The Long, Steep Fall of an Online Education Giant
Ed-tech company 2U, once worth over $5 billion, fights for its life after missteps in a difficult marketplace
Melissa KornMay 12, 2024 at 5:30 am ET
They had plenty to celebrate. 2U, which partners with universities to bring degree programs and other classes online, had a market value topping $5 billion and held lucrative contracts with schools including Georgetown University and the University of Southern California.
Six years later, the company is valued at roughly $30 million and facing an existential crisis. Its balance sheet is crippled by $900 million in debt, and some university leaders are looking for the exits.
The company’s executive team is racing to reopen talks with lenders. 2U also said earlier this month it continues to cut costs and is on track for revenue to grow again next year, and highlighted new contracts and partnerships.
2U set out to revolutionize education, bridging the divide between for-profit online learning and highly reputable universities. But with shifting student interests and fierce competition—including from universities that realized they could handle much of the operation in-house—it has struggled to keep up.
‘We were like a steamroller’
The initial plan was simple: design, identify students for, and operate online courses for elite schools, which would handle their own admissions decisions and provide faculty. The company would generally lock in long contracts and get 60% of tuition revenue.
USC jumped aboard with graduate degrees in education in 2009 and social work in 2010. Georgetown and University of North Carolina at Chapel Hill followed with nursing and business.
“We were like a steamroller,” said one former executive. “It was very, very difficult to slow us down.”
2U went public in 2014 and quickly expanded its roster of partner schools.
But the company struggled to replicate its early wins. Online tuition, which schools set, generally matched the campus versions of the same courses. As those prices rose, the programs became a tougher sell. With students’ shifting financial calculus, as well as changes to the world of online advertising and increased competition, marketing costs—which 2U generally covered—started to soar.
That pressure to lock in students drove admissions representatives to be aggressive, peppering prospects with calls and emails. Some former students have even sued, saying 2U and its partner schools misrepresented the programs or played down the potential cost of enrolling.
2U’s former chief executive officer, Christopher “Chip” Paucek, said 2U was wrongly accused of being predatory, maligned just because it was a for-profit company.
Meanwhile, the company hasn’t posted an annual profit since its initial public offering.
Paucek is known as a smooth salesman, with a few days of stubble, a casual-yet-polished wardrobe of blazers and jeans and seemingly boundless energy.
Culture was king for Paucek, who became 2U’s CEO in 2012 after teaming up with Princeton Review’s John Katzman to launch it in 2008. 2U touted guiding principles like “Have fun” and “Give a damn.” At the Maryland headquarters, the lyrics of Journey’s “Don’t Stop Believin’ ”—one of Paucek’s favorite songs—wrapped the walls of a staircase.
And each year, nearly all full-time staff were shuttled to a three-day gathering in spots including Las Vegas and Long Beach, Calif. They heard from students, buzzy executives, even Michelle Obama.
“On one hand, it was excessive,” said one longtime senior employee. “On the other hand, people loved working at the company.”
Storm clouds and an albatross
By 2019, the average enrollment in its biggest programs had fallen below 2017 levels.
The company tried shopping itself to private-equity firms in 2019 and 2020, but prospective buyers balked after seeing how much the company was spending to lock in new students, according to a person involved in the process.
2U began losing out on contracts to other companies like Katzman-founded Noodle and Risepoint, previously known as Academic Partnerships, which offered arrangements that allowed schools to just buy recruiting support or course development technology, rather than the soup-to-nuts packages 2U offered.
Former 2U CEO Christopher ‘Chip’ Paucek in 2014. Photo: Melissa Golden/Redux
In 2022, 2U started offering more flexible contracts. But by that point, some critics say, it was too late. And other competition was emerging from schools themselves, with newfound confidence after bringing courses online during the pandemic.
Through acquisitions in 2017 and 2019, 2U expanded into executive education and tech boot camps. In June 2020, 2U set its sights on acquiring edX, the nonprofit provider of massive, open online courses backed by Harvard University and the Massachusetts Institute of Technology. With edX, 2U could reach a global audience and lower advertising costs by promoting all of its offerings on a single platform.
2U secured $475 million in short-term financing to buy edX, but by the time the $800 million transaction closed in November 2021, borrowing was getting more expensive.
While noting “the strategic rationale for edX is well intact,” Paucek said “in hindsight the decision to use debt was a mistake.”
The company refinanced some loans in early 2023, pushing back a crucial due date by two years, but failed in another effort to ease the burden last fall.
The University of Southern California was 2U’s first contract, with graduate degrees in education in 2009. Photo: Mario Tama/Getty Images
Meanwhile, the company’s oldest client was becoming a drag on its reputation.
USC’s master’s degree in social work was a lightning rod, leaving students with six-figure loans and low-paying jobs for what many said was a subpar product. A 2021 Wall Street Journal investigation into the program led to inquiries by lawmakers and heightened scrutiny of the revenue-sharing model on which 2U relied.
Executives say the company regularly pressed schools to moderate their tuition increases and highlight lower-priced offerings like a $10,000 master’s in artificial intelligence at the University of Texas at Austin.
A new era
Last November, 2U and USC said they would unwind nearly all their partnerships. USC paid 2U $40 million, which a person familiar with the arrangement said covers the tuition revenue the company would have received for students it had already recruited.
2U earned $26 million from another divorce last fall, but it declined to identify the school. It has quietly unwound other relationships, including with Tufts, American and Baylor universities, in recent years. 2U declined to comment, citing mutual confidentiality obligations in its university agreements.
Longtime partner UNC has also soured on the company, according to a confidential March internal audit viewed by the Journal. UNC ended the contract for its accounting program and plans to terminate one in public administration. The master’s in public health and M.B.A. want to break ties, too.
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The audit said 2U’s marketing plans were vague, enrollment projections were overly optimistic, and the quality of its course production was on the decline. According to the audit, UNC has “no intention of signing any new degree programs for services from 2U.”
The company announced Paucek was leaving in November, as revenue continued to flag. By the end of last year, enrollments in the degree programs were down 30% from their 2022 peak. And the company’s share price has slumped so low that it is in danger of being delisted from the Nasdaq.
Paul Lalljie, who took over the top spot after serving as chief financial officer since 2019, remains optimistic in what he called the company’s “shrink-to-grow strategy.”
2U leaders have been meeting with university presidents, trying to assuage fears about an imminent demise.
“We’re all waiting with bated breath,” said one president whose school partners with 2U. If the company can’t invest in marketing the programs, the president said, “that could lead to a slow death for everyone.”
Longtime partner the University of North Carolina at Chapel Hill has soured on 2U. Photo: Jonathan Drake/Reuters
Lisa Bannon and Laura Cooper contributed to this article.