Matrix FinTech Index: 2018 Edition

The full overview of the Matrix FinTech Index 2018 edition is available on TechCrunch here.

At the end of 2017 we published the Matrix FinTech Index for the very first time. In what we hope will become an annual tradition, we are excited today to publish an updated index and set of supporting data.

There is no doubt that this has been another stellar year for fintech. In last year’s version of the Matrix FinTech Index, we predicted the crypto enthusiasm would be short lived and that the fintechs would be the more relevant disruptors in 2018. By most metrics this seems to have turned out to be true. A comparison of search interest in “fintech” vs. “crypto” is one clear indicator of this:

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Definition: Matrix Partners considers “fintechs” to be venture-backed organizations that are (a) technology-first companies that leverage software to compete with traditional financial services institutions (e.g. banks, credit card networks, insurers, etc.) in the delivery of traditional financial services (e.g. lending, payments, investing, etc.) or (b) software tools that better enable traditional finance functions (e.g. accounting, point-of-sales systems, etc.)

Methodology & Results

As a refresher, the Matrix FinTech Index is a market-cap weighted index that tracks the progress of a portfolio of the 10 leading U.S. public fintech companies over the course of the last two years (beginning in December of 2016). For comparison, we have also included another portfolio of 10 large financial services incumbents (companies like JP Morgan, Visa and American Express) as well as the S&P 500 index.

With two years of data now in, the results are pretty clear — the fintechs continue to outperform both the incumbents and the S&P 500. 2 year-returns for the fintechs were 133% compared to 34% for the incumbents and 24% for the S&P 500.

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Updated Data Now Available

As we did last year, we are releasing an updated data package that anyone can download here and which has a range of other helpful information on both the U.S. fintechs and the incumbents. The updated package has much of what we had last year plus a few newer elements:

  1. Market cap and stock price data for the fintechs and incumbents
  2. Comp sheets with financial metrics
  3. Data on the 20 fintech unicorns
  4. Information on the fintech “Brink list” — companies that have raised over $100M in equity financing
  5. M&A & IPO activity in fintech this past year

As always we appreciate your feedback and thoughts on the process and methodology. And we look forward to sharing our thoughts again in 2019!

Enterprise Payments: The next frontier for payments innovation

Towards the end of 2017, we discussed the rise of the FinTechs and briefly alluded to payments as being a key area for further innovation. The payments ecosystem is an ever-evolving space froth with opportunity and plenty of buyers with deep pockets (see Paypal’s announcement a few weeks back). Furthermore, it is a deeply intricate ecosystem with challenging technical problems, shifting regulatory components and a variety of consumer and enterprise use cases. For all these reasons, it is worth a “double click” to explore further.

We have already seen huge amounts of innovation in payments over the last few decades. In the U.S., this innovation was enabled by a few important advances. The establishment (and operation) of ACH by the Federal Reserve Banks and EPN created a much needed electronic network for financial transactions. NFC technology and POS hardware enabled mobile payments. More recently, pay-out APIs and fraud management systems have allowed developers and those working in risk to manage feature build-out while also keeping an eye out for bad actors. And we are just beginning to see some applications of crypto in the payments space — such as this.

Despite these advances, most of the innovation has been focused on two areas: consumer-to-consumer payments (e.g. Venmo), business-to-consumer payments (e.g. Square) or new entrants that facilitate one of the two (e.g. Stripe). A third category, business-to-business payments, has not benefited from innovation to the same degree as the other two categories. This is particularly interesting given that the market size of B2B payments is 5–10x that of C2C or B2C payments. And yet, technology has been slower to transform the B2B payments world. Case in point, B2B payments made by the good ol’ check, as a share of overall transactions, leveled off around 2013 at a point significantly higher than C2C and have actually gone up slightly to ~51%.

