April 21, 2021 – On today’s podcast, we welcome special guest Chuck Cohn, Founder and CEO of Nerdy, a leading direct-to-consumer, curated gig economy platform for live online learning benefiting both learners and experts. Nerdy recently announced a merger with SPAC TPG Pace Tech Opportunities in a deal that valued the company at $1.4 billion.
On the podcast, Chuck discusses:
- The founding of Nerdy and how the business developed over time
- What attracted him to the online education industry
- How the pandemic affected Nerdy’s growth prospects
- Insights into the deal with SPAC TPG Pace Tech Opportunities
- The investment case for the stock
- And more
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.
Julian Klymochko: All right, we are alive with Chuck, from Nerdy. Happy to have you on The Absolute Return Podcast, so welcome. I wanted to kick things off with the name. I mean, that’s a super unique company name, Nerdy. What’s the story behind that? Where did it come from and how did it develop?
Chuck Cohn: Sure, well first. Thank you for having me on. Excited to be here and have the opportunity that tell the Nerdy story. So, a good question to kick us off. So Nerdy means to be characterized by an obsessive interest in something, especially in technology. And so, at Nerdy, we’re really passionate and obsessed with transforming how people learn and that name really defined how we thought about the future of learning and the place that we can actually have [Inaudible 00:00:47]. And it represented an opportunity to speak to the bigger idea that we’re going after. One, where you can actually help people learn in any subject, anywhere and in any time across any learning format.
Julian Klymochko: Interesting. And you’re all about learning, education, online education industry. What attracted you to that specifically? Did it start as a passion project? Was this something that you’ve always been thinking about? What led you to ultimately start up Nerdy?
Chuck Cohn: Well, I started the company based on my own personal experiences and frustrations finding the help that I needed when I was in college, I was studying for a calculus course. I knew that I needed personalized help outside the classroom, and it was quite difficult to find the help that I needed in town. And the realization that I came to was that there were many students across all ages, across all subjects who needed more assistance that was personalized, and that there was an opportunity to leverage technology in such a way where we could provide a higher quality service at a lower cost and more convenient setting. And that was the genesis for starting the business about 14 years ago.
Julian Klymochko: So, it’s really been a long-term commitment and I guess you started this right out of college. I was interested in learning about, you know, how that developed early on just browsing to your career history. You had a stint as an investment banking analyst, which is always interests us because both Mike and I started on that career path as well. So how did the business develop from an idea in school to perhaps, you know, something part-time and now, you know, a fully legitimate company worth over a billion dollars undergoing a going public transaction?
Chuck Cohn: Well, it started with having a problem that I thought needed to address. A really important and acute problem that I thought I could actually tackle and do good on. And so very modest beginnings on a college campus and an introduction of entrepreneurship course and kind of got the product market fit right at first. Finding solutions that leveraged technology to personalize learnings to deliver more value and to remove a lot of friction related to discovery that had historically been present in the model. As we kind of ramped up very early on, you know, I realized I needed to get a job. I went to work in energy, power, and investment banking, and then I actually spent three years in healthcare, late-stage venture and private equity and the whole time, and tried to learn a little bit during the day, come home at night, try to employ some of those learnings related to, how we could leverage technology and how I could build a team in such a way that we could actually go after that big opportunity.
And so, at the end of 2011, I realized I had become the big constraint to growth and that there was just a tremendous opportunity here and started focusing on it Full-Time. And then in 2013, 2014, there were a couple of big technology shifts that allowed for us to take advantage of the ability to send audio and video packets, peer to peer in a browser-based setting. And that was a pivotal moment where I realized that it was going to become possible to digitally enhance what had historically been an offline service and improve it in ways that it just previously hadn’t been possible. That’s when I went out and raised institutional capital and recruited a world-class team who had some of that pattern recognition and really went after that big opportunity.
