The Next Generation of Leading EdTech Companies with Tory Patterson of Owl Ventures

Tory Patterson is the co-founder of Owl Ventures and is actively involved with all facets of the firm. As one of the early pioneers in the next generation of leading EdTech companies, Tory has led investments in some of the most successful companies in the sector. As a lead investor and board member he has played a hands-on role helping leading edtech companies across all facets of development including core definition and measurement of value proposition, sales & distribution, hiring, funding and eventual paths to successful exit.

Prior to Owl Ventures, Tory was a Partner at Catamount Ventures where he founded and ran one of the venture industry’s first education investment practices. Tory is a Pahara-Aspen Education Fellow and an Edmund Hilary Global Impact Fellow. He holds a B.A. in Economics from Williams College and an M.B.A. from the Stanford Graduate School of Business.

Recommended Resources:
🌐 owlvc.com
✉️ tory@owlvc.com

Transcript

Ben Kornell  00:55
Hello, Edtech Insider listeners. We are excited to bring a conversation to you with Tory Patterson, Managing Director of Owl Ventures. Owl Ventures is one of the if not the largest venture capital firms focused on ad tech with 2.5 to 3 billion in assets under management. Tory is the co-founder founded in 2014. He also sits on the board of directors for a number of edtech companies including Accelerate Learning, BetterLesson, Gather, Hazel Health, Kiddom, Labster, Newsela, Noodle, Quizlet, Rebel Girls, Remind, Subject and uLesson. Prior to Owl, Tory was a partner at Catamount Ventures, and he was a student at Stanford Graduate School of Business where this idea first was percolating. So we'll hear a little bit from Tory about the founding of the fund, where things are today and his vision for the future. excited to share with you our conversation with Tory Patterson.

Hi everybody, it is Ben Kornell here. And I've got a longtime friend, an amazing leader in the education space founder Managing Partner of Owl Ventures Tory Patterson, welcome to the show.

Tory Patterson  02:09
Thanks for having me, Ben. Good to see you.

Ben Kornell  02:11
Tory, let's just get started a little bit with your origin story. It's like, you know, and superheroes, you want to know, where did they come from? How did you end up starting our ventures? What was the inspiration? And really, what was that journey? Like?

Tory Patterson  02:25
Thanks for the question. Yeah, it's a fun thing to dive into. Because it's been a journey. It's the right word. So a little bit about me. I grew up on the peninsula in the San Francisco Bay area, I had a lot of advantages with my education. I went to private high school, I was lucky enough to go to Williams College, I joined Robertson Stevens, as an investment banker, right out of undergrad, I got to work in San Francisco and the finance business, I then went to Stanford Business School, again, an amazing break and blessing to get to do that. And then I joined a venture fund, a generalist fund, and one that was focused on impact, and one that was in this unbelievable growth mode. It was such a joy to be part of that small team and doing that work, I was lucky enough to get the opportunity to back some business school classmates. And the first investment I made at that point is a company called presence learning now called presents. And this was in like very early days at Tech. I mean, we were at sub 10% broadband penetration in public schools when we did that deal, but the value proposition was so unbelievably clear and abundant. efficiencies were all over the place. Like it was just one of these businesses, that it's unbelievable. It didn't exist earlier. But you know, for me kind of stepping aside a little bit, I spent a lot of time hanging around the new school ventures, folks at that time, this was 2007 to 2010. And I drew deep inspiration from what John Doerr, Brook Byers and others were doing. They're in that early chapter of new schools, which was basically to say, what if we took capital risk in education, and specifically curriculum and innovation in schools, in the same way that we took capital risk in all other sectors of the economy. But what would happen if we apply this crazy model of venture capital to this sector, and that was just a really inspiring experiment. And something that drew me in very deeply.

Ben Kornell  04:25
I remember hearing from Clay and Jack as they were talking about it. And it was one of those where, you know, providing speech therapy to kids who literally have no access to it. It was the only way you could do that was through technology, the only way you could actually meet that need. So this was in the origin days where we were looking around and saying, man, there's all these problems, how can we find scalable models to solve them? And so they were one of the OGs really.

