Education has historically been a high-risk, low-reward gamble for investors, who typically place small, safe bets in an unproven market.
But the first half of 2015 alone saw education technology companies raise $1.6 billion across 167 deals. The industry is ballooning—and so is investor confidence, as evident in the growing number of funds dedicated to supporting education technology companies.
One new investment vehicle is Owl Ventures, which closed a $100 million fund to support startups that have demonstrated product-market fit. “We’re looking for companies that are able to drive quantifiable improvement in student achievement,” says Tory Patterson, Owl Ventures’ co-founder and Managing Partner.
The San Francisco, CA-based fund will invest up to $8 million to lead Series A rounds, and contribute to Series B deals, for companies that deliver data-driven outcomes in US K-12 education. So far it has cast a wide net; current portfolio companies include Newsela, Panorama Education and Raise Labs, which respectively offer tools for literacy, school surveys and student scholarships.
Here’s a clearer investment criteria: “We are less likely to invest in companies that don’t have a clear revenue plan,” states Patterson. “I think the user metrics required to continue to fund a company that has no stated business model is astronomical and there are very few of those in this space.” Exceptions do exist: Remind, a communications tool used by 1 in 3 US teachers, has raised nearly $60 million from esteemed investors that include Kleiner Perkins Caufield Byers.
Patterson professes to be a “huge fan of the freemium model.” But it works differently for education companies than for consumer businesses that rely on users to self-upgrade to paid plans. Salespeople in edtech companies still play a major role, but they’re no longer cold-calling schools and districts. Rather, he observes, edtech startups are “pursuing a much more data-driven, lightweight, in-house district sales model, rather than relying on outside rep sales model that is very expensive and risky.”
That insight reflects Owl Ventures’ experience with investing in education industry. Most of the team came from Catamount Ventures, whose education portfolio includes Declara, MasteryConnect, Presence Learning, Revolution Foods, TenMarks and—full disclosure—EdSurge, where Patterson is a board member. Owl Ventures’ co-founder and partner, Jed Smith, founded Catamount Ventures.
Since 2010, a steadily growing number of investors, incubators and accelerators have helped many education entrepreneurs turn ideas into companies. Whereas many funding deals during the early years of this decade concentrated on seed-level investments, the industry has seen more robust activity in middle- and late-stage funding. That should come as no surprise; as companies mature, they demand bigger dollars to scale and grow. (Many others, it’s worth noting, have also closed up shop.)
Starting a new fund to invest in education was both “in sync with our personal values,” says Patterson, and financially attractive as well. “We were seeing the the performance of these companies rival high-achievers in other industries,” he observes. As part of the Catamount Fund, Patterson has seen Revolution Foods, which delivers low-cost, healthy meals to schools, grow to generate close to $100 million in revenues. And TenMarks, an adaptive math tool, was acquired by Amazon in October 2013.
Patterson expects other technology and media enterprises to “move aggressively into the education space” as potential acquirers. In April 2015, LinkedIn purchased Lynda.com for $1.5 billion. Entrepreneurs and investors are also eyeing Google, Apple and Microsoft as they jostle to expand their footprint in education. And traditional publishers like Pearson, which has sold several profitable businesses to focus on digital learning, will remain a major player in the acquisitions business.
But the industry has one major roadblock, says Patterson: “Student data privacy is a massive stumbling point.” As digital tools find their way into the hands of learners, the collection, use, and security of student data has become a paramount concern among educators and parents. Companies lacking proper safeguards have been duly criticized, losing trust and customers.
So far in 2015, 46 states have introduced 182 student data privacy bills, according to the Data Quality Campaign. These proposed legislations, which state how data can legally be used, carry significant ramifications for edtech companies that rely on such information to drive their products.
Investors are not sitting idly. Rethink Education, a White Plains, NY-based firm that also invests in edtech companies, has hosted “privacy bootcamps” for entrepreneurs to familiarize themselves with existing and proposed legislation. These gatherings also spur industry players to be proactive in earning public trust, with many looking to healthcare and banking as examples of industries that have established rules to protect consumer privacy.
“I’m highly confident that a set of privacy standards and protocols will emerge that will become widely accepted and adopted in edtech,” says Patterson. “This is not an unsolvable problem.”
