Class Clowns: How The Smartest Investors Lost Billions in Education

LATE IN 2013 John Fisher, scion of the family that founded Gap, co-owner of the Oakland A’s, and chairman of the well-regarded nonprofit charter school chain KIPP, purchased control of Avenues School. Avenues is a private elementary school that first opened its doors to students the previous year. The school is housed in a magnificent new building created on Manhattan’s far West Side by the architecture firm Perkins Eastman and the interior design firm Bonetti/Kozerski Studio, “best known for crafting Donna Karan’s sensuous but scrupulously minimalist Manhattan apartment.”¹ Unlike KIPP, which operates public schools for low-income families in underserved communities, Avenues set the high-water mark for private school tuition in New York City and fashioned itself “The World School” in anticipation of a network of comparable campuses in “20 or more” leading cities around the globe.

What was unusual about this high-profile deal is that there was no press release and no media coverage whatsoever. This is particularly strange given the entrepreneur who raised the cash to fund the original venture, legendary salesman and promoter H. Christopher “Chris” Whittle. Few others have succeeded in securing front page New York Times coverage for the launch of new ventures.²

The quiet sale to Fisher followed industry whispers that Whittle would fail to find backers to finance his global ambitions. Why would Whittle choose not to use the vote of confidence from a respected billionaire to trumpet his success? In fact, the transaction was a kind of hostile takeover that followed the collapse of frantic efforts by Whittle to find alternative financing that would leave him in control of Avenues.

The first public acknowledgment of the change of ownership was buried toward the back of Avenues’s New Year annual letter in 2014. Whittle’s letter mentioned only that Fisher was “an important new investor” who would add to Avenues’s “financial strength and overall leadership.”3 Later, the letter noted that in addition to providing needed capital to the business, Fisher would be buying out one of the two original investors after less than three years. Finally, “an important new team member” was welcomed. Jeff Clark, Whittle said, would serve as president/COO where he would be responsible for “buildup of infrastructure, methods, and systems.” Left unsaid was that no one would now report directly to Whittle and that all of the operating decisions would be made by Clark, the leader placed by Fisher.

Whittle’s effective removal from any day-to-day responsibility for Avenues was not itself a surprise. Indeed, to a greater or lesser degree, that had happened at each of his previous ventures. Time and again, investors or senior executives insisted on Whittle relinquishing control as a condition of their continuing involvement. What is surprising, even shocking, is that for over twenty years, in the educational arena Chris Whittle has been able to continue to separate sophisticated investors from their money despite a plethora of red flags that in any other context might be viewed as disqualifying.

Whittle’s durable fundraising success in the face of financial and operating failure can only in part be explained by his marketing prowess. By the time Whittle directed his full attention to the educational arena in the early 1990s, his previous exploits had already left a widely publicized trail of unhappy partners, tales of profligate corporate spending and personal excess, accounting irregularities, exaggerated claims, and charges of self-dealing, all culminating in financial collapse. A close examination of Whittle’s track record reveals much about the faulty assumptions and predispositions that have made education investors particularly vulnerable to his unique talents.

The rise and fall of Chris Whittle’s mini-media empire of specialty publication and video products that preceded his exclusive focus on education has been thoroughly documented over the years.5 Backed by a University of Tennessee professor, Whittle and some college friends launched what was called 13-30 Corporation in 1970 in an abandoned pillow factory in Knoxville. The original business created free publications underwritten by a single advertiser. These first targeted college students—Knoxville in a Nutshell was the maiden effort—and later expanded to serve other geographic and demographic niches. However, in 1979 with the help of money raised from the Swedish Bonnier publishing empire, 13-30 bought control of Esquire magazine.

The birth of Whittle Communications came in 1986 when Whittle and his founding partner, Philip Moffitt, agreed to go their separate ways—Moffitt keeping Esquire and Whittle keeping the the specialty publications. The break with Moffitt reflected the culmination of a long-running psychodrama in which Whittle struggled to emerge from the shadow of his one-time mentor.⁶ But the tensions were aggravated by the extent to which the growth of the business and the introduction of serious outside money—which by this time included not only Bonnier but also Lord Rothemere’s Associated Newspapers—had fed Whittle’s weakness for lavish spending and self-promotion.

Whether the topic was expensive new hiring, a personal car and driver, or the need for either personal or corporate PR, Moffitt had consistently served as a constraint on Whittle’s desires. Whittle had developed a close personal bond with architect-designer Peter Marino, a Warhol protégé who specialized in opulence and had become popular with celebrities. Together they spent four years putting the final touches on Whittle’s apartment in the Dakota, complete with sock drawers lined with hand tooled leather. Whittle also purchased a Vermont farmhouse and adjoining land and supervised the complete relandscaping of the property. Even as he oversaw these projects, Whittle found time to travel the world amassing dozens of precious works of art of all types.

Untethered from Moffitt, Whittle’s extravagance escalated, both in his outlays and in his claims about the performance of the business. Furthermore, without a day-to-day partner, there was no one to enforce boundaries between the personal and professional at close range. Immediately after the split, Whittle launched a massive project to construct a headquarters covering two square blocks in downtown Knoxville, Tennessee. Designed by Marino and modeled on an Ivy League campus, the project was dubbed “Historic Whittlesburg.” This one project would ultimately cost over $50 million—even though the assets of 13-30 taken over by Whittle Communications had generated revenues of only $40 million the previous year.

Most fateful, however, were two initiatives that, unlike his various publishing launches, required massive start-up capital investment. Both Channel One, which programmed a network for elementary school classrooms, and later the Medical News Network (MNN), which programmed a national network of doctor’s offices, relied on the same business model: install televisions to attract a customer base and hope to be able to sell enough advertising later to justify the upfront investment in equipment, programming, and sales. It was Channel One that first introduced Whittle to the K–12 education market. In anticipation of its launch he began giving speeches on the need to transform education arguing, for instance, that textbooks were an obsolete “technology straight from the Middle Ages.”7

“If you build it they will come” business models like Channel One and MNN can succeed, but they require an appropriate capital structure to provide the funds to build the business to a scale that generates cash. The modest profits from Whittle’s publishing business, particularly after the drain from the Knoxville construction project, did not come close to filling this gap. So in 1988, with the help of then-banker Richard Holbrooke, Whittle sought a major new strategic investor in Time Inc. Time, inexplicably, permitted all of the $175 million it paid for half of the company to go immediately out of the company to the shareholders. Whittle personally pocketed $40 million, leaving the company as financially constrained as before.⁸

By 1991, with construction of Whittlesburg just reaching completion, the company was running out of money and could not afford to pay bonuses. The top twenty executives held a two-day intervention of sorts with Whittle at a secluded (and of course expensive) Smoky Mountain resort. Viewed by many attendees as “the most crucial two days in the company’s history,”⁹ the team begged Whittle to scale back expenses and initiatives as the only way to avoid the inevitable implosion of the entire enterprise.