Tory Patterson  04:54
They were unbelievably scrappy entrepreneurs. I mean, we did a lot with very little capital and the These days. And so just to give you a sense, like there's a company that had, you know, out of the gate revenue traction to, you know, unbelievable founders with incredible pedigrees and profiles, solving a problem in a super scaled market. And men getting money together to build that business was a nightmare. I mean, we raised money from foundations, from banks, there was no play to go up and down Sand Hill Road and raising money from venture capitalists for a company selling a product to a school district in those days was impossible. And so, you know, it was a really wide open field. So for me, that was exciting. And a little background, like, you know, my grandfather was a superintendent in King City in rural California. You know, most of my extended family were teachers who largely know that unified. So like, you know, my family story is one of, you know, a lot of Americans, which is, you know, folks immigrated here with very little in terms of education or access to the economy and through public education, over several generations built up a large and growing family that had, you know, meaningfully enhanced opportunities. And so, obviously, a deep family legacy and reverence for public education was where I came from, like a lot of people. So as we started seeing that market begin to unlock with companies like presence under the Obama administration. And my good friend, Ted Mitchell started to do things like taffy Ray pool of funding to subsidize high speed broadband, every classroom in America, we started seeing scaled infrastructure investment from the government that was going to essentially create a very, very big and exciting software market on the back of that infrastructure investment. So ad tech or software, broadly speaking, being applied to education has been artificially restrained relative to every other category of our global economy, due to this chicken and egg infrastructure investment problem. And so as the Obama administration started doing creative things to break that logjam, you know, I got very inspired that there was going to be a scale software market on the backside of that, that would not only be a fun market to build big businesses in, but it would be like a break in the dam, so to speak, in terms of a lot of these impact agendas, and all of the inefficiencies that were plaguing the system, boy, what an amazing opportunity to go play in that space. Right. So, you know, I made five investments out of that prior fund that was a firm called Catamount ventures. And that, you know, built a deep network for me in folks who were interested in funding tech in that very early cycle. And again, that was largely foundation capital. So programmatic related investments, these were for profit investments being made by foundations, because the impact agenda associated with each of these companies was so aligned to what they were trying to achieve with their grant work, that they kind of found a way to get involved in this funding ecosystem. So anyhow, I was very networked in that world. In 2014, I spun out of that prior fund and began raising l ventures one out, which was, you know, that was a very hard road. And we like to say, Oh, we started the firm in 2014, when I started raising that fund in 2011. Right, so this was several years to pull together. What in today's terms would be a very modest 100 million dollar fund one.

Ben Kornell  08:24
I can empathize. And in that fund, one was that where companies like Newsela, and some of the, you know, what we would say are kind of category defining companies, those companies were coming of age at that same time too, right?

Tory Patterson  08:38
We had a very good run in that fund. So we had what I'd like to say, sort of a pick of the litter, and that was a $100 million fund that got invested into nine companies. So we were investing kind of rough math, like five to $12 million into companies, which again, today that's like a seed round. Back then that was like game-changing ridiculous high risk capital concentration into ed tech companies. But I'll tell you what we saw. I mean, we really saw it there in terms of adoption. And we really saw the ability to unseat a lot of the analog incumbents that weren't delivering the value proposition that these companies could. So that fun one, we had some hits. So we were lucky enough to work with Jessie Woolley-Wilson and John Doerr and Reed Hastings on Dreambox.

Ben Kornell  09:23
And Jessie's just joined Owl as an operating partner.

Tory Patterson  09:28
So after 10 years of working together on that board, we're lucky enough to call Jessie a partner at Owl which is a very big deal for us. It's also a very big deal for you know, this next wave of entrepreneurs that are gonna get to work with her front and center. It's, I mean, for those who know Jessie, she is the real deal and impact is what she's about and she's built enormous scale and enterprise value, so we're gonna have some fun with her. We also were first money into Quizlet you know, we're, you know, led the series A and B for news ELA out of that fun panorama. We let this There is a panorama. I'm sure I'm leaving out a few. But like, these are all companies that went from pre revenue to, you know, essentially 100 or more million in revenue in the course of about five to seven years. So this was something that was not happening in the education space broadly prior to software playing a front and center role. So what I mean by that is like, why wasn't education a big venture category, prior to 2015, what was being sold to those institutions was largely print content. That is, like, you know, rough math, like somewhere between 10 and 20%, gross margin. So super low gross margin businesses were what was consuming the bulk of the spend in that category. As we moved all of that content, digital enhanced, it made it dynamic to two way interactive, all of the things that software can do, you know, we were selling 90 to 95%, gross margin software to those same spending buckets. So all of a sudden, you have a big incumbent unseat moment. So the kind of revenue acceleration that was possible with these companies was very high. And you have very high gross margin business models. So all of a sudden, you have the perfect formula, perfect storm, perfect recipe, so to speak, for venture returns. And what I would say is that that is held, right. So if you look at the bulk of the spend on education, obviously the vast majority is on people and facilities. But everything in the materials, consumables assessment, students support side, all of that is now being migrated from very low gross margin print things which were hard to track hard to understand their impact, very difficult to assess the efficacy to very high gross margin software solutions where all of those prior stated problems evaporate. And so they're very easy to track and manage and understand the use profile, the learning acceleration attributable to those products, etc. So, you know, again, I could ramble on about this for a long time, a little bit, you know, for this unbelievable power of capital to impact a category. So pick any industry vertical in our global GDP, right? You have pretty active capital markets, across all of them in the technology sector or the healthcare sector, you have unbelievably active venture capital markets, where you have a ton of capital, throwing a lot of ideas and solutions against the wall, people taking very enormous risk with the anticipation of very high return, that was not happening in education. So you had, you know, a handful of companies that were under investing in r&d, and essentially controlled that market, like it was an annuity.

