About three of seven billion people on planet earth have some internet access and are taking advantage of new learning and market opportunities. Entrepreneurs are taking advantage of digital networks—platforms, application and content ecosystems—to deliver healthcare, learning opportunities, agricultural productivity and access to markets.

The reduction in the cost of computing devices, increased access to broadband, and creation of new tools and school models suggests that (where politics allow) it will be possible to offer a cost effective education to every young person on the planet by the end of the decade. The expanded learning opportunity resulting from developments in EdTech ranks with biotech, clean tech and the spread of democracy as a world-shaping force.

The learning opportunity is driven by three critical digital shifts in education toward being:

Self-directed: the shift from rigid age cohorts to individualized instruction that enables students to advance at their own speed in schools that blend online and onsite learning and where learning professionals work in teams;

Adaptive: the shift from print textbooks and paper testing to digital tools enabling adaptive learning that is customized to the needs of the learners and provides instant performance feedback and motivational reward mechanisms; and

Networked: the shift away from schools based solely on physical facilities and print products with centralized acquisition, distribution and production systems for learning products toward networks of teachers and learners in educational models that blend the best of online and face-to-face learning with decentralized acquisition of learning products.1 Knowledge is no longer best stored in hardcover textbooks or file cabinets, but in the new filing system—the Cloud, a new paradigm where applications running on a network can be accessed by any device, anywhere in the world at negligible cost.2

Boosting achievement and completion rates in america and extending access to quality learning worldwide will take entrepreneurship, massive investment and updated government policies.

The Role of Private Capital and Profit-Seeking Organizations

Government agencies can deliver public services with equity but often lack quality, efficiency and innovation. While government agencies suffer from political oscillations, non-profit organizations have the opportunity to sustain a mission over time. However, non-profits lack the ability to raise capital to produce and scale innovations. Compared to public and private sector organizations, foundations can take a long-term perspective and are particularly well-suited to promote equitable outcomes.

Private capital is particularly useful in producing and scaling innovative products and services. Venture capital firms seek high returns by making risky investments in start-up and early-stage companies. Private equity investments allow revenue- producing companies at or near break-even profitability to achieve scale and produce attractive returns. These investments in innovation and scaling bring new services to education institutions and students.3

The table below compares the relative benefits and limitations of public, non- profit and for-profit organization structures.

Greenfield_Vander Ark_Table1 Philanthropic and Private Capital

 

In an efficient market, money flows to good ideas. The inefficiency of the U.S. K-12 education sector has hampered investment and innovation. Purchasing is done by about 15,000 districts and more than 100,000 schools, leading to diffused and protracted sales efforts. A web of interlocking employment agreements and local policies is compounded by 50 different complex education codes that deter interest from the private sector.4

Foundations have a hard time developing products and strategies that scale rapidly and become self-sustaining. And foundations have another key weakness: once the design of a program is locked into place, it becomes difficult for program officers to consider ideas that do not fit into the framework, no matter how powerful those new ideas might be. Venture capital firms, on the other hand, are finely-tuned mechanisms for detecting new ideas and new business models. Venture capital firms have the potential to serve as a kind of innovation radar for foundations.

Until the mobile inflection point of 2010, private investors largely avoided investment in new tools to serve the K-12 market. Now, more powerful application development platforms and the explosion of tablets and smartphones make it much easier to develop and deliver new applications directly to students and classroom teachers. the mobile revolution led to a dramatic increase in private investment in U.S. K-12 venture funding from negligible in 2008 (when learn capital was formed) to $452 million in 2013.5

The market continues, though, to suffer from strange inefficiencies. Investors avoid certain vitally important sectors within education. For example, most venture capitalists will not consider an early-stage technology company that sells products to K-12 school districts. There are only five venture capital firms in the entire country that have demonstrated a liking for and understanding of early-stage businesses that sell to K-12 school districts. Larger companies do not face this prejudice. Once a company has scaled to $15 million in revenue or more, there are hundreds of potential investors, in other words, once a company no longer needs capital urgently, there are many venture capitalists prepared to provide it. But when an innovative K-12 business desperately needs venture capital (series a and B rounds) to survive and grow, the list of funders is short: Birchmere, Catamount/Owl Partners, Learn Capital, new Markets Venture Partners, and Rethink Education. These firms have raised funds that vary in size between $28million and $82million. That is a slender base of support for the start-ups targeting the urgent needs of the second-largest sector of the U.S. economy.

