As the global labor market continues to evolve in response to automation, rising quit rates and continuing labor shortages, more and more companies are investing in attracting, retaining and upskilling employees. Workforce development alone is a $360 billion market that has minted edtech unicorns like Udemy, Pluralsight and Guild.
With the ongoing mismatch between the skills that employers want and the skills that graduates have, companies like Amazon and Walmart are taking training into their own hands, partnering with edtech providers like Springboard to offer programs tailored to their workforce needs. I believe every company will be an edtech company in the next ten years.
As this process unfolds, one trend I am following closely is the rise of vertical edtech. These are companies that solve labor market problems specific to an industry, through entry-level training, upskilling and reskilling. Instead of focusing on general functions (like sales or leadership development) these companies look to become the go-to learning platforms, and sometimes certification and labor solutions, for companies within a vertical. This is a new category of startups that will become iconic global companies in the next ten years.
Many examples exist in healthcare, pharmaceutical, legal and hospitality. Stepful trains medical assistants to enter the healthcare workforce. Nana Academy partners with appliance manufacturers to train repairmen on their products. RockED is looking to become the leading learning company for the automotive industry.
There is a precedent for this. Just as SaaS as an industry transitioned from horizontal solutions to vertical solutions, so too is edtech evolving. In SaaS, the growth of AWS and Salesforce, used across many industries, led to the emergence of vertical SaaS like Veeva for the healthcare industry and Nearpod for K-12. In corporate training itself we have seen powerful platforms emerge across industries (Degreed and Edcast, for example) now being complemented with solutions specific to certain verticals.
Accelerating this trend is the emergence of Generative AI. Historically, high content development costs steered companies towards developing generic materials that could be widely adopted for different use cases. Today, AI can help startups create very specific content at low cost. This is transformative for both companies and learners.
Take, for example, the MBA experience. While traditional programs are designed for a broad swath of professionals, there is value in applying MBA concepts to specific industries. We have seen founders who are planning on developing customized MBAs (think “MBA for pizzeria owners”). Such targeted programs can deliver much more relevant value, in a much shorter time. This is critical particularly when serving working adults.
With the emergence of online education platforms, hybrid models (in industries like healthcare, where in-person last-mile training is often necessary) and VR/AR experiences, the opportunity to address industry-specific learning solutions is bigger and more global than ever. In northern Mexico, for instance, the nearshoring boom has created vast demand for skilled labor in manufacturing that universities or trade schools will not be able to provide.
Focusing on one industry can also reduce go-to-market friction, through clear messaging and positioning that all customers in that vertical can relate to. Assuming the first set of customers are satisfied, they naturally become case studies for others to reference. In other words, there is a real network effect in their go-to-market motion.
Still, despite the advantages of vertically-focused edtech, there are important considerations to keep in mind. As investors it is important for us to understand the following aspects:
1. TAM: Being constrained to a particular industry limits the number of companies that can potentially be your customers. There are ways around this such as expanding to peripheral markets (think nursing companies moving into the medical assistant market). Another is moving through the value ladder; for example, expanding from an educational provider for current employees (content) to support services (coaching or peer mentoring) and potentially to a labor supply solution (new employee sourcing).
2. Replicability: The needs of everyone within a vertical may not be homogeneous. Companies vary in their operations, size, margins and needs. Industries may be funded and regulated differently across countries. In France, for example, baking is considered a high-skill industry (which some startups train for) that requires specialized training and certifications. This is not the case in most other countries. It is critical for vertical edtech to find industries that have similar profiles and needs, ideally across the globe.
3. Credentialing: This is a critical requirement for many industries, and the process to getting a credential can vary state by state, country by country. In the U.S., hair styling requires a license. It is important to consider this implication on the business and how that might help or limit expansion opportunities.
4. Labor Intensity: Education and training is ultimately a people business. Finding industries that are labor intensive is important as these will be the ones that benefit most from tailored educational solutions. That said, the future of labor is very much in question; some analysts say up to 300 million jobs may be impacted by generative AI.
If you are developing an edtech company focused on a vertical market, we’d love to talk!