Ben Kornell  12:42
Now, this is like the Rob Waldron story with curriculum associates. I mean, it literally was like a print shop out of like Western Massachusetts that's now become, you know, one of the digital learning leaders in the world. And not possible if we did not have the infrastructure, but also the shift in the ability of educators to adopt software, and administrators and so on. You know, you're a decade in, now we have a new shift, which is really around AI. And we've got a lot of folks speculating from these large tech companies OpenAI being one, you know, Microsoft and Google have longer experiences in education, where there's a sense of a new paradigm with AI, enabling education outcomes, you know, at this new decade, how does that shaping your view? And what is it reinforcing the kind of truths that you've known for the last 10 years? And where is it opening new opportunities?

Tory Patterson  13:36
Love the question. Well, let me kind of level up a little bit. And then I'll get down into the weeds on what we're seeing on AI and where we're inspired. Like, I think like a lot of markets, like the value proposition that is being discussed and demoed to users is unbelievable, right. So like, if you haven't seen the Khan Academy demos lately, go watch him. Like, I'm sure everyone listening to this podcast has seen them 100 times. But the value proposition that's being put on display there is extremely. And, you know, subsequently, the interest in the entire ecosystem is like, you know, peak excitement. And I'd say we are now, like, entering kind of step two, like from the investor perspective, excitement around backing AI ideas was off-the-charts time. So you know, us included, we backed several of them. And our strategy was to really find very accomplished very pedigreed AI experts who wanted to build an education and support them at the very early kind of inception seed stage. I'd say we're now kind of cresting into the classic, you know, like a little bit of the zone of disillusionment on like, where the business models are going to be. And so we're seeing a lot more skepticism. It's a lot harder to raise money for an AI product that doesn't have a pretty stated and compelling business model. And that's totally normal. We're in this sort of, like, evolving market cycle. I think we're gonna hear a lot of pests. Mazloum around the business opportunity in AI over the next 12 to 18 months, what's going to happen and all of that kind of uncertainty is someone who's going to settle into a business model. Like from where I sit, I don't see ad models being the right model. You know, so much of this early demand is a kind of free product. So again, like I think paid subscription out of the gate is going to be tricky. Like, I don't, I don't exactly see it yet. But I have a lot of faith that it's coming, right. And once we settle into these kinds of, you know, business models that are going to be applicable to a lot of different product types. And we're going to see an avalanche of investment behind all that the same way. We saw SAS, like, you know, finally a software platform that isn't a subscription model at this point, right, they hardly exist. And I think we're going to see a similar wave of coalescing around go to market strategy and business model for a lot of these, these AI tools. But right now, it's a little chaotic. So what I would say, as someone who's investing pretty actively in the space, I'm maniacally focused on the user value proposition. So I'm not trying to get ahead of ourselves on what is going to be the be all end all business model, I'm not making bold, you know, predictions that, hey, it's all going to coalesce around one vendor, or big tech is going to own this stack. And, you know, we are just backing people who are addressing the core problems that we have, you know, since inception, focused on student engagement, and leveling the playing field for students support, right, like how do we like radically up in the cost paradigm in tutoring, or one to one student support, you know, AI has unbelievable promise to basically knock those problems totally out of the water. And I think the way we have measured his students' success historically, we're gonna get really good at migrating students to those historical mastery of standard paradigms, right? Like, we're gonna get very good at supporting students through getting great grades. I think what's going to happen simultaneously is that we're going to totally shift what we expect of students and what we want to see from students and what we're trying to achieve as we develop young people. Right, so the end zone is going to move right in the midst of all this technology, basically solving all of our historical objectives. And that's okay, that's like natural evolution. And so, you know, for us, we stay focused on who's doing quality work, who is chasing long term societal benefit, not like near term test score accomplishment or things like that. But it's hard. Yeah. Again, let me just level up the history of the firm and how I've been thinking about it, right. It's like the first wave of this game was, you know, migrating content from analog to digital, and putting that on subscription revenue models created billions of dollars of enterprise value. Phase two is going to be, you know, working with these kinds of next level of technologies. Now that you know, the bulk of our curriculum stack and assessment cycle is on subscription revenue software now. It's now about integrating these next level technologies. And AI is like front and center of all that, of course, are you tough to talk to any AI expert, put them on a stage anywhere in the world, ask them to talk about the promise of AI and not have that conversation migrate back to education pretty damn quick. So, you know, it's fun to be working in a category where, you know, the world's most disruptive technology, certainly in our lifetime, maybe in you know, recorded human history, I don't want to get too crazy, is aiming its powers right at our space.

