This might be the worst time to grow a new company, unless that company is looking to improve the online experience of education.
That’s the bet that local venture capital firm SustainVC is making on a Philly-based company called Yellowdig.
That five-year-old start-up aims to create online learning that is as instinctive as conversing on social media. It has attracted online universities and brick-and-mortar schools as clients, and is among the few firms growing briskly amid COVID-19.
“Before the pandemic hit, we had about 50 enterprise clients and institutions,” Yellowdig CEO Shaunak Roy said. But after classes went online, “the amount of interest we received was almost four- or five-fold of that.” By year’s end, Yellowdig expects to double its client base to 100.
“Online education is basically the secret sauce that substantially reduces costs for people who want cheaper alternatives,” Roy said. “I think that’s where education is going.”
Yellowdig is the latest investment by SustainVC, a venture capital firm focused on social or environmental impact. Started in 2007 by Tom Balderston and Sky Lance, the firm, which has offices in Wayne, Boston, and Durham, N.C., launched fund-raising efforts enabling it to invest $250,000 to $1 million in more than 32 early-stage companies across the country.
At the end of 2019, SustainVC concluded fund-raising for the company’s new social-impact fund, totaling $27 million from outside investors. The company plans to invest those funds over the next five years, with a goal of backing 25 new companies.
Balderston says that money has been committed. “We’re fortunate to have completed our fund-raising in January before the emergence of COVID.”
But that doesn’t mean SustainVC’s investments have been unaffected by the pandemic. Balderston and his team helped their portfolio companies pivot to new opportunities. United by Blue, a local coffee shop meets retail store, is an early SustainVC investment that transitioned to coordinating deliveries of meals and groceries to families.
The pandemic affected how SustainVC approaches new investments, too. Eric Chapman, another managing principal at the firm, said that when evaluating new firms, SustainVC started to ask “Will these companies be having COVID headwinds, making things more difficult, or will they have a tailwind, and somehow accelerate their business?”
That’s how the firm found Yellowdig, now based at One Penn Center. As colleges shut down across the country, and instructors struggled to transition classes to online formats, investing in an online education firm seemed to be the perfect move for SustainVC.
Yellowdig provides schools with discussion board platforms, similar to those used by learning management systems such as Blackboard and Canvas. These boards allow professors to post questions to the class about a given topic, and let students respond. “Their main focus is to ensure higher learning quality,” said CEO Roy.
Roy, who grew up in Calcutta, earned a graduate degree in engineering systems from MIT. Part of his inspiration in creating Yellowdig was to help make education more accessible at a lower cost.
Current learning systems typically include features that allow professors to make sure all the right people are in class, and that everyone has access to a syllabus. But Roy thinks these platforms can be limiting and don’t pique student interest or encourage participation as much as live in-class discussions do, and he wanted to change that.
So Roy and his team added features that would allow students to react to each other’s comments with likes or follow-up comments, and to highlight certain responses with hashtags. He wanted communication on Yellowdig to have the flow of social media, and make it easier for students to learn the platform. “Social media is already so engaging,” said Roy. “And we wanted students to already feel used to it.”
There are more features too, such as individualized reminders to do assignments or a points-based reward system for good comments. Yellowdig has demonstrated that those features are successful through case studies at such schools as Arizona State University, which is an investor in Yellowdig. “We have studies which definitively show that if you use our platform, you can get 5% to 10% more students retained,” Roy said. That’s key because online courses tend to have much higher dropout rates than in-person classes.
Yellowdig’s recent success story is rare during a time when most businesses are struggling.
“Early venture capitalists are definitely still investing,” said Ellen Weber, executive director of Temple University’s Innovation and Entrepreneurship Institute. But “they’re looking really carefully at what we call the company’s runway.” Now more than ever, Weber thinks that investors are considering each company’s ability to survive over the next 18 months, and whether entrepreneurs can “weather whatever’s going to happen.”
Weber, who is also the executive director of angel investment group Robinhood Ventures, thinks that firms such as SustainVC are taking the right approach. “Sustain is part of a larger general movement in investment to focus on having a social or environmental impact while still obtaining financial returns,” she said.
Still, there are challenges to impact-focused missions. “You can either look at it as limiting, which is a negative, or you can look at it as focusing, which is a positive, because you get really good at what you do,” said Weber. While firms such as SustainVC consider a smaller pool of companies, they’re better at recognizing the patterns of firms that will be successful in those sectors. That’s why SustainVC chose to invest in Yellowdig now when there’s a greater need for improved online education, she argues.
“You may not see the Ubers,” said Weber. “But that doesn’t mean the companies you’re looking at can’t have a huge return, too.”