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Existing Challenges

In the early days of C2C and B2C payments, there were many intricacies from a technical and regulatory perspective that had to be navigated very carefully. After all, real consumer money was at play so the stakes were high. The same is true in the B2B world, with a few additional challenges that make things even more hairy:

  • Transaction values are significantly higher: While the volume of B2B payments is much lower (some say in the 9:1 range compared to B2B + C2C), the value of these payments per transaction is much larger. This makes enterprise transactions prime targets for hackers, front-runners and a host of others with bad intentions. Beyond the actual financial risk, enterprises also risk having the banking information of their suppliers and customers exposed.
  • There is greater complexity: In the enterprise payments context there is significantly more complexity. Let’s take the simple example of someone in procurement trying to pay a supplier. Post RFP, legal review, etc., the buyer will need to first work with the various business units and other internal stakeholder to issue a purchase order. The supplier must do the same in order to provide an invoice to the buyer. The buyer must then send a request to the card issuing bank (via p-card or some other mechanism.) The buyer’s bank must then handle settlement with the supplier’s bank. This may happen via check, credit, debit, ACH or even cash. Post-settlement, the buyer and seller must ensure that both their internal financial systems and/or ERP systems are accurately updated. Imagine the complexity involved when doing this hundreds or thousands of times per day across many different payment types (one-off, recurring, up-for renewal, etc.)
  • Many people are involved with any given transaction: As a result of the greater complexity, many heads are involved on both sides of the transaction. Procurement, legal, finance and the BU may all be involved at various stages. B2B payments affect the workflows of a much broader set of people than C2C or B2C payments.
  • The life cycle of a payment is longer: As a result of the added complexity and multiple stakeholders, the duration of the payment is longer than in the C2C and B2C contexts. C2C payments in today’s world can clear in a matter of minutes. On the enterprise side, the payment life-cycle can have a duration of 60, 90 or even 180 days.
  • The life cycle of a payment is longer: As a result of the added complexity and multiple stakeholders, the duration of the payment is longer than in the C2C and B2C contexts. C2C payments in today’s world can clear in a matter of minutes. On the enterprise side, the payment life-cycle can have a duration of 60, 90 or even 180 days.
  • The U.S. is not well structured for top-down fixes to B2B payments: When Europe moved to the Euro, all the participating countries did a significant overhaul of their banking systems allowing them to make significant upgrades to the tech stack. In the process, they solved a number of the pain points above (including significant reduction/ elimination of checks). But in the U.S., the Fed does not have the authority to mandate unified standards. Lack of standardization is particularly tough in the U.S. as we have many more banks than Europe (including regional and community players) — creating a major interoperability problem with few bank-agnostic solutions. Meanwhile, the U.S. banks themselves have made little attempt to create a common solution to fix the antiquated system.

Key Opportunities

While these challenges are daunting (they most certainly are not for the faint of heart!), the good news for new entrants is that the banks and other FIs are unlikely to be the ones to fix enterprise payments. We believe FinTech startups are best positioned to make progress here, bottoms-up. More specifically, there is an enormous opportunity to capture value in enterprise payments($2.1T in payment revenue by 2026) across 5 specific subcategories: (1) capital markets, (2) procurement, (3) treasury management, (4) payment dev-tools and (5) blockchain.

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  • Capital Markets: Many parts of capital markets (e.g. HFT, commercial lending, etc.) send/receive very large transactions each day. Most of the time these payments are slow, expensive and require manual reviews to ensure they are valid. In the HFT world, for example, every minute matters when making a trade and fees add up. Payments solutions that focus on speed and automation, without sacrificing security will do well here.
  • Procurement: In procurement, enterprises and their suppliers face the problem of trying to integrate procurement software tools, with ERP systems and antiquated payment processes. This problem is particularly challenging with services and in the “long-tail” spend, where some enterprises have to pay tens of thousands of suppliers each year. Solutions that integrate with existing software solutions, simplify the enterprise’s workflow and get the money to the supplier faster (e.g. lower DSO) will have the most success here.
  • Treasury Management: Initiating and managing ACH payments to other businesses, auditing those payments and then closing the books at the end of the month is still not straightforward. Software tools that provide solutions for both the finance and the tech team to navigate this process have a shot at building a must-have for anyone trying to get a grip on treasury management. Particularly for SMBs who don’t have the luxury of simply throwing more people at the problem.
  • Payment Dev Tools: Companies like Stripe and Plaid have created great APIs and financial plumbing tools. But they are largely focused on C2C and B2C payments. B2B developer tools / APIs that work for the IT and risk departments of enterprises and address the complexity therein will do well. Certainly a hairy problem to figure out but there is a lot of spend here for the right solution.
  • Blockchain: In the short run, blockchains have enough technical issues (e.g. scaling, interoperability, etc.) to work through. But in the long-run distributed ledger technology can provide a single database of truth between two enterprises, eliminating the need for ledgers on both sides and making verification/ security a bit more manageable. The real question from a B2B payments perspective is not “if” but “when.”

