.?
In terms of educational content and applications, solutions are popping up worldwide. However, there are a few reasons why adoption and penetration in emerging markets are still lagging. Many mobile applications are sold on a subscription basis, and prices can be too high for consumers from lower-income countries. Basic tech infrastructure can also be unevenly distributed, and things like tablets and iPads are too expensive for many households. We have seen several exciting innovations come from parts of India, Southeast Asia, and the Middle East, but most of the more substantial growth is happening in the U.S. and other developed markets.
What are investors looking for when it comes to early childhood education technology providers?
Broadly speaking, it all comes down to whether or not a solution is truly providing value and whether the financial models are scalable. For instance, investors want to know if digital instruction and content apps are generating tangible outcomes and delivering efficacy. These can be difficult to measure, so we also look at other related metrics, such as user engagement, retention, and customer reviews. The growth of adoption of these models is something we focus on, along with unit economics and retention dynamics. That kind of data gives us a sense of the lifetime value of a product. Distribution is also essential, so we examine the models companies use to distribute their products, which vary by geography and type.
The childcare market tends to be fragmented. Does this pose unique challenges to technology companies seeking to operate in this space?
Fragmentation is a broader characteristic of many education end markets worldwide. Companies that distribute directly to parents and consumers in a fragmented market may find customer acquisition costs to be challenging over time, as competition for the attention of these consumers is fierce. So, creating a distribution flywheel can be a major competitive advantage. Entrepreneurs that raise capital and invest in a strong sales and marketing engine to get their brands in front of customers gain more scale and success over time. We also see various companies adopt freemium models or other distribution strategies that start with the educator.
What are the trends that you see in early childhood education technology?
EdTech acts as scaffolding for young learners to build on concepts and can produce long-term learning gains. As awareness of that has grown, we have seen more investment coming into the private sector. Venture capital firms are now backing companies that are building engaging, early EdTech solutions. Digital content products and toys, and edutainment are all on the rise. We are also interested in technology products and services that help childcare centers operate more efficiently, like communicating with parents, scheduling, and collecting payments. Lastly, although very early in its development, we are seeing more apps that can be personalized to a child. While this is a trend that applies mostly to K12 and higher education, we are seeing personalization spill into early education as a way to engage with different learning profiles and intervention needs.
Do you find that early childhood education service providers support adaptive learning technology? Are there some hesitations?
They are trying to, but it is difficult to do well. The technologies that enable real personalization driven by artificial intelligence and machine learning are relatively new in terms of their application in the education sector. One of the hesitancies is around over-exposure to screens, and also the difficulty with assessment at an early age, but there are increasing efforts to build adaptive technologies into some of these apps.
Growing up in Asia and Africa, you saw first-hand how equity in education has the capacity to eradicate poverty. Tell us more about your childhood experience.
Where I grew up has had a profound impact on how I see the world and has undoubtedly shaped the evolution of my career. My father’s job as a diplomat took us to three different continents—Asia, Africa, and North America—where I attended both public and private schools. I spent much of the ‘70s and ‘80s in South Africa during apartheid, and saw first hand the impact of segregation. That lived experience informed my belief in the importance of equity in education.
This interview has been edited for length and clarity.
Published in May 2022