Edtech sector has sights set on graduating with large exits

Investor interest in edtech is expected to continue in a post-pandemic world, according to Tory Patterson of edtech-focused Owl Ventures, who says that we will soon see some good IPO candidates.

Pandemic-fueled school closures have been a boon for online education companies.

During the first eight months of 2020, investors poured $4.8 billion in edtech start-ups, surpassing the sector’s global venture funding for the entire 2019, according to CB Insights data.

Until this year, many venture capitalists had reservations about investing in education technology, says Tory Patterson, managing director with Owl Ventures, the world’s largest edtech-focused fund, which has amassed over $1.2 billion in AUMs since launching in 2014.

“Growing edtech is hard. We should avoid this category,” was the argument many investors made back then, Patterson says. “But the pandemic has opened up the eyes of a lot of investors and capital allocators to the magnitude of this opportunity.”

In September, San Francisco-based Owl Ventures announced that it raised $585 million across two vehicles, a $415 million fourth fund aimed at early-stage companies and a $170 million opportunity fund for supporting growth-stage companies in its portfolio.

LP demand for these funds was high. “We could have easily closed on a billion dollars,” Patterson says.

Valuations in edtech have increased and Patterson thinks it’s for a good reason. The sector is seeing an emergence of “of very high gross margin, hypergrowth businesses with an enormous total addressable market,” he says.

Riding the edtech boom

The edtech boom is expected to continue even when the pandemic subsides and students around the world go back to an in-person learning environment, Patterson says.

Specifically, Owl Ventures is anticipating significant user adoption in three major edtech categories:  international, K through 12 education and post-secondary learning.

According to Patterson, the most compelling opportunities are currently in international markets, especially in India and China. He says the countries have a high stakes-testing environment. If a student performs well, that could benefit their family for generations.

“As a result, per capita household spending on education is an order of magnitude higher than in the United States,” he says.

In fact, CB Insights data shows that eight of the top 10 funded edtech companies are based in China.

India claims the world’s most valuable edtech start-up: Byju’s. With its latest valuation of $10.5 billion, the online tutoring app has displaced the budget lodging provider Oyo as the country’s second most valuable VC-backed company.

Byju’s, an Owl Ventures portfolio company, which has also received funding from Mary Meeker’s Bond, Tiger Global and General Atlantic, has big plans. Byju Raveendran, Byju’s founder and CEO, has reportedly said that the company aspires “to be in kids’ learning like how Disney is to kids’ entertainment.”

Another significant edtech category where Patterson expects dramatic growth is K-12 education in the US. He notes that when the firm started six years ago, broadband penetration was at 30 percent, but is now at 100 percent in US schools.

“And we are rapidly approaching a one-to-one learning environment, meaning one internet-connected learning device, a Chromebook or an Apple, per student,” Patterson says.

He adds that now, during the pandemic, teachers are experiencing how digital tools can pinpoint exactly where a student is struggling with the material, which is valuable and actionable knowledge for time-pressed educators.  And since these modalities are also significantly less expensive than traditional textbooks, “I think school districts will be foolish not to continue adopting digital curriculum,” Patterson says.

Owl Ventures is an investor in a handful of companies in the K-12 category, including Newsela, an instructional platform, which is already being used by a large percentage of US schools.

Patterson now also sees a change occurring in the post-secondary education market.

“We have a huge student debt crisis in the US. I think a lot of people are saying, ‘the value of a degree both in terms of cost and time commitment is no longer what it used to be,’” he says. He adds that unless there is an opportunity to attend an elite university, people will start considering alternative career pathways through shorter, less expensive online programs.

Companies in this category include coding boot camps, such as Lambda School, which raised $122 million in VC funding. While Owl Ventures is not an investor in Lambda School or any similar company, Patterson predicts that in the coming years his firm will invest in companies that make college education more accessible and less expensive, through online programs in partnership with elite universities.

Exit opportunities on the horizon

Over the last five years, the edtech space has had only a few significant exits, but Patterson expects that to start changing quickly.

“When we got into this business, it was our presumption that the incumbents – McGraw-Hill Education, Wiley, Pearson and Houghton Mifflin Harcourt – would be voracious acquirers of innovative technologies. But for reasons that are still puzzling to me, that was not the case,” Patterson says.

He adds that these companies no longer have the balance sheet to afford many of the better companies in the category, including Duolingo, a language-learning app, which is worth $1.5 billion, or Coursera, an online education platform, which is reportedly valued at $2.5 billion.

According to Patterson, Owl Ventures now has upwards of 10 portfolio companies with about $100 million in annual revenue. “I’m very surprised many of these companies weren’t aggressively taken out earlier, and frankly, I’m thrilled,” he says.

Patterson believes that many edtech start-ups will soon be good IPO candidates. “We are going to see $30 billion to $50 billion market cap companies emerge. They will be of similar scale the incumbent publishers held in the past,” he says.

And the edtech companies that will emerge as leaders, will start consolidating other high-growth start-ups in the sector, Patterson says.

Some of this is already happening. For instance, Byju’s acquired White Hat Jr., an Owl Portfolio company, for $300 million this August. While last year, the Indian decacorn bought US-based Osmo, for $120 million.

Patterson also thinks that giant software companies such as Zoom or even Apple and Alphabet would want to be a part of this rapidly growing sector.

“This market is about to get turbocharged by the volume of students who are now inextricably linked to technology platforms. And we at Owl Ventures are having the time of our lives,” Patterson says.