By this time, Whittle had already churned through a series of financial and operating executives who had departed after their similar advice had not been heeded. Hearing the same now in chorus from the collective executive team had little more impact. Instead, Whittle turned to what he did best: selling. This time the objective was a new investor who would fund both his personal appetites and the continuation of precisely the corporate behavior that the intervention had sought to restrain.

In the end, Philips got no bargain. In 1992, revenue actually declined as expenses and investments continued to mount. The banks became increasingly frantic. At a contentious meeting in the summer of 1993, the frustrated and skeptical board established a task force headed by Philips to get to the bottom of the company’s results. It also insisted on the hiring of a CFO, which Whittle had resisted for two years even as the company’s situation became more precarious.

Whittle’s decision to hire his own banker to contact a new buyer in the face of an explicit prohibition from the board was no doubt in part a function of his frustration with the unattractive terms offered by Goldman. But the real problem for Whittle was Goldman’s refusal to make a side payment to address his personal financial straits. The other shareholders would not fund any further losses so were unwilling to run an auction or pursue any other alternatives that would put the Goldman deal at risk. But Whittle, despite all the cash he had pulled out of the business and from investors along the way, had by this time managed to rack up as much as $35 million in personal debt and could not afford to do any deal that did not provide him some relief.10 Whittle in a sense would be no worse off if he pushed the company into bankruptcy, so he waited until someone—whether it was Goldman, his “partners,” or an alternative buyer—was willing to pay him off.

In the summer of 1994, Whittle found a savior in K-III (later renamed Primedia), a portfolio company of private equity giant KKR that the new CFO had previously identified as potentially interested in buying just Channel One. The value K-III placed on the asset would satisfy the outstanding company debts even after a $10 million payment to Whittle.¹¹ The investors agreed once K-III committed to fund the losses until the deal closed. When it did, Philips lost its entire $175 million and Time lost well over half of its $185 million. Whittle Communications would forever be known at Time Warner as “Time Inc.’s Vietnam.”¹²

In a final twist, a money-losing Channel One would ultimately be more or less given away by Primedia in 2007 to a small youth marketing and media company. When that company in turn was sold in 2012, the buyer, Time Warner, had only one condition—it would not take Channel One. The lessons of Vietnam were not lost on Time Warner.

Before the K-III transaction was finalized in October 1994, the price drifted downward as a number of accounting irregularities were discovered. Goldman had identified these same problems earlier. Revenues had been inflated by booking long term revenue deals up front. More concerning, the company had never bothered to file state tax returns despite the auditor insisting that it had told them to do so. The reported $300 million deal had become $240 million by the time it closed. The balance of the assets were sold off quickly at distressed prices or simply shut down.¹³

Interpreting Whittle’s motives and behavior through the seemingly inevitable collapse of the business is a complex matter. Most damning, ironically, is a highly sympathetic biography by an author who agreed to let Whittle review the manuscript in advance as the price of cooperation. An Empire Undone contains many cringe-inducing passages by a biographer clearly smitten with his subject: “Designing a brilliant model for the Edison Schools was fairly easy.…”14 This overarching perspective makes the sections most relevant to a prospective investor even more startling. Whittle routinely makes outlandish projections not embraced by the operating executives. Those who counsel caution—particularly with respect to implementing needed operating disciplines—or predict financial disaster are disregarded or discarded. Even those most generous to Whittle speak of his alternate reality.

Whittle himself acknowledges his willingness to ignore the obvious in terms of financial risks but justifies it: “I call it robust naiveté or conscious innocence.”¹⁵ Whittle’s choice of words is telling. In criminal law, securing a conviction requires “actual knowledge” showing an evil intent. A long-established line of cases, however, provides an exception to this general rule, condemning also those who merely “consciously avoid” becoming aware of the relevant facts.¹⁶

Even as his niche media empire started to crash down around him, Whittle had become enamored with the education market and begun to design what would become known as the Edison Project. The liquidation of Whittle Communications drew much unwanted attention as Whittle attempted to launch Edison as an independent venture. In October 1994, veteran journalist James Stewart wrote a wide-ranging article on Whittle in The New Yorker titled Grand Illusion.¹⁷ Stewart, who had met Whittle during the Esquire years and expressed fondness for him, struggles in the piece with assessing Whittle personally. But with respect to the prospects of Edison in light of the Whittle Communications saga he is unambiguous:

Irrespective of its educational merits, which have generated controversy and also garnered much praise, and its economic feasibility—a far shakier proposition—the likelihood at this juncture of major investors’ trusting their capital to Whittle seems remote.…[O]nce the public school administrators of America have absorbed the magnitude of Whittle’s failure with his other ventures they are hardly likely to trust him with their tax dollars, let alone their children.¹⁸

A large number of government entities did hand over both tax dollars and children. More incomprehensibly, major investors would continue to fund Whittle’s ventures for years to come even after he repeated many of the worst excesses of Whittle Communications on a grander scale. In the case of the investments in Edison, what makes this particularly surprising, reputational issues aside, is just what a shaky proposition the economic feasibility represented on its own terms.

Whittle had immersed himself in public policy ideas when he flirted with a Tennessee Senate run, even hiring Roger Ailes as a tutor at one point. In 1989 he gave a series of speeches followed by an article in one of his short-lived publications on creating something called the “New American School.”19 As first articulated, the idea was to have the federal government hand over $1 billion to the “one hundred best people you know.” The goal was to inspire “visionary leaps of human consciousness” that would create “a new dynamic that will light the way to a transformed educational system.” While not prejudging the outcome of this exercise, Whittle had plenty of ideas: year-round classes and no homework or tests; a teacher-student ratio of 5–1 achieved by enlisting millions of young and elderly volunteer assistant teachers; and on and on.

A year and a half later, in May 1991, Whittle came forward with the first formal presentation of the Edison Project. During this time, Whittle had directed a secret internal project to create a framework to achieve the “transformed educational system” of his earlier musings. Despite his friend Lamar Alexander becoming Secretary of Education, Whittle realized that the originally hoped-for $1 billion would not be forthcoming. In its place, the project relied on raising $2.5 billion from private corporate investors. In lieu of this money going to 100 visionaries, it would now be entrusted to a massive for-profit enterprise that would be part of Whittle Communications.

The plan was for that new business literally to build 1,000 new schools to serve two million students (around 10 percent of all elementary school students). These schools would be among the best in the world, based on a promised three-year $60 million project to design the optimal twenty-first century curriculum and overall delivery architecture. Although no formal research work had yet commenced and Edison had no dedicated employees, it was clear that the results would incorporate many of Whittle’s earlier ideas like longer days and school year as well as additional technology resources. Whittle expressed confidence that such an enterprise would not only be profitable but that tuition could be held at the average cost per pupil of public schools—at the time, only $5,500.