Ben Kornell  18:37
EdTech was really backwater, you know, a decade ago, and now it's one of the first three use cases that Sam Altman would use Reed Hoffman with. I mean, there's so much excitement about it. And it's not just us, it's also global. I know, your firm is globally focused, as you've looked outside the US, what dynamics are you seeing? Not just with AI, but just with Ed Tech in general?

Tory Patterson  19:03
Well, what I would say is, we're having a lot of success with a few companies in Europe, we're having a lot of success with a few companies in India, I'd say like this similar from traditional technology, we don't view Silicon Valley as having some sort of like, incumbency to win when it comes to founding and building it tech companies, like, you know, if you're gonna build like a traditional SAS business or network infrastructure company, like odds are, you know, you're gonna find the talent and the, you know, early high risk customers and all the things you would want to build those in those spaces in Silicon Valley. I don't think that's the case with that tech. So, you know, as we design our firm and design our practice, obviously, we have to have eyes and ears and be hyper open minded about investing in all regions. And so we've done that and we've had some success doing that. I'd say, the success we've had has reinforced our conviction that that is the case.

Ben Kornell  19:56
One more question on that just before we move on. You know, your reputation at owl is that you go deep with the companies that you invest in. And you're in many different markets. Is the hiring of Jesse and some of the moves you're making, really about the operating partnership? And how much do you think about the role of a venture capital firm sourcing deals versus actually supporting your portfolio? Just given where, where you are? And, you know, maybe it might have been different in year one, or fund one, where you are now in year 10? You know, your partner, a co owner, with the founding teams, in many of these companies, how has that affected your mindset for the firm

Tory Patterson  20:39
I'd say a lot is the short answer. Let me start off with you know, we've been a sector focus fund from inception. And we started at a time when there weren't many sector focused funds in our category, certainly ones that had, you know, been taking this like, kind of scaled approach to declaring like a shift moment in time around the opportunity set. So it's a long winded way of saying, we started the firm at a very opportune time, when companies, you know, basically, digital education businesses were able to build an upscale to generate the type of returns that enabled us to keep investing in this fund. So we started at a good time as kind of the most scaled sector focused on so deal sourcing for us. Now, we have a whole team that spends all day every day trying to uncover things that aren't coming inbound to us. But we've never really had to do the same things that generalist VC funds do in terms of how they set themselves up, and how they sort of invest their resources around generating deal flow, we've been very kind of blessed that we were a very small fish in a very microscopic pond, right? Like, you know, we are not getting ahead of ourselves on who we are in the world. But we were big relative to the industry that we were solely focused on. And so we've had a lot of, you know, that's basically taken the deal sourcing, stress, sort of off the table for us, like we've been blessed in that regard. So what do we do, we are sort of students of the venture capital game, right. And so we are cognizant of the fact that, you know, in any given fund, we're going to invest in, you know, our more scaled funds, now, we'll have anywhere from 20 to 40 companies in them, we think somewhere between two and five of those companies are going to generate all of the returns in those funds. So, again, we don't want to take small stakes in companies, because it's very important for us to, you know, build large ownership stakes in those ultimate two to five winners. And so how do we determine who are going to be those two to five winners in every fund, and boy, as we look back in our 10 year history, that model has really played out. And if you look at the returns across any venture fund in any category, that's how it's been, we don't think we're going to be different from that. And so to make these judgment calls early enough to be able to build significant stakes and really embed ourselves into those winning companies, there's no way around it other than to be hyper involved from the get go in everything. And, you know, we try to encourage founders that are off track, or unlikely to be able to build 100 million dollar revenue businesses to find homes for those businesses earlier than probably other venture capitalists would be encouraging portfolio companies to do that, right, we're trying to make sure that our loss ratio is very low. And subsequently that, you know, nevermind, the sort of portfolio approach, even on a unit by unit basis, that is generating Net Present Value optimized returns for all of the individuals involved. Because we're not playing this, like going for broke 28 zeros and two RINs strategy, really trying to, you know, optimize the outcomes for everybody who we work with.