Julian Klymochko: Right. So, education, obviously a massive total addressable market. You have the product market fit that you figured out as things developed. Let’s talk about the service that you offer, the learning platform that really helps your customers attain their goals. What’s really been the key to success thus far? Because as we all know, there’s a ton of different options to get what the customers want, which is to learn the skills necessary to accomplish their goals.
Chuck Cohn: Sure. So, the thing that we’ve done that’s really unique is figure out how to scale high quality live instruction and deliver it through a single cohesive learning destination. So, you know, it’s not hard to deliver a service with one individual. Once you start getting up to a thousand or ten thousand or a million, that’s where it becomes immensely, immensely complex, and you need to take a software-driven approach to how you scale it. And what we’ve done, that’s really unique is be able to use software. Hold a really high bars relates to live learning and the personalization and the quality that is related to it, and then also bring together multiple different learning formats. And so, from the consumer’s perspective, you can learn any of the three thousand different subjects. You can learn in a one-on-one setting in a small group class, 5 to 25 people. In a large format, class 500 to 50,000 people, or you can do self-study, including using adaptive tools. And so, the net effect that’s been really exciting is that when we brought together all these different ways of helping people, we’ve been rewarded with really deep relationships with customers, really strong retention and accelerating growth.
Michael Kesslering: So, you really highlighted what the value proposition would be from a consumer’s perspective, 3000 thousand different topics that any of us can learn on. It’s a double-sided platform. What about from the perspective of the experts? What’s the value proposition from their side?
Chuck Cohn: So, from the expert’s perspective, they’re drawn to the opportunity to work with students, make supplemental income. Not have to be all the marketing and sales associated with running your own business. And we make it really easy to do high-quality and meaningful work from the comfort of your own home, that is intrinsically rewarding. And so, people are drawn to the platform because they like instilling their knowledge in the next generation of people. It’s one of the few jobs you can do from home that is very rewarding. You can do an off hour, and we can really take advantage of the full educated workforce in the United States. And we can offer them this really attracted the ability to do meaningful work in kind of off hours.
Michael Kesslering: That makes complete sense. And so, from an expert’s perspective as well, like how much are some of these experts earning on average?
Chuck Cohn: For most people, it’s a barely supplementary job. So, there’ll be an engineer by day and then teach calculus on the platform at night, or maybe they’re a teacher by day and teach elementary reading at night. And so, it really varies. And so, depending on the complexity of the subject, there’s kind of a varying amount they can earn. More complex subjects that to allow them to generate more revenue and then separately in the class setting, because we now have all at 5 or 10 or 20, or even 25 students in some of these classes, the actual amount that they can generate them is also higher. So, depending on complexity of subject and number of students in the class. That can allow them instructors on the platform, for experts on the platform to generate substantial income.
Michael Kesslering: Interesting. And then in terms of being the learner, I guess. There’s a certain amount of trust that the consumer puts in the platform where curation of a group of experts is really important. As I understand you are using some, some AI to help with some of that matching and curation. Can you go into that in a little bit more detail?
Chuck Cohn: Sure. So, this is a category that’s really unique in that there’s really only demand for high-quality service and it’s not commoditized. So, people come to our platform because they’re looking for an expert in the truest sense of the word, and that then requires that we’re able to consistently deliver high quality live instruction at scale. And so long ago, I used to go to a coffee shop and personally interview each and every perspective expert and tutor on the platform. Give them a diagnostic test. They would actually do a mock lesson plan. Talk about their past experiences and why they thought they would do a great job working with students. You know, background check, test scores, you name it. And eventually, if they’re really good, they would get access to the platform.
And that was very labor intensive. And so, what we’ve done over the course of many years, to start investing in technology, including process automation, including machine learning, including leveraging computer vision and other technologies, where we actually leveraged those throughout the entire experience, to make sure that we’re getting great experts on the platform. And then allowing those experts to work with a learner who could very specifically benefit from their own expertise. So, we have machine learning, matching algorithms that actually take into account over a hundred different variables that allows us to personalize the match for a given learner. And what we find is that when we get that match, right, it has a profound impact on the learner satisfaction with the retention on the platform and the extent to which they get value. And so, as we’ve gotten signal, related to some of those things over the years, we’ve really leaned into leveraging a software driven approach and particularly machine learning driven approach, wherever we can.