The team took until early 1993 to produce something that they felt was ready to present to potential funders. Whittle had, nonetheless, managed to keep interest in the venture high since the announcement almost two years earlier. On May 25, 1992, Yale President Benno C. Schmidt, Jr. informed the university trustees that he was resigning to join the project. Schmidt’s announcement sent “shock waves” that “reached well beyond New Haven,”20 provoking front page coverage from the New York Times.²¹ The unexpected move had followed many months of intensive lobbying by Whittle.

The selection was vintage Whittle. At Edison and his previous ventures, he wooed a series of high-profile figures to play senior roles—journalist Michael Kinsley (who never ended up in a job) and former presidential chief of staff Hamilton Jordan (who did and was miserable22), among others. These expensive hires—known derisively within the company as Whittle’s “million dollar men”²³—reflected the founder’s continuing obsession with image and brand. As the president of one of the oldest, most revered American educational institutions, Schmidt symbolized acceptance by the intellectual establishment, precisely the brand image required for this radical new venture. Given Whittle’s deep disappointment at failing to get into Yale Law School, then quickly dropping out of Columbia Law School, securing Schmidt—who had been Dean of Columbia Law School before his relatively short and unhappy tenure at Yale²⁴—must have been particularly sweet.

Schmidt may have been a singularly powerful example of the potential marketing value of an investment in a “million dollar man.” However, his selection shared an important common characteristic with many of the other celebrities from politics, journalism, and academia who had joined Whittle over the years—an absolute lack of domain expertise or meaningful experience in the function for which they were being hired. Schmidt, a First Amendment lawyer by training, had no relevant experience in any for-profit business or K–12 education generally.

Whittle and Schmidt spent the balance of 1992 on a road show of sorts—without the benefit of an actual completed operational design, much less a business plan—highlighting the need for educational reform, defending the potential role of the profit motive in the sector, and avoiding too much detail regarding what they actually proposed to do. The duo turned up everywhere from Larry King Live to the National Press Club and were sometimes treated skeptically but always respectfully. In the absence of specifics, the pair offered up the attractive promise of much more for less. Student spending had skyrocketed, but students’ results had not: surely that meant that the problem wasn’t money but “the system.”²⁵ By reinventing the system, they argued, it would be possible to take back the presumably wasted spending, deliver the wanted outcomes, and still have money left over for investors.

Once the specifics of the Edison design became finalized in early 1993, the hard part started: finding investors. The design itself was a lot less radical than advertised. An Edison school ran longer hours, had shorter vacations, used more technology, and had more demanding curriculum requirements. The curriculum itself was largely not original—it used widely available, well-established course materials such as Success for All reading, developed at Johns Hopkins, and Everyday Mathematics, developed at the University of Chicago. In short, Edison looked like a very expensive private school that somehow charged very little but managed to be profitable.

Imagining anyone would underwrite this proposition—to the tune of $2.5 billion dollars—was fanciful. First, the amount of capital claimed to be required was cut in half, then cut in half again, and then by a factor of ten. By late 1994, as the balance of Whittle Communications was being liquidated, Whittle’s pitch was simply to find $40 million to open twenty schools. Meanwhile, the entire business model changed from opening stand-alone private schools to managing schools for public systems.

A senior K-III executive described Whittle’s efforts to get them to fund Edison along with the side payment they made to him in connection with their acquisition of Channel One: “It sounded great but we saw how he was treating his partners from Whittle Communications,” he said. “Whenever he was selling we felt like the oarsmen who had to block their ears from the siren’s song to survive.”26 The former General Counsel of Time Warner used almost the same language to describe his role in being dispatched to attend any meetings that Time Inc. CEO Reginald Brack had with Whittle: to play Ulysses and provide the earwax whenever Whittle asked for money.²⁷

An overenthusiastic entrepreneur, who plunges headlong into new projects even as previous ones falter, is not an unusual phenomenon in the venture world. Venture capitalists are also used to an early business model shifting, sometimes even radically, as market and product constraints are taken on board. But the trouble with Edison was that even radically scaled back, it required a far greater investment of capital than would be typical before a basic prototype had been proven out. In part this reflected Whittle’s insistence on starting big. But it also reflected that Whittle’s spending habits were inconsistent with a start-up. And the perks demanded by Benno Schmidt were similarly unheard of in the venture world. In order to entice him to Edison, Whittle had provided him not only a $1 million salary but also a $1.8 million loan and access to a private jet.²⁸

At the end of 1994, Edison was facing closure. A single potential lead investor, the Sprout Group, was still actively engaged in discussions with the venture. When they saw Edison’s cost structure, Sprout executives were incredulous. The group had never had a CEO make over $200,000 in salary, and the $16 million in annual overhead was many times greater than what could be reasonably justified in an early-stage company. After the costs and ambitions were dramatically scaled back, an agreement was announced in March 1995.29 Whittle, after selling enough art and residences to satisfy creditors, invested $15 million of his own money and Sprout invested $12 million.

The balance of the $30 million financing came from Benno Schmidt and two friends. By this time, Schmidt was having to explain the embarrassing collapse of Whittle Communications as he flew around the country trying to sign up customers for Edison. As a result, this critical piece of funding came only after Schmidt insisted that Whittle be denied the formal title of chairman at the company. Despite these early tensions, Schmidt would remain associated with all of Whittle’s educational ventures for decades.

Sprout’s investment was contingent on limiting the initial launch to four modest schools, serving around 2,000 students in total. In an interesting piece of revisionist history, Whittle argued that “the birth of Edison killed its mother, which was Whittle Communications, but the child survived.” And despite these humble beginnings, in Whittle’s view, this was going to be a very big baby. “Think of it, 30 percent of $260 billion rounds out to a new $75 billion category.…Edison should have a big piece of that market.”³⁰

When the company published its prospectus in 1999, much of the critical public commentary was around the personal finances and compensation of Whittle and Schmidt.31 Schmidt had borrowed money from the company and, even at the below-market interest being charged, he was in the hole to the tune of $2.5 million. As for Whittle, how often does the CEO and president need to pledge all of his stock to satisfy personal loans? This noise aside, the most important problem with the Edison Schools story is that it really didn’t make much sense on its own terms and that story, whatever its virtues, was not consistent with the financials provided.

Whittle had consistently painted the portrait of Edison as a unique vision of education that came out of a multimillion-dollar, multiyear global study of how to design the optimal educational system. Suspiciously, most of the key elements of the design were present in the various presentations and talks Whittle gave before even putting together his much-vaunted design team in early 1992. The core design was created over the course of a year and only one of six designers remained past their two-year contracts, with the rest returning to jobs—like editor of Mirabella magazine—more suited to their backgrounds and skills.32 In the prospectus under the heading “Research Behind the Edison Solution,” it is asserted that the design and curriculum “grew out of a comprehensive three-year research project conducted by a team of approximately 30 full-time professional employees and numerous outside experts under the leadership of Benno C. Schmidt, Jr.” In fact, Benno wasn’t hired and the design team wasn’t even aware he was being considered until they were halfway through their work.³³ In an interview with 60 Minutes a few days after the offering, Whittle claimed the R&D underlying Edison was even more extensive. “Between 1991 and 1995, we spent $45 million,” he told Morley Safer.³⁴

Edison’s core differentiator, according to the prospectus, is its ability to address what it views as the three main sources of the failure of public schools: the lack of consistent leadership, the inability to invest in the future, and the inability to exploit the advantages of scale. Yet if these are truly the correct diagnoses, Edison would on its face be an odd tool to correct them.

