How Can Startups Set Themselves Apart in the EdTech Arms Race?

“There is nothing quite like adoption to signal success.”

Trace Urdan, Managing Director at Tyton Partners Investment Banking

The education technology sector is experiencing a renewed wave of activity as artificial intelligence continues to reshape classroom learning, administrative workflows, and student engagement models. Investments in edtech startups globally have seen a 290 percent total funding growth over the last five years.

However, the landscape has changed. Early enthusiasm around AI-driven education platforms has shifted into a more cautious phase. As AI tools become increasingly commoditized, investors and district buyers alike are placing greater scrutiny on evidence of outcomes, operational value, and adoption rates. In a crowded field where AI is now the baseline, the true differentiators are effectiveness, defensibility, and scalability.

To better understand how startups can differentiate themselves in this hyper-competitive market, we spoke with Trace Urdan, Managing Director and education investments expert at Tyton Partners. Urdan has closely tracked this shift and has direct insights into what today’s market demands from early-stage companies aiming to survive, scale, or exit successfully in an increasingly saturated environment.

Trace Urdan is a managing director at Tyton Partners and has followed the Global Knowledge market for nearly 20 years.

He has spent much of his career as an equity research analyst covering the Knowledge Services sector, most recently as a managing director at Credit Suisse. Prior to working in the institutional investment industry, Trace was the CFO of the information, communications and entertainment practice at KPMG Peat Marwick. Prior to that, he held a number of senior management positions within Time Inc. Asia in Hong Kong.

Urdan is primarily focused on developing new relationships in support of the Firm’s banking and consulting practices and extending its sector thought leadership through various research, publishing, and presenting initiatives. He is based in San Francisco, CA.

During his career, Urdan has followed a wide range of companies serving the education market, including early childhood, K-12, higher education, and employment training. He is widely cited as an expert on the topics of for-profit education, education technology, and education policy. He has been cited by Career College Central magazine as one of the 25 most influential people in the career college sector, testified before the Spellings Commission on the Future of Higher Education, and authored a white paper for the Kauffman Foundation on the topic of higher education regulation.

He received a BA degree from Yale University and an MBA from Harvard Business School.

The explosion of AI tools in education has made innovation easier to claim but harder to prove. In the early waves of excitement, startups rushed to add machine learning features, hoping to ride the trend. Today, that is no longer enough. Real success now demands something far more difficult to achieve: meaningful adoption.

For edtech startups targeting schools and districts, the bar is especially high. A product must either save administrators money, save teachers time, or deliver such extraordinary instructional results that its value becomes undeniable. Without meeting one of these core needs, even the most technically impressive platforms often struggle to find a foothold.

“There is nothing quite like adoption to signal success,” says Urdan. “For a school-based sale, it matters whether the product saves money for administrators or saves time for classroom teachers. If it does neither, and is intended as an instructional innovation, then its efficacy has to be exceptional.”

That reality reflects a broader shift in how districts evaluate new tools. Budget pressures, staffing shortages, and heightened scrutiny over learning outcomes have forced decision-makers to be more selective. Flashy AI features are no longer persuasive on their own. District leaders increasingly prioritize practical solutions that integrate into existing systems, reduce friction, and show evidence of real-world impact within months, not years.

Startups that recognize this environment are adjusting their strategies. Rather than focusing solely on technical sophistication, the savviest teams work early to build pilot programs, forge district partnerships, and generate organic momentum that proves their relevance. In a market saturated with ideas, the companies that will survive are the ones that can demonstrate, convincingly and repeatedly, that they are solving real problems.

In today’s edtech market, adoption is not a checkpoint along the way to success. It is the foundation for everything that follows.

In the rush to capitalize on AI’s promise, many edtech startups have fallen into a dangerous trap: believing that technical features alone can create a sustainable advantage. The reality is harsher. As AI capabilities become standard across the industry, innovation is no longer just about who can build; it is also about who can endure.

For early-stage companies, defensibility does not come from branding, distribution muscle, or broad platform integration, the typical advantages of incumbents. Instead, it must be forged through continuous innovation and an unrelenting focus on delivering better outcomes. Simply being cheaper, safer, or more familiar than competitors may not be possible for a startup operating without the resources of established giants. In those cases, the only viable path is to be unmistakably better.