Julian Klymochko: Yeah, what I find fascinating. And you mentioned the concept, a number of times, machine learning, artificial intelligence, and how advanced those platforms are getting, and looking out into the future, say probably still a number of decades away, but do you envision a future in which there, perhaps you don’t need human experts? Like I wonder if software could do the teaching, do you think that will ever happen?
Chuck Cohn: Well, I think there will be a confluence. So, the way we think about it is, we’re trying to give experts and learners super powers that simply are not present in the offline world. And so, we’re going to continue to enhance that digital delivery, arm them with content and capabilities that you just couldn’t get in an offline role. That our expectation is that over time, the Delta between the experience you get, either on other platforms or offline will grow and that there will be an opportunity to enhance it with technology and AI in such a way that eventually in the fullness of time, those experiences become blended and it’s markedly better than what you could get from any kind of unaided solution outside of the platform.
Julian Klymochko: Yeah. So, let’s discuss alternatives. There are obviously many ways to learn out there. You have a number of competitors, Chegg [Inaudible 00:11:50]. How does Nerdy differentiate itself? And do you want to walk us through the competitive environment and like what’s your value proposition versus some of your main competitors?
Chuck Cohn: Sure. Well, the companies you referenced are quite different, but what we do, that’s very neat is, live learning at scale for a software driven approach. So, we’re providing this high-quality experience that from the consumer’s perspective feels very high touch. We build deep relationships with each customer where they reward us with high LTV and high retention as a result of being able to provide that high quality service at scale. But because it’s being driven by a software-oriented approach and marketplace infrastructure, we’re able to do it in such a way where we provide immense value to them. So compared to some of the other legacy companies and professional training, or in test preparation or in learning centers, you know, very often we’re providing one-on-one through a better platform, markedly better platform at a third of the price or half the price, and it’s better personalized to them.
And so, we feel like there’s just this immense value component that the consumer sees, but they say, well, why would I go anywhere else? And really, as you look across like the $62 billion market that kind of exists in direct-to-consumer learning just the United States alone, it’s massive, it’s fragmented, it’s split among tens of thousands of companies, millions of independent individuals, tutors, other training professionals. And that’s the opportunity we have here. To provide a higher quality service. That’s more convenient, personalized, that is all delivered through a comprehensive, single online destination.
Michael Kesslering: So, I have to ask as well, because I mean, obviously a marketplace platform is a very, very good business model. And so, when you were thinking about your pricing strategy, I mean, there’s tons of great information online from the VC perspective. I mean, Bill Gurley has talked a ton about optimal pricing strategies for marketplaces, but what’s your pricing model and how did you go about thinking about how to implement that pricing model?
Chuck Cohn: Sure. We certainly didn’t take the kind of Bill Gurley formulaic approach. We looked at it relative to the competitive set. We tried to provide the value proposition from a pricing perspective that was so compelling that we thought we could just take a massively disproportionate set of the market. So as opposed to drive it by, you know, by percentages as he might’ve described in the past, or alternatively, you know, based on some other construct related the brand power, however other businesses might think about this. We very want to be so compelling from a pricing perspective that you feel like you’d be crazy not to consider us while still allowing for healthy, gross margins, strong contribution margins that allow for us to build a business that allows for the reinvestment in product and technology and all the things that will eventually allow us to build a competitive moat.
Julian Klymochko: It’s interesting to note the competitive environment, pricing strategy and how you guys compare to other offerings out there, especially in a very unique time period going through this pandemic. Many people stuck at home. So, I suppose that was really prime time for Nerdy, but I really wanted to talk about how the business was affected by the pandemic and how did it affect the industry as a whole? because I’m sure it’s a highly volatile time. Was that, you know, something that really skyrocketed the growth of the company?