On the leadership front, none of the four members of Edison’s “experienced management team” had previously run a single school and, with the exception of Whittle’s own checkered experience, had not run a for-profit enterprise of any kind. It is hard to argue against the observation that “a sustained commitment to effective implementation over a lengthy period of time” is valuable in all things, but how can one then justify selecting individuals who had never implemented any commercial undertaking? On the investment front, the annual appropriations cycle of schools certainly is a constraint on long-term planning. But that hardly justifies replacing it with an unprofitable organization requiring regular new capital infusions to stay afloat and whose CEO’s personal loan obligations could result in a sudden change of control to his banks.

The more fundamental business question, however, is whether this is a scale business and, to the extent it is, whether Edison would operate at a scale advantage or disadvantage. The structural competitive advantage known as economies of scale is easily misunderstood. Scale in this sense is a relative rather than an absolute concept for two important reasons.

First, scale refers to one’s position relative to others in a relevant geographic and product market. This means that, even as one grows in an absolute sense, it is possible to diminish “scale.” For instance, an operator who dominates a region and decides to compete nationally, where there are multiple larger competitors, moves from having a scale advantage to a scale disadvantage. The question of whether a market is primarily local, regional, national, or global is a function of the extent that the specific fixed cost investments can be leveraged. In the school context, most of the fixed cost infrastructure required to manage day-to-day school operations—hiring, building management, customer relations, new client development, and the like—all are locally or regionally based. So, for example, Edison organized its “business development” function under twelve regional vice presidents. Fixed cost categories that seem more national in nature, like curriculum development, also have a significant local component as curriculum must be modified to comply with specific state standards. Even the vaunted standard Edison “design” was modified locally wherever union agreements required that in order to secure contracts.

In making his case for scale, Whittle frequently points out that the vast majority of school districts “tend to be small, independent and localized operations.”35 But the business plan, initially at least, called for a focus on the largest districts. These tend to be huge—there are over one million New York City public school students, and dozens of districts around the country serve at least 100,000 children—and have the additional administrative advantage of being tightly clustered. The seventy-nine Edison schools, by contrast, were randomly scattered around the country, in thirty-five cities across sixteen states, with only eight school districts using Edison for more than two schools. Although Edison boasted enrollment of 38,000 nationally, within any of the twelve regions into which it organized itself, even assuming stunning continued growth, Edison would continue to be among the very smallest players. The fact that Benno Schmidt spent an inordinate amount of time in the early days of Edison on his private plane making sales calls to Honolulu³⁶ (which still had not paid off by the time of the IPO³⁷) reflects the team’s failure to appreciate that regional density is the most powerful source of scale.

Local modifications aside, curriculum development intuitively seems like the area where benefits from a central infrastructure of scale could be realized. But even here, Edison often operated at a significant scale disadvantage. The business sought to operate in thirteen different grades, each of which require different curricula. Although Edison hoped ultimately to grow its elementary and middle school contracts into high school business, there was little evidence that the Edison solution had a viral quality—either to adjacent grades or adjacent communities. Less than 5 percent of Edison enrollment, representing just two schools, was in high school.

More broadly, Whittle’s argument for the long-term economic viability of Edison seemed at times to be that it would allow governments to shrink the expensive and inefficient local education bureaucracies by leveraging the intellectual capital that would reside at Edison’s more efficient scale center. Even if Edison were eventually capable of taking on these functions, the same political realities that made these bureaucracies lumbering in the first place made it hopelessly naïve to believe that they would downsize proportionally to their usage of Edison’s schools. It would be far more likely that an incremental bureaucracy would need to be created to oversee the Edison contract implementation.

How, then, could the public and institutional investors be convinced to invest given the frightening financial profile and tenuous narrative?

Before large investment banks agree to sponsor a company in the public markets, it must be reviewed by each firm’s “commitments committee.” Central to the commitments committee process for an IPO underwriting is support from the bank’s equity research analyst who oversees the sector. Equity research is supposed to operate completely independently of investment banking, and the analysts are meant to come to their own view of whether the company is of a quality that the bank should be associated with. Only then do they address the question of the value at which it should be offered to investors. During the IPO process, these research analysts share their views on the company’s prospects generally, and valuation specifically, both with the internal trading sales force that is placing the stock and directly with the institutional investors considering participation.

The DCF can be a useful instrument, but it is an extremely blunt one. This is particularly true in instances where the company, like Edison, has no current cash flows and there is little basis for determining what “steady state” profitability might be achievable in the future.38 Because it is not possible to project an infinite number of future year cash flows, the convention is to estimate the first five or ten years and then calculate a so-called terminal value to approximate the worth of the infinite number of years to follow. Although this terminal value concept sounds complicated, it ends up being just a function of how fast the cash flows are growing and the appropriate discount rate: 1/(discount rate–perpetual growth rate). This formula yields something called the “terminal multiple” which is simply multiplied by the last year’s cash flow to produce the terminal value. That value is then discounted back and added to the other discounted cash flows of the interim years.

As an example, if a company has a discount rate of 10 percent and a perpetual growth rate of 5 percent the terminal multiple is 1/(10 percent–5 percent) or 1/5 percent, which is equal to 100/5 or a terminal multiple of 20 times. So, in addition to discounting back each of the projected first five or ten years of cash flows, in this case a complete DCF would require that you multiply a final year of cash flows by 20 and discount the resulting terminal value back as well.

The terminal multiple itself, we saw, is a function of the discount rate and the growth rate. Neither of these numbers, however, is very scientific. The right discount rate is something called “the weighted average cost of capital” or WACC for the company. The WACC is essentially the average cost, expressed as an interest rate, that the particular company needs to “pay” to raise capital.39 This is a theoretical value, not something that can be empirically verified. If you asked a dozen bankers or economists about a given company’s WACC, you are certain to get a scatter of responses that has a range of at least a few percentage points from high to low. Similarly, the growth rate required for the terminal multiple formula is not arrived at by calculating how fast cash flows have actually grown, but estimating how fast they will grow on average into infinity. Although most companies’ growth over time converges toward the overall growth of GDP, there is always disagreement both about the long-term growth of GDP and the extent to which any given company’s trajectory is likely to diverge from this.

The problem here is that even if the disagreements about both the growth rate and the discount rate are relatively small, the combined impact on the resulting terminal multiple are massive. Let’s take our example of a 10 percent WACC and 5 percent perpetual growth rate. Assume we are confident that there is only a 1 percent possible variation in either number: 9–11 percent for WACC and 4–6 percent for growth. When we plug all these combinations into the formula for terminal multiple, it yields a range of terminal multiples from 14× to 33×—a variance of over 130 percent!

