Academic journal article Education Next

For Education Entrepreneurs: Innovation Yields High Returns

Academic journal article Education Next

For Education Entrepreneurs: Innovation Yields High Returns

Article excerpt

Entrepreneurs are having a heyday. Mark Zuckerberg of Facebook graced the cover of Time magazine as Person of the Year, Ashton Kutcher played Steve Jobs of Apple in a recent biopic, and Amazon's Jeff Bezos even bought the venerable Washington Post. Our culture is enamored with the idea that a visionary individual can create a brand-new business that not only makes it big, but also makes a big difference in the way we live and work.

Meanwhile, few sectors are more desperate for new ideas than the $600 billion system of K[+ or -]12 public education. Many intrepid entrepreneurs have waded into the waters, hoping to improve outcomes for students. And many have failed or faltered in attempting to address an institution that "alienates creative problem solvers while erecting bureaucratic barriers against those who would devise new solutions," as Frederick Hess and Chester Finn wrote in these pages a few years back ("What Innovators Can, and Cannot, Do," forum, Spring 2007).

Education entrepreneurs create either a for-profit or nonprofit enterprise, based on their fundraising needs, the revenue model that will suit their product or service, and

Learning from Larry Berger, Jonathan Harber, and Ron Packard

the employees they hope to entice. Those who take the for-profit route face mistrust on the part of policymakers and many parents, and for-profit ventures have consequently been prevented from participating in federal grant programs like Investing in Innovation (i3) and barred from operating charter schools in some states.

Despite a surge in education entrepreneurship over the last several decades, for- profit education ventures have received far lower levels of investment than those in telecommunications, medicine, and energy. When they need new products, school and district administrators often choose to develop solutions in-house or buy from one of the big publishing companies rather than take a chance on a new, possibly untested, innovation. Not surprisingly, it has been difficult for entrepreneurs to persuade individual angel investors and venture capital firms to back their ideas with funding. Willing investors give a company money in exchange for equity (a share of ownership in the company), figuring that if the venture does well they'll recover their investment at a premium once the company is either sold or sells its shares on the public market (known as an "exit"). But there is often little patience among investors for the slow growth required to create a high- quality education product and to develop trust among school, district, and parent customers (and earn revenues).

In the late 1990s, investments in e-learning companies and for-profit school management firms surged along with those in Internet companies. The public stock market saw 11 initial public offerings (IPOs) of education companies in 2000 alone. Most education companies founded and funded during that time went bust (although a few of those left standing eventually became success stories, as I'll show below), leaving entrepreneurs and investors alike gun-shy about venturing into the sector for most of the last decade.

By most accounts, however, the economics of education investing are changing. Schools are now wired and have accountability incentives to invest in technology to boost student achievement, while teachers are ready to experiment with new tools. For start-ups, hardware costs have come down and software is cheaper than ever to develop. Longtime education banker Michael Moe of GSV Capital says a higher quality of entrepreneurs is entering the space. Consequently, education technology companies raised $1.1 billion in funding from venture capitalists in 2012, more than double the amount raised the prior year and nearly 10 times as much as a decade earlier. Today's education entrepreneurs and the investors who back them believe they can avoid the mistakes of their predecessors and find their place among the 20 or so percent of companies that succeed. …

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