How Follett Pursues Interdisciplinary Edtech Investing

04/24/2015 12:22 pm ET | Updated Jun 21, 2015

More than $2 billion in venture capital was invested in educational technology companies last year, and there are an increasing number of firms that are specializing in what is now a booming sector.

The most notable edtech investors include limited partnerships like Learn Capital, social impact-based investors such as Kapor Capital, and philanthropic entities including the NewSchools Venture Fund and The Bill & Melinda Gates Foundation. Educational publishing companies like Pearson Education and McGraw-Hill also regularly make direct corporate investments.

Corporations that make venture capital investments (in all sectors, not just edtech) are usually looking for some combination of financial and strategic returns. So while every firm is looking to invest in the next (which sold to LinkedIn earlier this month for $1.5 billion after raising less than $300 million in venture capital), other considerations include how a startup investment prospect can fit within a larger company's distribution system and overall approach to market.

While strategic investors understand marketing opportunities and how to leverage new innovations with their existing assets and sales channels, they are not typically specialists in private equity deal formation. The direct investment approach, for some companies, comes with complications.

"Corporate venture capital is fraught with short-term outlooks," explains Mary Lee Schneider, CEO of the Follett Corporation, a nearly $2.6 billion privately held educational publishing and software company based outside of Chicago. "There can be changes in management, lack of commitments and an attention deficit."

This is why Follett, which provides educational technology and content to 80,000 K-12 and higher ed institutions in the United States, partners with Silicon Valley-based Atrium Capital for all of its venture investments.

"We get calls from five companies a week that meet our mission and our goals," said Schneider. "That is wonderful, but also enormously distracting for us. With Atrium, we say 'here are our guard rails. Get to know our business'. It's important that they know what we want to do and don't want to do."

A "hybrid" venture model
Established in 2013 with a $50 million corporate commitment, the Follett Knowledge Fund typically invests between $1 million and $1.5 million in startups approaching a Series A round of financing. Money is allocated for follow-on investments in those companies. To date, the fund has invested in four companies, including leading the $3.2 million Series A round raised by Chicago-based ThinkCerca last month.

ThinkCerca, which develops web-based Common Core-aligned reading assignments and exercises for students in grades 4-12, was identified internally at Follett as a worthy investment prospect with natural partnership opportunities. Atrium, which also manages corporate venture funds for Samsung, Toyota and other companies, led the financial due diligence.

"We act as a virtual extension of Follett's innovation and corporate functions," said Russell Pyne, Atrium's founder and one of six General Partners who began working with Schneider years ago when she was an executive at RR Donnelley. "It's a hybrid venture model where we combine the domain expertise and resources from a company like Follett with the best practices of a VC firm."

Pyne said approximately two-thirds of the fund's deal flow is sourced by Atrium, which is networked into Silicon Valley and active in industry conferences like the ASU + GSV Summit and the International Society of Technology Educators (ISTE). The balance "bubbles up through the Follett organization", as was the case with ThinkCerca.

For Atrium, there are tradeoffs with this approach. For instance, what happens if the firm finds investment opportunities with enormous financial upside that are not strategic fits for Follett?

"That happens and that's too bad," explains Pyne, who said "there are a number of VC firms that would love to have a partner with domain expertise for due diligence that also has a powerful engine to support the deal."

Finding companies that support teachers in technical transition
In addition to ThinkCerca, the Follett Educational Fund is also an investor in Santa Clara-based assessment company ShowEvidence, adaptive learning platform, and teacher/student communication application ClassOwl.

A common thread shared by all of these portfolio companies is a mission to make teachers' lives easier - not more difficult - as they sort through all of the digital innovations becoming available (or are pushed upon them).

"When I have an opportunity to speak with teachers, they are overwhelmed with what they are seeing," said Schneider. "One thing they aren't getting is professional development."

In this environment (author's thoughts, and not derived from interviews) professional development for teachers includes not only support in learning to use education technology, but also guidance as to how to find teacher-vetted resources specific to their instructional goals.

As teachers develop better ways to discover digital resources that can help them with subjects ranging from sentence construction, to exponential functions, to civics and government, investors will have an even wider pool of prospects to target. There are tens of thousands of high-quality resources that can help K-12 teachers organize their classes and develop Common Core-aligned lesson plans.

The mission of the appoLearning PreK-12 educational search engine for teacher-vetted apps, videos and websites is to provide teachers with a starting place to identify, research and share the best ones for them and their peers.

The best teachers will find the best resources, which will ultimately attract the best investors.