And what do we multiply this terminal multiple by to get the value which drives the DCF? A cash flow estimate for the year in which we have the lowest possible level of confidence. We know what last year’s cash flow is and we have a good sense of what next year’s will be, but with each passing year of projections our estimate becomes more speculative. The mathematical formula for terminal value relies on our estimate of the cash flows in the most distant year considered.

Cappelli justifies his approach by arguing that “our DCF analysis allows us to take a more sophisticated approach to identifying the intrinsic value embedded in Edison, because it explicitly incorporates more significant variables…than traditional methodologies.” In particular, Cappelli identifies a number of structural barriers to entry that he believes will allow Edison to achieve continuously improving profitability as it grows at an average compounded growth rate of over 17 percent for the twenty-six-year period. The two main competitive advantages highlighted on the cover of the report are “a clear first mover advantage…in the $300 billion-plus K–12 market” and “increas[ing] operating leverage through economies of scale.”

Regardless of Whittle’s claims, if Edison were a genuinely scale business with a primarily fixed cost infrastructure, replicating success would be no easy matter. Cappelli’s model assumes that as much as 70 percent of all administration, curriculum, and development expenses would be fixed. This justifies the predicted continuous margin improvements over the twenty years following the point at which he hopes Edison would begin generating cash flow. As noted, however, the administration of schools is an intensely local activity, not only in lobbying and oversight activities but even in customizing the curriculum to address state standards and local concerns. Achieving the 15 percent margins Capelli assumes in the all-important “terminal” year of projections seems wildly optimistic. So does the implicit assumption that there would be no political backlash from generating anything like that kind of profitability.

Complaints of high teacher turnover, enrollment declines, and poor student performance resulted in some cancellations and heightened the difficulty in signing up new schools.40 And, as expected, any misstep was exploited by not just teacher unions, but other groups who were offended by the very notion of a for-profit running public schools. A particularly dramatic protest at the Las Vegas School Board featured the arrival of a community group dressed in black bearing a small white satin coffin filled with African American dolls.⁴¹

Financial results started to roll in as well. Of course, Edison had been projected to be unprofitable for its first several years. But the revenues were not growing as quickly as predicted. More concerning, the supposed benefits of scale did not appear to be manifesting. Indeed, administrative expenses as a percentage of revenues actually seemed to be increasing. The company cited the high cost of lobbying for major city contracts to explain the anomaly. But surely such activities would be an ongoing administrative cost of the Edison model as new cities were targeted and existing contracts came up for renewal.

In early 2002, another issue that had been endemic to Whittle entities from the start took on new urgency at Edison as a public company in the age of Enron: a lack of appropriate financial controls. In February, Bloomberg ran a story questioning the company’s accounting policies and suggesting it might be overstating its revenues.42 Edison stock had peaked at $36.75 in February 2001, and fallen steadily since then in the face of mixed news. By April 2001 it was below its original IPO. At the time of the Bloomberg story, the stock was around $13 and immediately fell another 10 percent.

Edison aggressively attacked the Bloomberg reports as “irresponsible” and never disclosed that the SEC launched an enforcement action on this and other accounting issues at the company until a settlement was reached in May. By then the stock was under $3, battered by the news that Philadelphia had awarded Edison less than half the schools expected. Reinforcing concerns about the underlying business model, Whittle’s prescription for the ballooning administrative costs was to reverse course and intentionally slow the growth of new contracts.⁴³

On top of the accounting issues, the mixed academic results, the failure to deliver a blockbuster big city contract, and the uncertain financial picture, the company was running out of money. It was only in August 2002 that the company came up with a complicated and expensive financing plan to provide the funds that would allow it to deliver on the modest Philadelphia contract. By then, Edison was a penny stock, having fallen below $1 per share in July.

The company also announced a management restructuring and four new independent board members. At the top, the restructuring did not add significant new industry or operational strength to the team. Instead, Chris Cerf added the title of president as well as COO, the general counsel also became an executive vice president, the controller was promoted to CFO and a board member, former UBS Capital executive Chip Delaney, was made “vice chairman.” Delaney, the press release said, would lead a “re-engineering process designed to bring greater efficiency to the business” and join Whittle and Cerf in a newly created “Office of the Chief Executive.”44

The addition of board members had been necessitated by the resignation of three previous members who had participated in the emergency financing and could no longer be considered independent.⁴⁵ What the new independent board members didn’t know as they were elected in December 2002, and what the board would not be informed of for many months, was that Whittle and Cerf were already discussing with Cerf’s brother, Monty Cerf, a banker at Bear Stearns (“Bear”), how to take the company private.

Although Bear was not formally hired until February 2003, Whittle and Cerf had begun planning the previous year. By engaging bankers personally, Whittle could ensure that so-called strategic buyers—companies with their own management teams and strategic perspective—would not be contacted and that his own personal employment and financial matters could be dealt with explicitly up front. In a company-run process under the oversight of the board, strategic buyers were much less likely to be excluded and the exclusive focus would be getting the highest value for shareholders. Any discussion of management would be meticulously avoided until a high bidder was identified.

Once engaged, Bear worked with Whittle to prepare a list of potential private equity firms with the money and likely inclination to back him in a buyout and a presentation to sell them on the idea. In late March, Whittle informed the independent board members what was going on. In the end, seventy-six private equity firms were contacted by Whittle and his advisors, of which nineteen were interested enough to take a pitch meeting. Nine of these agreed to undertake more detailed diligence of the company. When this was completed in early May, the stock was still trading at barely $1 and Whittle told them they would need to pay at least $1.40, which narrowed the field to four.

Whittle’s personal financial situation continued to be precarious. Although he had sold 670,000 Edison shares in early 2001 when the stock approached $25, this was not nearly sufficient to cover his spending and outstanding obligations. He owed the company over $10 million, which he had borrowed to buy shares. These shares in turn were pledged to J.P. Morgan just as his equity holdings had been in Whittle Communications days.47 Reflecting this situation, the final four interested parties were given an unusual term sheet that detailed Whittle’s personal financial needs in any transaction. In addition to proposing employment and new equity requirements, he informed them that he planned to sell all of his existing equity in the company. Before selecting a middle-market private equity firm called Liberty Partners as the “winner” to be his preferred partner, Whittle negotiated these terms with the parties to determine where he could get the best deal for himself.

Generally a “management buyout” implies that, usually with the help of a partner, the management is actually using all or a substantial part of its equity in the company to help finance the transaction. Here, however, Whittle wasn’t buying anything. He was looking to get completely cashed out and then provided a salary increase, new equity, new loans, and non-compete payments (as well, of course, as getting the expenses for his financial advisors paid for). Whittle ultimately negotiated that over the next several years he could make the company buy up to $10 million of that equity back from him plus another $7 million to cover the non-compete (held in escrow just in case).

