Fueled by an explosion of broadband access, education software and, of course, the irresistible allure of financial returns, investors across the world want a slice of the U.S. edtech industry.
Those are a few of the favorable trends that Tory Patterson, a co-founder and managing partner at Owl Ventures, believes has helped his team close a $185 million education investment fund in a “reasonably quick” amount of time.
The new fund (simply dubbed “Owl Ventures II”) will support companies that serve a broad range of learners, from preschoolers to professionals. Already it has invested in Tinkergarten, a platform for where parents can find outdoor classes for young children in their local neighborhoods, and Lingo Live, a language-learning tool for companies. Another company, Piper, offers a playkit where students can build and learn about computers. All three deals came from Owl’s second fund.
This new pot of money comes just two years after the San Francisco-based firm launched a $100 million fund in August 2015, which invested solely in K-12 companies (with one exception). All the capital from this previous fund has already been invested or allocated to support those portfolio companies, says Patterson.
Owl Ventures currently lists 12 companies in its portfolio. A handful of additional investments have not yet been disclosed.
This latest fund boasts backers from the United States along with those from Asia, Europe, the Middle East and South America. While some of them are “purely focused on financial returns,” says Patterson, “there are also strategic investors who want to identify leading software solutions with an eye of bringing them back to their region.” These financiers include endowments, foundations, family offices, education companies and a sovereign wealth fund.
“We’re seeing broadband deployment scale across the world, and an enlightenment from institutional investors to the fact that web-based software will be used globally in education,” Patterson observes. “The education market is becoming a global market, and global investors are eager to participate in that economy.”
The international cadre of limited partners may also nudge Owl to invest for the first time in a non-U.S. education company.
What will not change is Owl’s overall investment thesis and criteria. Patterson says his team still prioritizes three metrics when evaluating funding opportunities: product-market fit, monetizable business model, and the ability for companies to show quantifiable learning gains with evidence such as third-party randomized controlled trials. Those are the typical pre-requisites before Owl decides to lead a Series A and B funding round.
All of the companies in its portfolio are generating revenue, and roughly 60 percent of them “have the ability to elect to be profitable,” Patterson shares. They haven’t done so yet because “they’re electing to burn some more capital to double down on growth,” he adds.
Currently “some of the fastest-growing companies in the world, in terms of revenue, are edtech businesses,” claims Patterson. His bet is that “we’ll see a number of edtech companies cross the $100 million revenue mark and have the ability to go public.”
The majority of companies in Owl’s portfolio offer products and services to schools, ranging from web-filtering, scheduling and surveying tools to digital curricula for math, science and English language arts. Their ability to sell directly to K-12 districts is a testament to “incredible execution,” says Patterson, especially since these buyers are often notorious for their complex procurement processes and slower sales cycles.
It’s worth noting that not everyone in Owl’s portfolio is an overnight success. Quizlet, best known for its digital study aid materials, has been around since 2007. Dreambox, a provider of online math materials, dates back to 2006.
Still, other education investors are re-upping their war chests. Reach Capital, another investment group based in the San Francisco area that focuses on education technology companies, is raising up to $75 million for its second fund. New York-based Rethink Education recently partnered with a university and an accelerator to support early-stage edtech startups.
Through the first three quarters of 2017, U.S.-based education technology startups have raised just over $1 billion, according to our unofficial count. (That sum equals the total raised during all of 2016.) Our figure does not include companies that solely offer student loan refinancing services, such as SoFi, which raised $500 million earlier this year.
Another validation for the education sector’s financial attractiveness comes from private equity firms, which have taken a keen interest in acquiring education assets in recent years. Thoma Bravo acquired Frontline Education, a provider of school operations and administrator tools that had already acquired 10 other education companies since 2014—and will “absolutely” look for more. BV Investment Partners openly announced giving $150 million to Hero K12 to go shopping for edtech assets.
Participation from these groups “are a beautiful leading indicator of the financial attractiveness of education companies,” says Patterson. Private equity firms, after all, are cutthroat and excel at scrutinizing business metrics, identifying growth opportunities and maximizing profitability.
“The interest from private equity firms in the education market is unambiguous and clearly growing,” he adds. “That will further strengthen the case for early-stage edtech investing.”