Chuck Cohn: Well, you know, COVID is kind of been a mixed bag for us. And so, on one hand, the really tremendous thing that it did is it brought attention to the fact that you can get an exceptional experience online. You don’t have to drive to a strip mall anymore. You don’t have to drive to a corporate office apart from the comfort or your own home and go to a website and get an exceptional experience. It’s higher quality, lower cost, more convenient. The tough thing about COVID was that there are a number of different ways that it actually served as a temporary demand headwind. So, college enrollment is down this year. Graduate school enrollment for many programs is down. You have people that are scared to go get professional tests that were taken, you know, like the Series 7 Exam, a variety of other standardized tests are canceled across the country.
Entire states went great optional. And so those were all kind of demand headwinds for us. And so now, as COVID dissipates and schools return to in-person learning, we’re actually really excited about the fact that 1) consumers are now aware that great online learning exists. But at 2) there’s some sort of return to normal as it relates to testing, admissions, grades counting again, things that are actually drivers of the business. And as you probably know, we’re in this unique point in time where students are way behind, you know, on average students in the United States are something like 5 months behind what would be expected of them from a grade level proficiency. So, there’s this acute problem and acute pain that people across the country are feeling. And we feel like we’re uniquely positioned to help those students in this really time of need related to COVID learning loss. So, you know, maybe that just summarizes, you know, the business is humming. We feel like we innovated our way through and now as we come out of COVID really benefiting from some of secular tailwinds, but also can do a lot of good with a lot of people who need help.
Julian Klymochko: Yeah, that’s a good point. I really feel for these students that have lost so much time and it makes you think how lucky we are being older and not having to go through that. But nonetheless, I mean, Nerdy is going through a massive milestone in its growth. Let’s talk about the big deal announced in January merger with SPAC TPG, Pace Tech Opportunities, valued Nerdy at a $1.4 billion dollar enterprise value. Obviously TPG is a very big name in the private equity space. How did you guys link up with TPG? And, you know, tell us a bit background behind this going public process. Was it competitive? Did you consider other structures?
Chuck Cohn: Sure. As I mentioned, being in the [Inaudible 00:18:41], I became convinced that it was a once in a generation opportunity to take advantage of this technological ship back in 2014, 2015. That was the moment where, you know, I kind of knew we were going to take this business public, that there was an opportunity that I don’t think I would ever get again to really transform an entire industry and that we needed to go out and raise institutional capital and find investors who had the pattern recognition, having done it before. So, our first institutional round is from TCV, technology crossover ventures, one of the largest and most successful consumer internet investors that’s out there. And they’ve been a terrific investor in helping us guide towards and eventual IPO. And we had really thought about a couple of things, a couple of items that we wanted to get done prior to going public.
And those included things like really rounding out the product suite well beyond one-on-one into multiple different learning formats. Proving to ourselves that we could be profitable and self-sustaining, which is something that we’re able to do in the back half of 2020, and building out a complete management team that we thought could take full advantage of this opportunity. And so, you know, the plan had been to take the business public in 2021. And I had built a relationship with TPG over the course of four plus years, including getting to know their CEO Jim and one of their large venture funds, The Rise Fund, which invests in a lot of education, education technology, businesses. So, we had a deep relationship with them already. And as we started thinking about the process of going public, they were kind of at the top of our list to talk to, given their past experience there in the trust that we’d built. So, you know, like many late-stage businesses now, you know, there’s no shortage of investors just pouring in and talk to you all the time. But from my perspective, it’s really important to find a partner that you think can actually add value to the process.
Julian Klymochko: Oh, that’s super important to have, you know, a highly credible partner, which certainly found in TPG. Now going through some of the investor materials. I noticed the term inflection point. It was mentioned a number of times, do you need, you could expand on that from an investor’s perspective. You know, what is really changing with respect to Nerdy as you move along in this process?