At Matrix Partners we are deeply interested in backing the next generation of enterprise payments companies. We focus primarily on Seed/ Series A investing here in the U.S. Please let us know if you are building something interesting here — would be great to meet up and learn more!

FinTech: We’re just getting started

Global FinTech investment in 2017 was unprecedented with $16.6B of capital (+20% compared to 2016) deployed across 1,128 deals. Despite this, some have argued that FinTech’s days are numbered and that it is less clear how much opportunity still remains for future innovation. Proponents of this line of thought argue that most traditional financial services have already been unbundled and that large startups that dominate areas like payments, lending, and investing have even begun to re-bundle services. Moreover, despite the uptick in investment into the sector, the early-stage portion of overall financing dropped to a 5-year low which has further supported the belief that most of the innovation in FinTech has already happened.

At Matrix, we believe that we are still in the early innings of the financial services disruption. While FinTech startups have done very well in the last decade, there is still room for more great companies to be built. As a follow-up to our previous article where we introduced the Matrix FinTech Index, we have put together a corollary to that piece where we specify 7 tailwinds that have powered FinTech innovation for the last 10 years, discuss key drivers for future innovation, and identify the subcategories we believe are most promising.

Review of 7 important tailwinds for innovation in FinTech the last 10 years

  • Mobile has been leveraged as an enabler: Companies like Squareleveraged mobile as a way to reduce the cost of doing business for merchants by allowing for new features like secure payments via mobile applications.
  • The financial crisis created unmet demand: Incumbent’s unwillingness to lend to credit poor individuals and high-risk SMBs created a window of opportunity for companies like Lending Club and OnDeck to fulfill this unmet demand.
  • The payments infrastructure opened up to developers: APIs and developer tools made available by companies like Braintree and Stripeallowed developers to integrate payment processing into their websites without the need to maintain a merchant account.
  • Online banking penetration unlocked important customer data: Deeper penetration of online banking has made it possible for companies like Yodlee to allow users to see all their banking information on one screen and others like Credit Karma to provide credit monitoring services.
  • Core financial services have been unbundled: Many sub-segments traditionally handled solely by the banks have been unbundled. For example, SoFi is helping with borrowing, Xoom with money transfers and Mint with financial management.
  • The cloud provided a new distribution channel to serve SMBs: Companies like Kabbage, which provides loans to SMBs, can now justify serving lower life time value customers like SMBs due to the lower customer acquisition costs associated with the cloud.
  • Digital disintermediation provided greater value to consumers: Companies like WealthfrontBetterment and Robinhood all reduce the fees charged by brokerages and traditional investment managers providing greater alpha to retail investors.

Key drivers for innovation in the next 10 years

Many of these 7 trends will continue to play a role in FinTech innovation moving forward. But we have identified 3 additional drivers for innovation in FinTech going forward.

1. Incumbent failures are really coming into focus.

Traditional financial institutions are anachronistic. They serve their customers with antiquated products and are often slow to innovate due to both their size and regulatory burdens. Moreover, financial products have historically not been customer-centric, as banks devote most of their resources to optimizing their data and analysis and boosting their bottom line. Consequently, incumbents in financial services have largely failed to meet the needs of consumers, and the emergence of FinTech has put their shortcomings under the spotlight.

Figure 1

While financial services as an industry has been notorious for low consumer trust levels, consumer trust has plunged even further in the wake of fraud, scandals, and data breaches (e.g. Wells Fargo and Equifax). Additionally, poor customer experience has left consumers with limited loyalty to their financial services providers.