Ben Kornell  23:49
Especially important in our sector to where, you know, some of these companies are delivering amazing value, but may not have figured out that economic model that makes them you know, a unicorn or a huge return, but without your partnership or capital wouldn't have gotten to the scale or impact.

Tory Patterson  24:09
By the way, back to your original question super briefly. Like we basically view our firm like everyone who is on the Owl Ventures team is there to help accelerate the growth rate of the companies we work with, like that is the measurement of value creation that's most creative to us and to founders. And so you know, whether it's Jessie or it's any of the unbelievable principles that we're lucky enough to work with, or Malvika who's who's like but boy if you haven't interviewed Malvika his podcast yet get her on.

Ben Kornell  24:36
We often share her reports with everybody.

Tory Patterson  24:41
She's the MVP in the room, but you know, everyone is dedicating their time to helping these companies grow faster. That's what we're doing.

Ben Kornell  24:47
So last question, given the state of the public markets and kind of how ad tech companies or education companies in general just have taken a beating recently. How do you navigate one you know a down trough in the sector? And what we've been seeing is that that public market depression has then kind of brought valuations down across the, you know, from seed to series, the, how are you navigating that? What advice would you have for folks that are in the space too?

Tory Patterson  25:17
Well, as an investor, like we don't try to time markets, right? Like, you know, of course, we can't help ourselves, but from acknowledging, oh, now is a down market and yesterday was an up market, probably tomorrow will be an up market again, that is like dangerous thinking for an investor. And again, I try to stay humble and really know my role, right. So all we do is back the best education technology companies globally at all times in all geographies in all states of weather. And so, so what I mean by that is like, we're going to invest in somewhere between eight to 15 companies a year in hot markets, and in what we're now perceiving today as being a software market, I'm not sure it really is right. And so, we are not trying to get too cute on market timing, what we are trying to do is maintain a steady pace across all year, vintages. And you know, if we can be in the top 10% of edtech deals in any given year. So let's say there's 20 deals that a year they receive notable venture funding, if we can be in, you know, the top quartile of those and concentrate all of our funds in the top quartile of those every single year, that will compound over time to generate, like, extraordinary returns for us. So our job as a fund is to put a compelling value proposition on the field to entrepreneurs who are having some success in the category to say, Hey, if you work with us, not only are we values aligned, as evidenced by our track, record, our team, the whole inception of the firm, everything we're trying to do. But if you think that we can help you go to market and generate sort of faster growth dynamics, build a better team, build a better long term business generate a better exit, we just have to be the best at that every single year. And hope they were smart enough to pick the top quartile every single year, and just stay in our lane and do that forever. I think the world will want a firm that is expert in this specific skill set for the next 100 years. And so again, I want this firm to be way bigger and have way more kind of lasting impact. And certainly the lifespan of my career, any of my partners careers, we want to create a machine that will continue to attract talent to execute this work. But always with a hyper focus on putting the number one product on the field helps entrepreneurs scale in this category. And so, you know, again, the public market stocks are down, I could point to check into. You and some of these historical names say, Hey, these are all bespoke problems. These aren't really like category killing trends or things like that. Again, it's not my place. I'm not a public market investor to say now's a good time now it's about time, I'm really just hyper focused on like, this is what we do. We stay in our lane, we're gonna do it for a long time. And we're committed to it.

Ben Kornell  28:10
Well, and that has to be part of the venture mindset, because your time horizon is seven years, 10 years, and you've got to be able to see the possibility around the corner. What a great and inspiring conversation. Tory, you know, when you started this 10 years ago, or actually, like you said, and more like 13 years ago, but when you start this, I mean, who could have imagined the journey that you would have been on and so it's really exciting to watch as you set off on this next decade. Thanks so much for joining us today. If people want to find out more about our ventures, what's the best way for them to find out?

Tory Patterson  28:45
Well, two ways. Go to our website owlvc.com or send me an email tory@owlvc.com The more the merrier. Please be in touch. We're here to help. It's like it's why we exist. So awesome.

Ben Kornell  28:58
Thanks so much. We'll talk soon. Thanks.