Chuck Cohn: Sure, there’s a few things. The first is related to this moment in time where all of a sudden, all consumers in the United States are aware that you can get a great digital online learning experience. That wasn’t the case two years ago. And it’s expected to be a huge secular tailwind for many years to come. The second is with some of the improvements we’ve made to our multi learning format approach, bringing together one-on-one, small group, large format and adaptive self-study into a single destination. We’ve seen substantial increases in retention and net promoter score in LTV, and those are durable changes. And there’s a lot of opportunity left to make them even better. And so, the unit level economics of the business have just gotten markedly better. And it puts us in a position where we can kind of play a different game, be a more offensive than we ever have been in the past.
And then lastly, you know, as a private business, we met a relatively lean team. And one of the things about this opportunity that gets me so excited is that we can be offensive. We can hire aggressively, particularly in growth-oriented roles, like product engineering, data science, and marketing, and really lean into this big opportunity. And so, you know, one of the things that you’ll see in our forecast is that we anticipate investing in some of those key growth-oriented roles, and we’re going to be able to go after this opportunity more aggressively than we have in the past. And those three things come together to create just a substantial reflection point and really all the momentum we saw at the end of 2020, that’s carried into 2021 just gets us really excited.
Julian Klymochko: Now with this transition from being a private company to now becoming a public company, through a SPAC Merger, which is ongoing. Would be interesting to get your point of view on the fact that, you know, there’s tons of SPACs out there, tons of new companies going public, how is Nerdy going to stand out with all these companies competing for investor dollars. What’s ultimately the investment case for the stock. And why should investors pay attention to Nerdy stocks specifically?
Chuck Cohn: Sure. Well, first, it’s a huge market opportunity. $62 billion dollar market. We have product market fit. We have multiple different product formats that allow us to have a very differentiated approach to the market. We’re providing immense value. We have a proven and seasoned management team. Our gross margins are getting consistently better over time. You have revenue accelerating, you have LTV going up, you know, every user metric that we’ve shared, kind of demonstrates the health of the network. You have each person on the other side of the network, the experts actually do more work. And so, you know, if I was an investor, the thing that I did would get me excited is the fact that you can look at the marketplace metrics, the marketplace dynamics and see that there’s something special here that’s happening. So, we think it all comes together to create, you know, a situation where we’re just really excited to be a public business. And you know, we think our product and our results will get people excited to be involved in the future.
Julian Klymochko: Yeah. And certainly, looking to capitalize on your recent momentum, and you mentioned this notion of inflection points, so perhaps you’ve really picked the right time to make your public market debut. Now, Chuck, prior to letting you go, where can potential investors learn more about the Nerdy story?
Chuck Cohn: Sure. Just check out nerdy.com, we have lots of investor materials there. You know, but also go to our flagship business, varsitytutors.com, and check out the website. You know, I think I saw in your bio, Julian, you had a background in crypto. Is that right?
Julian Klymochko: A little bit, yeah. Yeah, cryptocurrency.
Chuck Cohn: We’re actually announcing today a partnership with Coinbase.
Julian Klymochko: Awesome.
Chuck Cohn: Where we’re teaching a class on cryptocurrency for a kid. So, there’s a lot of cool classes out there. And, you know, for people that are interested in learning more, I think the best way to understand what we’re doing, why it’s different? Is to go try on some of our products.
Julian Klymochko: Awesome. I love that expansion into perhaps unconventional or brand new technologically advanced topics, especially cryptocurrency for kids. I think that’s an amazing idea because I probably wouldn’t have a good method of teaching that to children, but you’re the expert. So, I’m sure you guys have it figured out, but Chuck, thank you for joining us on The Absolute Return Podcast today. Real pleasure having you on the show, learning about your background, Nerdy and the growth opportunity that it presents to investors. So, thank you, and we’re wishing you the best of luck as you guys close the deal with TPG Pace Tech Opportunities and go on as a newly minted public company.
Chuck Cohn: Thank you so much for having me on. I really appreciate it.
Julian Klymochko: Alright, cheers. Best of luck. Bye everybody.
Chuck Cohn: Thank you.
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