Top Hat raises $22.5M for fight in publishing

Startup aims to disrupt textbook industry

Canadian education technology startup Top Hat completed a new round of funding to give it more firepower to go after textbook publishers such as Pearson PLC.

The $22.5 million round is Top Hat’s biggest yet and brings its total funding to about $40 million, the Toronto-based company says. New York-based Union Square Ventures participated, as well as previous investors iNovia Capital and Georgian Partners, among others. The funding values Top Hat at $185 million, according to people familiar with the deal.

Top Hat is one of a handful of startups trying to find ways to disrupt the traditional textbook publishing industry, dominated by companies like Pearson, Cengage Learning Inc. and McGrawHill Education Inc., which is owned by Apollo Global Management LLC. All of these firms have added digital educational materials to their range of products, but the transition has been rocky.

In October, Apollo put off McGraw-Hill’s planned initial public offering indefinitely after the publisher’s back-to-school sales were less than the company expected, people familiar with the matter said at the time. When McGraw-Hill initially filed to go public in 2015, competition from new entrants was the top risk noted in its prospectus.

Pearson followed up with its own bad news in January when it cut its profit forecast, reduced the dividend and announced plans to unload its stake in Penguin Random House to raise money.

Even as the big publishers work to increase the proportion of sales that come from digital products, they’re still largely dependent on physical books.

That’s a weakness Top Hat chief executive officer Mike Silagadze said he’s trying to exploit. He started by selling software tools to professors that help them engage their students, such as smartphone apps that let them tell lecturers in real time if they understand new concepts. The company, which launched in 2009, has two million students using its products.

The next step is to go after the textbooks and digital course content made by Pearson and McGraw, Silagadze says. In November, it launched an online content marketplace, where professors can create course materials and sell it around the world. The idea is to cut out the publisher and let professors sell directly to students and each other.

“It fundamentally breaks the publisher’s traditional model of producing content,” Silagadze says. “Our aim is to disrupt the paradigm the publishers have created over the last 100 years.”

The potential for building the go-to marketplace for educational content is what attracted Union Square Ventures, says Albert Wenger, a partner at the firm, which is known for making earlystage investments in Twitter, Tumblr, Kickstarter and Etsy.