While this was going on, the independent directors of the board were establishing a special committee and hiring their own financial and legal advisors to oversee what management was doing as well as assess whatever it might ultimately propose. This involved reviewing the private process run by Whittle and Bear as well as the company’s prospects. Although Whittle informed the committee that he was considering making an offer with Liberty in the range of $1.58 to $1.65 per share, his advisors initially refused to share the actual proposals submitted by the finalists to Bear.

Whittle and his advisors ultimately shared the details of the proposals as well as Whittle’s employment arrangements. A parallel negotiation ensued in which the committee sought a reduction in the more outlandish aspects of Whittle’s personal deal—effective forgiveness of loans from the company, reimbursement of three years of almost $1 million of “business expenses”—while arguing for a better deal for public shareholders. On July 13, 2003, after Liberty had raised its price four times and Whittle acceded to the committee’s demands regarding his employment agreement,48 Edison announced that it had agreed to be sold for $1.76 per share.

Although Edison sold for a substantial premium to its recent trading price, this represented a tiny fraction of what the company had sold for to the public only a few years earlier. As the company’s stock price had collapsed the previous year, the New York Times had reported that many finally had begun to “see déjà vu in Mr. Whittle’s stewardship of Edison.”⁴⁹ They pointed to the unrealistic expectations that had been encouraged, the financial regulatory problems, the high overhead costs, and hiring “smart, talented people who do not know enough about business and finance to keep Edison out of trouble,” as all reminiscent of Whittle’s previous ventures. In retrospect, some could be forgiven for wondering how they had been drawn in in the first place.

The fact that a presumably sophisticated financial buyer was interested in backing Whittle again, and that a number of such firms had been interested in doing so, created skepticism as to whether the public was getting the full story. Most major firms that had sponsored Edison had long before dropped research coverage and distanced themselves from the company. The few remaining research analysts—who had been enthusiastic about the stock at dramatically higher prices than where the newest group backing Whittle was buying it—smelled a rat. One ThinkEquity Partners analyst charged that the offer added “insult to injury”⁵⁰ and complained openly of the “shabby treatment of existing shareholders” and the “continued bad faith”⁵¹ of management in withholding key operating information needed to evaluate the offer.

They needn’t have worried. The public filings showed both the projections shared with buyers, and upside and downside sensitivities developed by the investment bankers who provided a fairness opinion in the transaction. In the most conservative case developed, Edison showed modest profit on revenues of $477 million in fiscal year 2008, the last of the five years projected. This was barely half of the $888 million revenues projected by Whittle for the “plan case” shared with buyers. In fact, in fiscal 2008, Edison was still unprofitable and had revenues of $264 million.

Although Edison continues to limp along to this day, amazingly with Whittle and Schmidt still on the board at least until quite recently, Liberty Partners was forced to write down its original investment years ago. Pieces of the business have been sold off52 and what remains is now run by the former general counsel who, according to the company website, ascended to that position in 2014 when “he brokered the acquisition and directed the restructuring of the company.”

Who was Liberty Partners and what were they thinking? The fund had been created in 1992 by former Merrill Lynch buyout group executives to specialize in so-called middle market investments. What made the fund unusual was that the entire fund was financed by the Florida pension funds. Although this arrangement avoided the expense of fundraising and managing diverse limited partners in the fund, according to an independent firm hired by the state to review overall performance by Liberty, fees charged were actually higher than typical while returns were “unequivocally unacceptable” and contained “far too much risk for the returns involved.”⁵³

At the time of the buyout, Florida teachers were horrified to learn that their pension funds were being used to back Whittle.⁵⁴ Speculation circulated that the presence of politicians sympathetic to the school reform movement on the board that oversaw the pension fund—notably Jeb Bush—had played a role in the investing decision.⁵⁵ Bush denied this, saying that he had no role in investing decisions. And to be fair, at least one other fund had arrived at similar valuation views.

At the end of the day, private equity firms take a view on a business model and management team and don’t always get it right. Despite the warning signs, they too can be seduced by management assurances that they are favored and come to believe that “this time will be different.” Furthermore, conversations with those familiar with Liberty decision making at the time say they were genuinely influenced by the “mission orientation” of the enterprise.

What is harder to understand, however, is how the same firm, having lost money in such a venture, would then back Whittle in entirely new ones. One theory relates to the idiosyncratic structure of the arrangement between Liberty and Florida. Liberty received numerous fees above the traditional management fees for sitting on boards and making investments but “paid no penalty” for money-losing investments. Furthermore, rather than returning any cash from harvested investments, as would be typical, “Liberty’s profits were recycled into the fund, guaranteeing the managers a continuous investment stream.”56

Whittle tired of Edison within a few years after the deal with Liberty closed. Costly high-profile contract failures resulted in a retrenchment from what was once the central Edison proposition. As this core Edison concept morphed and atrophied, entirely new business lines were developed to take up the slack. A UK partnership was announced in 2003 before the sale, by which time Edison had launched summer and after-school programs and something called “achievement management solutions” for school systems.⁵⁷ Then, over time, dropout programs, school “turn-around” programs, online programs, and a variety of other outsourced services to charter schools and districts were added. Some of these initiatives involved high-profile marketing partners like Magic Johnson. Within five years, Edison Schools changed its name to EdisonLearning, a rebranding meant to emphasize that Edison was no longer in the business of taking over schools but instead now was all about creating “partnerships with schools, districts, organizations, and charter boards and authorizers” to “achieve lasting gains in performance.”

Before then, however, Whittle was already focused on his next big idea—and on getting someone to pay for it. That big idea was in some ways as far from the original Edison idea as one could go: instead of contracting to take over the running of local public schools, Whittle now envisioned creating a global network of high-end private schools available primarily to the super-rich international set who could afford them. As originally formulated in 2006, these schools would “offer an internationally integrated, globally-focused education program.”⁵⁸

What this vision shared with Edison’s, beyond its grandiosity, was that its basic economics seemed questionable. Whittle would assert that the New York school “would be competitive with the finest schools in the city,” meaning the likes of Brearley and Dalton. But any parent who sends their children to elite private nonprofit schools in New York knows that in addition to the high tuition, which Whittle’s new venture intended to match, they are treated to a constant barrage of fundraising solicitations that these institutions claim are needed to cover basic operating expenses. Given that some of these schools also benefit from a substantial endowment, it is not obvious how a for-profit competitor would achieve attractive margins.

Whittle’s explanation of how the numbers would add up was reminiscent of the original Edison pitch: finding efficiencies through “economies of scale through their chain of large schools.”59 But if it was difficult to find such economies within distant domestic geographies at Edison, achieving them globally among countries with diverse laws, cultures, market dynamics and industry structures seemed more unlikely.