2. Millennials are emerging as the new source of spending power.

Millennials are the largest generation in American history consisting of over 70 million people born between 1980 and 2000. Millennials are digital-first users who grew up distrustful of banks and are generally more inclined to try FinTech applications. Furthermore, while traditional financial services has focused on large pools of wealth characteristic of older generations, FinTech innovation is making financial services and products much more accessible to younger generations.

Figure 2

3. Due to the transition of profit pools, incumbents are going to become a lot more acquisitive in the coming months.

Incumbents have begun to acquire FinTech companies as a means to compete against innovative startups and other acquisitive incumbents. Many of the acquisitions so far have been centered around automation of basic tasks. In the last 5 years, 18 FinTech startups have been acquired by banks, with 8 acquisitions occurring since the beginning of 2017. We believe that there is much more opportunity and incentive to acquire — especially for technologies that go beyond automation.

Figure 3

5 subcategories we are most excited about

Ultimately we believe the incumbents will continue to lose ground to the FinTechs and that there is plenty of opportunity for entrepreneurs to build enduring companies in the sector. Great companies will certainly be built across the entire financial services industry, but here are a few sub-categories within FinTech that we think are particularly exciting:

  • Payments: Even with all the innovation to date in payments, there continue to be pain points throughout the category and many customer demographics remain underserved. In order to be successful in this category, new entrants will need to build on-top of existing payment rails, serve large TAMs and go after new use cases.
  • Investing / wealth management: Despite recent innovation by players like WealthfrontBettermentRobinhood and others, wealth management remains dominated by the incumbents. This reality makes the category a ripe one for entrepreneurs as there are large TAMs, poor customer experiences and a new generation (i.e. millennials) that have unmet needs. Success here will require intuitive design, low fees and efficient customer acquisition.
  • Infrastructure Apps: Financial institutions suffer from bloated cost structures in the middle and back office for tasks like fraud/ risk management, collections, invoice management and customer support. There’s an opportunity for entrepreneurs to provide software tools that reduce costs and allow for more efficient work flows if they can manage the lengthy sales cycles and procurement processes.
  • SMB tools: Companies like Gusto and Namely, have begun to serve SMBs in areas like payroll and benefits administration. Even so, SMBs remain largely underserved compared to larger enterprises. FinTech companies that can acquire SMBs efficiently and provide enterprise-level experiences will be able to generate enough value to their customers to create large outcomes.
  • B2B Lending tools: On the consumer side, lending has become pretty crowded with some of the winners already declared. But on the enterprise side, the category is very ripe. The opportunity for entrepreneurs is in leveraging data at cloud scale combined with advances in machine learning to allow enterprises to better assess borrower risk and drive higher yield.

The author would like to thank Sreyas Misra for his contributions to this piece.

California, I’m coming home

After a decade on the east coast, I’m excited to announce that I’ve returned back to the west coast as an early stage investor with Matrix Partners in the Bay Area. I’m beyond excited to be joining this incredible team to help invest and support the next wave of bold entrepreneurs.

The last ten years in Ithaca and then NYC have been transformative. I’m lucky to have had the opportunity to learn at a couple of great schools and then learn some more at the first few stops on my career journey. Most recently, while working in the High-Tech and Fast Growth Tech practices as McKinsey, I worked with a dozen companies on everything from marketing & sales to customer success to go-to-market strategy. It was rapid-fire exposure to many of the key challenges founders and management teams face in the early stages and as they scale.

While I enjoyed this experience immensely, I found myself wanting to work with founders earlier in their journey and over much longer periods of time. Being there with the entrepreneur as an advocate through both good times and bad is what makes a successful outcome all the more rewarding. So when the opportunity at Matrix opened up, I knew I had to go for it.

