Edtech businesses take different funding paths

Three Perth tech companies servicing the education sector have completed major capital raisings, and all for exactly the same amount, but each chose a very different path.

Martin Dougiamas proves the adage that you never know where your next big opportunity will come from.

The founder of West Perth software firm Moodle, which is a global leader in online learning management systems with more than 100 million registered users, found his new business partner at an education conference in Tel Aviv.

“I wasn’t even talking about Moodle, I was talking about public education and having a bit of a rant,” he told Business News.

After his talk, he was approached by Education For The Many, an entity set up this year by the French-based Leclercq family, which is behind the Decathlon sporting clothes brand.

After several months of meetings and discussions, he struck an agreement last month for EFTM to invest $6 million in Moodle, to accelerate its product development and international expansion.

Another Perth-based education technology company planning to chase international growth is Schrole Group, which was established four years ago by former school principal Rob Graham.

He set up Schrole after seeing a big opportunity to streamline the recruitment of teachers for international schools and relief teachers for domestic schools.

Schrole has also recently completed a $6 million capital raising, via a backdoor listing on the ASX.

A third edtech business pursuing expansion is Joondalup-based SEQTA Software, and in a remarkable coincidence, it has also raised $6 million.

Seqta’s capital raising, completed in December 2015, came primarily from high-net-worth investors, including Navitas co-founder Peter Larsen and Mineral Resources chief executive Chris Ellison. 

The experience of these companies neatly illustrates the pros and cons of different capital raising strategies.

For Rob Graham, the ASX listing came after three smaller private raisings, to the tune of $2.2 million.

He looked closely at further private raisings, and even had a cornerstone investor who was keen to support Schrole, but couldn’t attract sufficient backers.

Like many people who pursue an ASX listing, Mr Graham found it was more complex and took longer than he had anticipated.

The listing process got properly on track when Schrole appointed Alto Capital as its lead manager.

“They don’t take a lot on, all their listings are above water,” Mr Graham said.

“They put some money into the seed raising, and within three days of launching this offer, they had commitments for $9 million.”

Mr Graham’s advice for anyone pursuing a listing is to ensure they keep focused on their operating business.

“Things are never as easy as you think they will be, but you need to keep focused on your sales and marketing and your product and your growth.”

Mr Graham said Alto recommended a backdoor listing – a reverse takeover of listed company Aquaint Holdings, as it meant the listing could be completed at a valuation that gave investors more upside.

“There is more upside for everyone coming in; that’s the key, provide upside.”

He believes the listing will assist Schrole’s growth, particularly among international schools.

“Being an ASX company brings real prestige with it, we think that will help the business,” he said.

EHG moves

Seqta’s capital raising was followed late last year by a corporate restructure, which saw Education Horizons Group established as a holding company for Seqta and Melbourne-based edtech company Synergetic Management Systems.

EHG executive chairman John Vickers said there were clear benefits from remaining privately owned.

“Some of the pros are not having the compliance, and the continuous reporting and regulatory issues, and costs of maintaining a listing,” Mr Vickers said.

However, the 2015 capital raising meant it ended up with more than 50 shareholders, and that made the subsequent restructure more complicated.

“We ended up doing a whole off-market takeover bid,” said Mr Vickers.

“It was a lengthy transaction and probably more complicated than it would have been if we’d kept our shareholder base smaller.”

EHG now has about 130 shareholders, including 40 staff with small holdings.

Mr Vickers said a big focus this year had been integrating the two operating businesses, which have 150 staff across Australia and in Singapore.

EHG also has more than 1,100 schools using Seqta’s teaching and learning software, or Synergetic’s school administration software.

“We clearly see potential to grow both businesses organically but we also see EHG as a platform for potential further acquisitions,” he said.

“We think the whole edtech sector in Australia is very fragmented.

“There are lots of players out there and some do not have critical mass.

“If we do find something that is too large to fund out of organic cash, we will have to look at what the next capital raise looks like.”

Mr Vickers said this could mean a listing or a private equity deal, which had pros and cons.

“There is a lot of private equity out there that is willing to take a significant minority stake,” he said.

“Regardless of whether they have a controlling stake or a significant minority, you pretty much put yourself on a pathway to an exit event that often plays into their timeline rather than your own or the other shareholders.”

Another option would be to issue EHG shares to the vendors of any business it buys, but he acknowledges that would have limited appeal as the stock is illiquid (not traded).

“If you are listed, you can more easily use scrip for acquisition funding,” he said.

Fit for Moodle

For Moodle’s Mr Dougiamas, one of his biggest challenges has been finding an investor that shared his values.

“I get approached by a lot of investors, all the time,” he told Business News.

“And usually they are in it for the wrong reasons from my point of view.”

Martin Dougiamas rejected overtures from multiple venture capital funds before finding the right partner for Moodle. Photo: Attila Csaszar

Mr Dougiamas said EFTM brought a different mindset to its investment.

“We’re not profit oriented, and neither are they particularly,” he said.

“They will be a good partner as well as an investor.”

Mr Dougiamas emphasised EFTM was not a venture capital investor.

“I’ve probably rejected 50 VCs that we talked to over the past year or two.”

EFTM will acquire a minority shareholding in Moodle in return for its $6 million investment but the precise amount has not been finalised.

“That’s subject to a valuation in a couple of years, there is a formula that is tied to revenue and not profits,” he said.

“They’re talking about being around for decades, they operate on a long time scale.”

Mr Dougiamas said the capital injection was limited to an amount that was useful.

“You hear about a lot of larger amounts but I was trying to keep it down to what we can actually use,” he said.

The $6 million will be used to accelerate the development and rollout of Moodle’s open source (freely available) learning management system, which is used in universities and businesses across the globe.

Mr Dougiamas said Moodle plans to hire a lot more people, particularly in its Barcelona office, to support the product rollout in Europe.

Key staff

Schrole has also been hiring, with the latest additions being a digital marketing manager and an IT development manager.

It’s growth targets have been spelt out in the performance shares that have been issued to Mr Graham and others as part of the ASX listing.

The series A performance shares will convert to ordinary shares (at no cost) if the company gets 215 international schools to subscribe for its Schrole Connect product or 198 domestic schools to subscribe for Schrole Cover within 18 months – roughly double current numbers.

The series B performance shares will convert if the company achieves total annual sales of $7 million within three years – a big jump from revenue of $1.6 million in the year to June 2017.

The series C shares convert if the company achieves underlying profit (EBITDA) of $7 million within four years – a turnaround from the losses incurred in each of the past two years.

The company is targeting the UK as one of its big growth opportunities.

“There is a readily apparent problem there that can be addressed by our software,” Mr Graham said.

Schrole is also aiming to extend its reach into other industries.

It took it biggest step in that direction last month when it won a WA government contract to provide Schrole Cover to Sir Charles Gairdner Hospital, to help it recruit relief staff.