“Start-ups lack many of the defensive characteristics available to well-scaled incumbents in terms of brand and distribution,” Urdan explains. “So really the only way to protect against competitors or substitutes is through innovation.”

This creates a difficult but clarifying challenge. AI may lower barriers to entry, but it also flattens differentiation. District leaders, educators, and even consumers have learned to expect AI-powered personalization, adaptive learning, and automation as basic features, not premium offerings. What separates a meaningful product today is not that it uses AI, but how intelligently, how efficiently, and how transparently it applies that technology to solve real educational problems.

Startups that treat AI as a foundational tool, rather than a marketing point, are better positioned to create defensible value. This might mean developing proprietary datasets that improve personalization, building specialized integrations that ease adoption into school systems, or creating workflows that genuinely reduce cognitive or administrative load for users.

In an environment where AI itself has become a commodity, the true differentiators are excellence, precision, and a deep understanding of the problems being solved. Without that, even the most sophisticated technology risks becoming indistinguishable from the competition, and ultimately, replaceable.

For many edtech founders, the instinct after raising a successful early round is to scale aggressively: build a large sales team, expand distribution channels, and chase bigger deals. Yet in education, where procurement cycles are slow and customer acquisition costs are high, that approach often backfires.

Urdan warns that over-investment in direct sales is one of the most common and costly mistakes he sees at the Series A stage. “You need to begin with the end in mind and ask whether you are investing in infrastructure that your acquirer will ultimately value,” he explains. “If your most likely exit is to sell to an existing company with its own distribution, every dollar you spend building a redundant sales structure is wasted.”

This strategic lens shifts how early-stage companies should think about growth. Rather than trying to mirror the operational model of larger incumbents, successful startups focus on proving their product’s appeal and efficacy at a smaller, more strategic scale. A few strong district partnerships, high-usage pilot programs, and documented success stories can do far more to attract acquisition interest than an expensive, sprawling sales force.

The appetite for platform companies, those aiming to own a broad ecosystem of tools, has diminished as well. Investors are increasingly skeptical of startups that overpromise platform ambitions without the resources to achieve them. In today’s environment, specialization and clarity of value often trump breadth.

Recent acquisition trends reflect this reality. In 2024, while overall M&A activity in edtech declined, early-stage acquisitions held steady. Strategic buyers are seeking solutions that complement and strengthen their existing portfolios, not competitors building parallel infrastructure. Companies that position themselves as plug-and-play enhancements, rather than challengers requiring heavy integration, have a clear advantage.

For startups, the lesson is simple but not easy: scale with discipline, not bravado. Focus on building assets like technology, adoption, impact, that a future acquirer would find irresistible. Growth for its own sake is no longer enough. Smart growth, tied to clear strategic outcomes, is what sets successful edtech companies apart in a market that rewards precision over scale.

The future of education technology will not be decided by who can build the flashiest features. It will be shaped by who can solve real problems better, faster, and with lasting impact. In an industry where AI is now an expectation rather than an advantage, startups must move beyond technical novelty and focus on operational relevance.

Urdan advises early-stage companies to think carefully about their position in the broader ecosystem. Innovations that enhance what large, well-resourced incumbents are already doing, rather than attempting to displace them, are far more likely to find success. Startups that understand the buy-versus-build calculations happening inside major players can craft strategies that align with market realities rather than fight them.

This perspective requires discipline. It demands that founders prioritize adoption over awareness, impact over aesthetics, and strategic exits over premature scaling. It means focusing on what makes their product indispensable to existing systems, not just exciting in a demo or a pitch deck.

In a landscape crowded with ideas but short on durable execution, the winners will be those who understand that technology alone is not a moat. The true defensibility lies in creating solutions so valuable, so clearly integrated into education’s evolving needs, that larger players see them not as competition to beat, but as assets to acquire.

For startups navigating today’s edtech market, the challenge is steep, but the opportunity for those who move with clarity and conviction has never been greater.