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The science of reading is a collection of decades of research from multiple fields of study on how children’s brains learn to read. It provides convincing evidence to inform how reading proficiency develops and how to most effectively assess and teach reading to improve student outcomes.

In recent years, more than half of all states have passed laws encouraging or incorporating the science of reading in classroom instruction, marking a major shift away from the previously pervasive balanced literacy approach.¹ This transformative movement is creating strong tailwinds for literacy technology businesses.

In this article, senior bankers from our Technology Group and Consumer Group discuss the trends driving investor interest in companies supporting a science-based approach to literacy, the differentiators of sector leaders, and guidance for those considering investing in the sector.

The Rise of Science-Based Literacy

Literacy test scores provide compelling evidence that new methods of reading instruction are needed. Of all U.S. students, 34% of children entering kindergarten lack the reading readiness skills they need, 65% of fourth graders read below grade level, and only 37% of high school students graduate at or above reading proficiency.²Science of reading-based approaches are replacing long-standing balanced literacy approaches at an accelerating pace as more states and districts mandate the shift. While this shift began several years ago, it has intensified as schools look for ways to gain ground lost during the pandemic and help struggling readers enhance their skills and test scores.“It’s a change that’s driven significant growth in many companies that were, at one time, serving a niche use case in literacy,” says Keck. “Solutions that were once considered supplemental are effectively becoming required in classrooms to help improve literacy across the country.”He adds that phonics is one example area of growth. “A number of founder-owned businesses have been providing phonics-based intervention solutions to help struggling readers who needed additional practice and remediation,” he explains. “The growing science of reading approach is driving accelerating demand for these solutions and investor interest.”The K-12 education technology landscape is also undergoing an unprecedented evolution driven by the rapid digitization of learning environments. “The shift to remote learning during COVID led to significant and continued investments in digital infrastructure initially supported by pandemic relief funds,” says Leed. “There is now increasing focus on digital teaching and learning platforms in literacy instruction, and other areas, which can serve the needs of children of all ages.”These two strong tailwinds signal both business growth and value creation opportunities in the sector.

A New Era of Investment Opportunity

Although science-based reading approaches and related literacy tech companies are both experiencing significant growth, literacy itself is not a new area of investment focus.

“The last significant wave was directed toward a series of adaptive reading platforms offering products designed to increase individual learner proficiency over time, such as Achieve 3000, Accelerated Reader, Read 180, and Newsela,” notes Keck. “We’re now entering a new era of investment opportunity around the science of reading.”

As literacy tech companies capitalize on the expanding need for science-based reading curriculums, investors are helping formerly bootstrapped companies build out more robust organizations. This includes adding direct sales organizations, investing in R&D and product development, and creating digital solutions.

“Many literacy tech businesses are focused on achieving scale, such that larger edtech curriculum platforms and publishers will see them as a necessary part of their portfolio to keep their core curriculum solutions relevant,” points out Leed.

At the same time, literacy tech leaders are rounding out their product sets to capture growing demand for tools supporting the science of reading. “Previously, many literacy tech companies were focused on just one part of the literacy spectrum, like phonics or vocabulary,” says Keck.

“Now we are seeing those businesses create broader solution portfolios that include expanded curriculums as well as decodable readers, which are books that align with and help reinforce phonics instruction,” he continues.

Leed adds that decodable readers present a substantial opportunity within the science of reading. “Entire school libraries will need to transform as they move away from a balanced literacy approach toward scienced-based approaches and tools,” he says.

Professional development also represents a large opportunity in this space. There’s a significant need to change the way that teachers help students learn to read while educating them on how to use new curriculum solutions and technology. The pipeline of new teachers graduating and entering the profession are often not well versed in the science of reading, creating long-term demand for these development programs centered around science-based approaches.

“The demand in professional development is such that we are seeing strong tailwinds for both the literacy tech companies as well as leading professional development focused businesses such as LETRS, part of Cambium Learning, and Lavinia Group, part of K12 Coalition,” shares Keck.

The growing focus on the science of reading has also been embraced by many of the leading early childhood program providers, tutoring companies, and after-school program providers. “These significant changes in literacy instruction are certainly on the minds of many parents, who want to ensure their students are as ready as possible for kindergarten and well supported if they are struggling with reading,” explains Spiller.

Key Considerations for Investors

Leading businesses in the literacy technology sector have proven track records of value creation, strong revenue growth profiles, and differentiated market positions. Their customer diversification provides low customer or contract renewal risk while their contract base and customer stickiness help assure predictable recurring revenue.

Given that many industry players began by serving a market niche, those with a large and actionable M&A pipeline to drive scale and expanded product and services offerings are highly attractive, says Keck. “This is an area we increasingly see on the radar of impact investors who want to target persistent learning deficits by supporting the buildout of capabilities and accessibility of solutions that improve student outcomes.”

To discuss M&A opportunities related to the science of reading, including the companies to watch in the space, contact our senior professionals.

1. www.ideastream.org/education/2023-02-23/the-evidence-is-clear-dewine-pushes-for-cience-of-reading-as-only-approach-in-ohio-classrooms

2. The Nation’s Report Card. Explore Results for the 2019 NAEP Reading Assessment. https://www.nationsreportcard.gov/reading/?grade=4