Matrix Partners has been quietly but consistently racking up wins for four decades over ten funds—a deep track record that few firms in the venture business can claim to have. In the early days, Matrix invested in the likes of Apple, SanDisk and FedEx. More recent investments include: Acacia Communications, HubSpot, Oculus and Zendesk. And there are some great companies in the portfolio well on their way like Lever, Namely, Quora and Activehours, among many others. The firm is also very well positioned internationally with presences in both India and China.

More important than this track record though, the team at Matrix is full of high quality people. The group has a diverse set of skills and a wide range of expertise (check them out here), but they share one thing in common: a deep commitment to supporting the visionary entrepreneurs who join the Matrix family all the way. And they do this with integrity, class and style.

I’m pumped to be joining this team, making the move back to CA and beginning to meet the founders and operators building the companies of tomorrow. If you’re embarking on this journey – let’s chat!

You can find me on LinkedIn, Twitter and Quora. I also actively write about technology, startups and investing on my personal blog here

Core & Emerging Platforms as we Move into 2017

Innovation at the platform level (whether it be improved hardware, changes in infrastructure or new ecosystems) has always led to new opportunity at the application level for both entrepreneurs and the investors that back them. As 2016 winds down and we look ahead to 2017, it’s as good a time as any to take stock of the innovation we’ve seen at the platform level in the last few years and the trends in tech that will drive new opportunity in application software.

More specifically, I see four core and emerging trends that will continue to dictate opportunity in B2B software: (1) continued dominance of cloud, (2) acceleration of mobile enterprise, (3) increased attention to AI (more specifically machine learning) and (4) the rise of AR & VR – particularly AR in the B2B setting. The figure below provides an overview that will be explained in further detail below:

tech-platforms

(1) Continued dominance of cloud

This is an “old” one but a good one. Of the four platform trends this is the most established one and has produced the most opportunity to-date.

From a horizontal perspective, the cloud has penetrated (though not yet dominated) every function within the enterprise. Salesforce is the prevalent choice for most in the sales / CRM functions. Companies like Workday, Cornerstone and SuccessFactors have gained real traction within HR. Eloqua, ExactTarget and Marketo are widely used marketing tools. NetSuite has a strong presence in ERP while Zendesk is a strong force in customer success. And there are many other more recent horizontal SaaS companies that have made big waves: Slack, Stripe, DocuSign and DropBox are just a few of many that had big years in 2016. And there are many more opportunities remaining in relatively untouched areas like: sales ops, SMB-focused HR tools, inventory management, market intelligence and customer care analytics.

Vertical software, is still very much in its infancy. There have certainly been some early winners like Veeva (life sciences), RealPage (real estate) and Fleetmatics (fleet management), but there are many more industry cloud winners to come. Industries like manufacturing, construction, logistics, agriculture, oil and gas and others have slowly begun moving to the cloud after remaining cloud-allergic for many years. 2017 will be a big year for many of these industries and the vertical-focused, category-winners that reshape them.

(2) Acceleration of mobile enterprise

Aggregate mobile enterprise revenue in 2016 was just under $100B –pretty solid for a platform that didn’t exist 10 years ago. However, this one is also just getting started. Forecasts show this number doubling by 2020 (and I wouldn’t be surprised if the growth rate is higher than that). Part of this growth is fueled by increased vertical software opportunities. Procore is a great example of a company delivering a vertical specific solution (in construction) via mobile enterprise. Industries like education, insurance and real-estate will soon follow.

(3) Increased attention to AI  

2016 really marked THE year when AI (or more accurately, machine learning) really came into focus in the startup and venture community. As seen in the figure above, deals done and investment dollars poured into the sector have grown exponentially in the last 2-3 years. In that time, AI has done a few interesting things:

  • It has re-opened the door in a real way to more horizontal software opportunities giving rise to the “disruption of the disruptors.” Suddenly, machine intelligence has allowed for greater insights and better products and services that opened the door to new entrants looking to enter horizontal spaces.
  • It has allowed for more focused solutions that really benefit from machine learning applied to large data sets to flourish. Little Bird (a market intelligence and data analytics company based out of Oregon) that was recently acquired by Sprinklr is a good example. AI powered point solutions like Little Bird, once bolted onto larger platforms (like Sprinklr’s social media management platform) can exponentially increase the utility to their enterprise customers.
  • It has brought back IBM’s relevance among innovators and early stage companies. Ironically, rightly or wrongly, IBM’s Watson is the most common machine associated with machine learning. Whether IBM is able to harness the potential of AI remains to be seen, but the company attempts to be mounting a bigger challenge to be a dominant presence in the space rather than giving way to the big four (Apple, Facebook, Amazon and Google) as it did with consumer devices, social, ecommerce and search.