The Innovation Agenda

The U.S. education sector is similar to the automobile industry of the 1970s—batch-processing and manual labor. It is one of the only sectors that has not experienced significant productivity improvement as a result of information technology. Despite an increase in inflation-adjusted expenditures per student and a reduction in class sizes, achievement has flatlined for 40 years.6

The basic building blocks have not changed—individual students struggling with text or a difficult math problem and schools filled with teachers in 900 square foot classrooms with rows of about 25 students. The students are grouped by age rather than level of understanding. Often, students are missing key precursor skills and the current lessons are thus incomprehensible to them. There are students sitting in algebra who do not know how to multiply fractions or what happens when a number is multiplied by zero. Current assessment tools deliver too little information and deliver it too late to affect instruction. Productivity breakthroughs will reshape the basic building blocks and result in improvements in productivity in learning, staffing and facilities.

Computers will finally pay off when they become core rather than supplementary, when content is more adaptable to student learning needs and interests than current textbooks, when engaging content supports higher student-to-teacher ratios, and when online learning comfortably supports better facilities utilization.

The most important productivity breakthroughs will come in the form of learning tools for the language and mathematics skills critical to accessing college and careers, as academic success is heavily dependent both on making the third grade transition from “learning to read” to “reading to learn” and building the problem-solving skills to be successful in higher level math and post-secondary eligibility. 7 Adaptive content has “game changing” potential in both areas.

Private capital is playing a particularly important role in eight categories:8

1. Digital content, particularly curriculum that adapts to individual learning needs, learning games, simulations and virtual environments.

2. Online learning where curriculum and instruction are provided online in both synchronous and asynchronous modes. An expanding category of online learning will be distributed workforce models in categories including speech therapy and other special needs; world languages, Advanced Placement and other college credit courses; and higher level math, science, engineering and technology (STEM) courses.

3. Blended learning, school development and improvement. Innovative school models that incorporate the best of online and onsite learning will expand as new school networks will be adopted by struggling schools. Private sector participants will operate schools and provide services to non-profit and public school operators.

4. Learning platforms that help customize pathways through digital content libraries based on assessment data collected in a comprehensive student profiles. Teachers will benefit from instructional and management tools, and students will appreciate social learning features.

5. Learning apps, particularly those that are focused on the mobile consumer. More than 100,000 of the million apps in the Apple Store are learning-focused.

6. Aligned Services, particularly those that are focused on the mobile consumer. More than 100,000 of the million apps in the Apple Store are learning-focused.

7. Learning certification and skills verification services, including low cost post-secondary options, as well as training in emerging job clusters.

8. School operations by for-profit companies. This trend is quietly emerging as a multi-billion-dollar subsector and follows successful introduction at the post-secondary level with a number of scaled participants operating online and onsite programs, including Apollo (University of Phoenix), DeVry, Grand Canyon, Strayer, Capella, and Corinthian. About 100 for-profit education management organizations like Academica, National Heritage Academies, Mosaica, and Leona serve more than a half a million students and are collectively larger than non-profit charter management organizations, with over $1 billion in combined revenue. For-profit private school networks like Meritas and American Education Group are acquiring individual schools and building substantial networks.

There is some public activity in these areas, but it is private investment that is pushing these frontiers as the sector shifts to digital personal learning. These areas represent new entry points and business models for private capital.

 
Matt Greenfield is Managing Partner of Rethink Education, a venture capital partnership focused on education technology. He serves as an advisor to University Ventures, the NewSchool Ventures Seed Fund and the College Board.
 
Tom Vander Ark, is the author of “Getting Smart: How Digital Learning is Changing the World” and founder of Getting Smart, advocates for innovations that customize and motivate learning and extend access. Tom is also a partner at Learn Capital, an education venture capital firm investing in EdTech startups.
 

1 Cohen, J., Daves, J. and Vander Ark, T. “Learning Returns: Impact Investing at the Education Turning Point.” Getting Smart. July 2012.

2 Moe, M., Hanson, M., Jiang, L., and Pampoulov, L. “American Revolution 2.0: How Education Innovation is Going to Revitalize America and Transform the U.S. Economy.” July 2012.

3 Vander Ark, T. “Private Capital and Public Education: Toward Quality at Scale.” Revolution Learning. February 2009.

4 For an extended discussion see Smart Series Guide to EdTech Procurement.

5 Carolan, J. “Edtech K-12 Investments Up 6% This Year.” EdSurge. December 2013.

6 Tucker, M. “Why Has US Education Performance Flatlined?” Education Week blog. December 2013.

7 Achieve, Inc. “Closing the Expectations Gap.” February 2008.

8 Cohen, J., Daves, J. and Vander Ark, T. “Learning Returns: Impact Investing at the Education Turning Point.” Getting Smart. July 2012.

 

This is an abstract from the white paper “Boosting Impact: Why Foundations Should Invest in Education Venture Funds,” March 2014