Whittle nonetheless found a new investor to fund his new dream. Sunny Varkey, a mysterious entrepreneur and self-educated Dubai-based son of Indian expatriate teachers, agreed to provide initial funding of $6.85 million. Varkey had built his own largely Middle Eastern-based network of private elementary schools called Global Education Management Systems (GEMS). To attract Varkey, Whittle also somehow convinced Edison’s new owners at Liberty to invest $3.33 million, despite the disappointing performance of the current investment. In addition to that $10 million, the continuously financially strapped Whittle contributed only twenty-five dollars⁶⁰—hardly a ringing endorsement. For his nominal investment and promise of involvement, Whittle received almost 5 percent of the equity of the venture. In January 2007, Edison and GEMS announced their international alliance, ultimately called Nations Academy, to build schools in major cities around the world.

As the need for operational discipline at Edison became more obvious, Liberty had brought in Terry Stecz, a healthcare and consumer products executive, as COO shortly after the buyout closed in 2004. Stecz added the president title the following year with the departure of Chris Cerf. Now, with Whittle becoming CEO of Nations Academy, Stecz replaced him as CEO at Edison. Whittle would remain associated with Edison—the vehicle through which the Liberty investment was being made—but now as chairman.

Whittle immediately began doing what he did best: selling. Reminiscent of his initial claim that Edison would require a $3 billion investment, Whittle now predicted that this venture would produce $3 billion in revenue across sixty campuses around the world by 2021. In the shorter term, he hoped to open the first two such schools—one in New York and one outside of Washington, D.C.—by 2010 and another ten in cities like London, Shanghai, Paris, Hong Kong, and Los Angeles in the subsequent couple of years. Whittle announced an agreement to buy the historic Bethesda estate of early National Geographic editor Gilbert Grosvenor61 and then a deal with Douglas Durst to develop 240,000 square feet on West 57th Street.⁶²

During Whittle’s publicity tour for the venture, Nations Academy expressed confidence that there was “enough money in place for the initial work.”⁶³ In fact, the ongoing operating costs of this venture would eat up all of the capital contributed before ground was broken on the first school. Indeed, according to private equity investor Lynn Tilton’s complaint charging “brazen fraud,” by early 2008 Nations Academy had gone through all of its initial funding and was facing a series of $10 million deposit installments to Durst.

Lynn Tilton is not someone you want to mess with. A colorful, self-described billionaire, her private equity firm, Patriarch Partners, owns seventy-five portfolio companies including defense contractor MD Helicopters.⁶⁴ According to Tilton’s lawsuit, Whittle and Varkey tricked her into wiring them $5 million based on a wide range of false representations and concealed facts about the venture.⁶⁵ Buried in the complaint is an excerpt of a memo Tilton somehow obtained in which Whittle threatened to blow the whistle on the precarious nature of Nations Academy’s prospects as part of his ongoing employment negotiations with Varkey. Just as in the Channel One sale and in the Edison go-private transaction, Whittle had managed to ensure that satisfying his personal needs was a requirement of any transaction.

Tilton had asked for written confirmation from Whittle of his continued employment at Nations Academy, and he provided that a few weeks after the threatening memo to Varkey. Tilton wired the money a few days later, on July 1, 2008. In August, the Durst project was abandoned before the next $10 million payment came due. By September 1, Whittle was no longer CEO of Nations Academy; the Washington school plan was publicly dropped a few weeks later.66

A year later, however, Whittle somehow had found a new secret funder to entice Durst to go ahead with an even more grandiose construction project at the same West 57th Street location for the same purpose, albeit with an undisclosed new name.⁶⁷ That funder was global education publishing giant Pearson. Reminiscent of Philips’s earlier investment in Channel One, Pearson’s funding would have been contingent on a deal under which the school would commit to use Pearson materials and technology so that much of its “investment” would come back in the form of purchased goods and services. On closer inspection of the business plan, however, Pearson ultimately could not justify the arrangement as an economic matter even with these structural advantages. The project was again abandoned.

The next year, 2010, Whittle located a warehouse near the New York High Line owned by a different developer that could be renovated for a fraction of the envisaged $200+ million construction project on 57th Street. Rather than relying on the questionable availability of tax-exempt bonds from the city Industrial Development Authority as he had the last time around, as little as $75 million ($60 million of which was for the building) from investors would cover the start-up costs of the New York flagship school of his planned global network. Whittle poached administrators from brand-name private schools like Dalton and Hotchkiss, but installed a long-time associate from Whittle Communications with no education experience as president.

Given Whittle’s own track record and the lack of any proven for-profit education operating executive, who would underwrite the rechristened Avenues School, now described with typical Whittlesque hyperbole as “the first global school”? The answer was in part the same people who had lost money in Whittle’s last two ventures, Liberty Partners. In January 2011, they and another private equity firm, LLR Partners, announced that they had split the $75 million investment required.⁶⁸ What were they thinking?

LLR is a mid-market Philadelphia-based firm for which “consumer and education” is one of six identified investment focus sectors. The partners had developed an investment thesis around an apparent market imbalance between the emerging wealthy in major metropolitan areas and the educational opportunities available to fulfill their aspirations for their progeny. Somehow they became convinced that the power of this idea combined with Whittle’s prodigious marketing skills more than counterbalanced any concerns about Whittle’s past performance.

Liberty is a more complicated situation given their long unhappy history with Whittle. The fund is currently in wind-down mode and declined to provide any perspective on their decision making. The unusual structure of their original investment vehicle has already been described and could provide part of the explanation. In addition, however, some have speculated that, because the Avenues investment was initially made through the shell of the failed Edison venture, it was viewed by Liberty as a “Hail Mary” pass to salvage the returns from the overall Whittle relationship.69

Within a few months, the Whittle marketing machine was in full swing in anticipation of a fall 2012 opening: a “spectacular” launch luncheon “attended by a who’s who of New York educators,”⁷⁰ profiles and interviews across major media, a slick ad campaign including glossy full-page ads in the Wall Street Journal and New York Times, and over 100 elegantly catered informational sessions for prospective parents at the Harvard and Core Clubs and posh hotels mostly in New York but as far away as Beijing. These presentations were described as “masterly” by the New York Times and vintage Whittle: “packed with alarming figures and thoughtful reflections on so many different forces at work in the world and in education: the rise of China, the failure of American education, the importance of reading, the aspiration that our own children will not only embrace the world but also be fluent in it.”⁷¹

A skeptic might be forgiven for finding Whittle’s basic pitch a little reminiscent of Harold Hill’s pitch to the residents of River City: your child is facing Trouble (with a capital T) if he or she goes into the newly global world without the otherwise unavailable tools that only “the first global school” can provide. Surprisingly, there was relatively little skepticism in much of the reporting on this newest venture. Most certainly made reference to Whittle’s shaky track record. But even the New York Observer, traditionally the most skeptical of Whittle critics, somehow concluded that the Avenues venture had the hallmarks of the work of someone who had learned his lessons: “The difference, it seems, is that Avenues is eminently doable.”72 Although mentioning that the Nations Academy initiative had recently been scuttled, articles blamed this exclusively on the global downturn of 2008, and no reporter seemed to have noticed the by-then-public lawsuit brought by Tilton.