Expect AI to be a powerful trend in 2017 and beyond, with both startups and established players getting involved, especially as the technological innovation becomes more advanced.

(4) The rise of AR & VR

AR and VR are the furthest off in terms of real platform potential and 2016 was largely a pretty big disappointment for these platforms. The biggest thing in AR/VR in 2016 was Pokémon Go, which was an entirely consumer play (and appears to largely have been a fad). I expect VR to still be a few years away from going mainstream –and even when it does, it will continue to be a consumer play.

That being said, I do think in 2017 we will see the start of some AR-based software applications that will gain traction among enterprises. And by 2020 forecasted revenues in AR will near $120B. Some of the important early verticals AR will start with will be healthcare, manufacturing, defense and architecture among others. Some of the early startups playing in these spaces, that I’ll be following in 2017 include: CrowdOptics, APX Labs and Pristine.

Grow fast or die slow: Why unicorns are staying private

In today’s world, technology companies worth more than $1 billion—and many worth $10 billion—have fewer reasons to go public than they did in the past. It’s a new paradigm shift that has really changed many of the dynamics in the startup community. A few of us in McKinsey’s High-Tech practice put together an article on the software IPO environment and the implications for founders and VCs. We hope it’s an insightful read.

The full article is available here.

Revisiting EdTech: Opportunities for 2016 and Beyond

It’s been a few years since I’ve written extensively about education technology and the opportunities that exist in the space. Since my last set of posts back in December of 2012, the space has continued to be a fast growing sector with much opportunity. Back in 2012, the sector was a $4.1T industry globally. That number just topped $5T in 2015 with a 7% CAGR. Unsurprisingly, the education sector remains the second largest industry, trailing only healthcare in terms of global market size.

Likewise, venture capital investment has picked up substantially in the last 3 years. In 2012, Series B investments totaled just $159M—that number is expected to top $500M in 2015 once the final numbers are published. Similarly, deal activity across all stages has picked up. In 2012, the total number of deals across VC/PE was ~500 deals—that number will reach nearly 800 deals by end of year 2015.

Most importantly, exits have finally begun to provide some hope for returns. A scarcity of exits has long been one of the big problems for entrepreneurs and investors considering EdTech. Indeed M&A activity has historically been slow (<1% of all M&A exits from 2002-2012) and IPO showings have often been abysmal (e.g. Chegg which fell 23% during its IPO debut and now has a market cap of just ~$620M, half of its opening day valuation.)

In the last three years, however, there have been a handful of successful EdTech IPOs including companies like 2U and Instructure. Others, such as Coursera, Udacity and Edmodo, are all not far behind in the IPO pipeline. M&A activity likewise has been quite strong. In fact, U.S. EdTech companies tend to command higher revenue multiples than the average tech exit—3.2x for EdTech companies vs. 2.5x for the broader tech industry. Furthermore, M&A exits themselves over the last 5 years have been fruitful with 25 buyers spending more than $100M on U.S. EdTech companies.

exits-1438648868.jpgSource: EdSurge

Yet despite this progress, there remain a wide array of inefficiencies and unsolved problems. Specifically, I see 6 promising near-term opportunities for entrepreneurs to take advantage of and for investors to invest in. In no particular order here are a few thoughts of what we will see beginning in 2016.

1) Cloud SaaS will finally replace on-prem at the school district and system admin level

Having spent time working at the district level in education policy, I was always amazed at how archaic many of the tools districts and school systems use at the city-wide/admin level. Software tools that track important mission-critical information such as attendance, student demographics, building information, zone data, etc. across schools within a district are still often hosted on-premise, using archaic databases and outdated software with GUIs that look like they were designed in the ‘90s. Below is an example of what the NYC DOE ATS currently looks like:

Untitled.pngSource: NYC Department of Education

I suspect that in 2016, as much of the IaaS and PaaS layers begin/complete their moves to the cloud through services provided by the likes of AWS, Azure, SoftLayer, etc, we will begin to see more B2B SaaS applications layered on top to replace the traditional on-prem software solutions. This will bring much needed functionality, analytics and a cleaner user experience to the education world. This in turn will increase productivity for educators working at the district and administrative level across school systems.

2) Learning content will be far more personalized

Recent survey data showed that less than 50% of teachers reported having digital resources that could be used to meet teaching standards. Moreover existing technology solutions often are not tailored to individual students and their specific needs. The next generation of student-centric software tools (across grade levels and subjects) will provide high levels of granularity and insight into the specific needs of individual students allowing for an end-to-end customized experience across lesson planning/ delivery, class activities and periodic assessments. This will be even more important for special needs students in ICT, 12/6:1 or similar learning environments. Personalizing learning content will ultimately allow for a more tailored learning experience and better long-term knowledge retention.

3) K-12 teacher development will rely more heavily on software platforms and tools

As it stands today, professional development for teachers is largely untouched by software tools and applications. At the district level, spend on professional development for K-12 teachers in the U.S. is ~$3B and usually takes 1 of 4 forms: (1) periodic school-wide workshops, (2) observation of other teachers, (3) coaching (usually by a more experienced teacher) and (4) generic online research.

In 2016, we will begin to see more PD content move to the cloud as doing so makes training teachers: (a) less expensive, (b) more accessible and (c) more personalized. Horizontal HR solutions like Workday, Cornerstone OnDemand and PeopleSoft will be re-built / tailored for the education sector enabling professional development in education to be more sophisticated and effective.

4) Higher education software tools will focus more on degree completion  

As the Baby boomer generations’ offspring (Gen X) move beyond the college-age window, the college enrollment growth rate will begin to slow and the focus for many higher-education institutions, from a revenue perspective, will shift away from recruitment/ matriculation and towards retention/ graduation. As of 2012, ~50% of all college students were in at least 1 remediation course.

In the years ahead, there will be a greater focus on retention and remediation of students already admitted into colleges. Software tools will increasingly be used for (1) recruiting the right type of student to admit, (2) providing BI and predictive analytics platforms for identifying and tracking high at-risk students and (3) supporting remediation instruction for at-risk students to get them back “on track.”

5) Online courses and degrees will become more relevant

While online courses (including MOOCs) and degree programs will never replace the off-line experience, these offerings will increasingly be used to supplement off-line instruction as well as provide a new delivery format to non-traditional segments (such as continuing education students). Two important trends are happening that will accelerate the pace at which this happens in 2016: (1) online courses and degrees are becoming more socially acceptable (many programs have been accredited, employers are increasingly hiring graduates from these programs, etc.) and (2) the infrastructure (managing enrollment, handling payment, providing tech support, hosting platforms, etc.) to provide these offerings is cheaper and more readily available.

As such, we will see a greater number of higher education institutions join the ranks of UNC, USC, ASU and many others that provide courses and degrees online. This trend will create a range of software opportunities across: video collaboration, course development and delivery, student / faculty services and recruitment / retention.

6) Demand for software tools that teach skill-based training will increase  

As colleges increasingly charge exorbitant tuition fees while failing to equip graduates will real skills, demand for skill-based programs, vocational certifications and other alternative teaching tools will increase. In 2013, the number of vocational certificates granted was nearly 1M—up 35% from 2005. Similarly, from 2013 to 2015, the number of graduates who graduated from coding programs (such as Codecademy) increased 630%+.

In 2016, we will see an even greater emphasis on tools for skill-based training. Some of this will be purely software delivered via the cloud and some will be more hybrid: software mixed with in-person training. Companies like Lynda (acquired by LinkedIn), Udacity, General Assembly and Udemy have already made significant dents in this space. We will see much more of this in the upcoming year.