The aggressive marketing combined with the scarcity of space at the more established New York City private schools enabled Avenues to open its doors to an impressively large contingent of students in the fall of 2012. Since then, buzz about the school from parents has been largely positive. But amid the good feelings of the successful launch, basic unanswered questions remained about the underlying economics of the enterprise, the availability of continued funding, and even the product being delivered.

On economics, given the financial fate of Whittle’s previous ventures, one might have expected a fully baked explanation of how the math would work. Instead, the explanations were reminiscent of those given at Edison’s launch with talk of scale (this time globally) and efficiencies, buffeted largely with anecdotal evidence. For instance, when pressed on cost savings, Alan Greenberg, the former Esquire publisher selected to run the actual enterprise day-to-day, pointed to the fact that “there are some schools in town that teach 15 languages. We teach two. Huge efficiency.”⁷³

Unfortunately, language programs are not a big driver of a school’s overall cost structure. Salaries are. In addition to a formidable central overhead of long-time cronies, Whittle was paying high-profile teachers and administrators as much as 20 percent higher than average to attract them to his untested venture.⁷⁴ In addition, Avenues made unprecedented technology start-up investments including the provision of both an iPad and MacBook Air to each student. This approach imposed costs not seen at any other school, private or public.⁷⁵ And, of course, significant development expenses are associated with the planned network of twenty global academies. The head of a competing Manhattan private school marveled at the outsized spending on salaries, marketing, capital, and development and concluded that “either Chris Whittle has lost his mind again or,” in the alternative, “the investors have lost theirs.”⁷⁶

On the “positive” side, financial aid was much more limited than at a typical private school.77 Whittle claimed that the New York campus had already “broken even” months before its doors first opened in 2012.⁷⁸ The problem is that this literally could not be true as, under generally accepted accounting principles, revenue cannot start to be recognized until services are actually delivered. Only a few months later, Benno Schmidt, who took the role of chairman at Avenues, told a reporter that the school would start turning a profit “in about five years’ time.”⁷⁹

The $75 million Whittle had raised was largely spent on the building, but Whittle went to great lengths to assure his various constituents that there was minimal risk associated with future financing needs. The school, he said, would take on no debt and would fund future growth from the cash flows and a single round of additional funding.⁸⁰ The remaining nineteen schools, he said, will cost $500–600 million to establish, although it is not clear why these—some in locales with even higher real estate costs than New York—are projected to be less than half as expensive to create on average.⁸¹ Although Whittle often touted the unique vision of Avenues, when it came to finances, he insisted that there was nothing unusual or complex about Avenues. “It’s pretty simple,” he told the New York Times, “there are thousands of examples worldwide to demonstrate it works.”⁸²

The question of whether a new school is any good takes many years to assess. Avenues graduated its first class in 2016. What is clear is that the venture is taking on a lot. Avenues is committed to an immersive curriculum in which half of all subjects, at least in the early grades, are not taught in English. Simultaneously developing a demanding new curriculum—one that integrates existing and new material consistent with its World School conceit—and opening all grades from nursery school to ninth, was a massive undertaking.

The idea of learning bilingually is not a new one, but its successful execution is complex and expensive. My own daughter goes to the Lycée Français in New York, which is part of a global network of almost 500 French government–subsidized institutions whose basic pedagogy was established by Napoleon over 200 years ago.⁸³ In addition to the historic track record, the Lycée usually requires that at least one parent supports the French language at home because of how demanding it is to learn bilingually. Avenues has no such requirement with respect to either its Spanish or Mandarin programs.⁸⁴ On a more practical level, the Lycée has a global network and home country from which to draw teachers qualified to teach all subjects in French. The challenge for Avenues in this regard is not trivial.

One key positive aspect of Avenues’s financial model that Whittle did not speak about publicly is that it starts in nursery school. The cost of delivering education increases with student age. High school is by far the most expensive program, and the nursery and pre-K years cost a small fraction of this to administer. Tuition for these early years, however, in the prestige-obsessed New York market is usually not significantly less than for later years—and this holds true at Avenues. Most of the other high-end private schools that Avenues benchmarks against start at kindergarten despite the outsized “profitability” of the earlier years. The reason for this is the inability to meaningfully test at that age whether a child is likely to be able to meet the challenges of the later curriculum. In addition, a variety of cognitive disorders do not manifest themselves until after these years. It is because of such late-manifesting problems that the Lycée Français of New York eliminated its “petite section” several years ago, even though it is part of the French national curriculum. Whether Avenues’s scholastic ambitions will ultimately clash with its desire to milk the cash flow potential of preschool will not be known for some time.

For once, Liberty had leverage with Whittle as it could block any new investor. But new cash was needed desperately as Avenues slowly grew into its full capacity a grade at a time. Relations between Whittle and both private equity investors had become poisonous by this time because of a recurring issue in Whittle ventures: a lack of internal expense controls. The marketing costs incurred to mount the impressive Avenues launch bore little resemblance to the approved budget. Furthermore, the promised international expansion would require significant new capital. Despite Whittle’s public assurances that financing the international expansion would be simple, it seemed that every few months his timetable slipped. He had originally promised that Beijing and Sao Paolo schools would open in 2014. Then, Sao Paolo slipped to 2015. Then both did. Liberty stood firm and insisted that any new money that came in would also need to take them out.

For a second time, Pearson had left Whittle to start over. In this case, however, time was running out, limiting his options dramatically. John Fisher, the billionaire known for his interest in sports teams and educational philanthropy, had invested $5 million in the original $75 million Avenues financing (as did current Illinois Governor Bruce Rauner) and earlier expressed interest in an additional investment on very different terms and with very different governance. Whittle had waved him off, and the larger investors permitted him to do so as long as the Pearson deal that would have left Whittle in charge was a live option. Once the Pearson deal collapsed, Fisher began to deal with the other investors directly. Whittle’s 2014 annual letter may have relegated his “important” new investor and new leadership team member to brief mentions following pages of details on the planned China expansion, but it was clear that Fisher’s new team was now firmly in charge. Less obvious was whether this team had the same stomach for costly international initiatives—the letter also touches on plans and discussions in Sao Paulo, London, Shanghai, Hong Kong, Delhi, and “the Gulf region”—or whether they would focus closer to home.

When asked about his greatest fear regarding Avenues, Whittle said that he dreaded it becoming “just another fine private school.”85 Although no formal announcement would be made, it soon became clear that the new owners would indeed dramatically scale back Whittle’s promise of twenty schools in ten years. The following year’s annual letter from Whittle was unusual in two respects. First, it did not represent “an ‘official’ Avenues statement but rather” Whittle’s “own opinions.” Second, titled “A Beginner’s Report on China,” it was described as a “personal reflection more than a progress report.” The almost 3,500-word musing on life and China was also notable for the fact that it said remarkably little about Avenues at all. Two months later, in March 2015, Whittle formally cut his remaining ties to Avenues.⁸⁶

Whittle, who will turn seventy in August 2017, has said of his ambitions for Avenues, “I view this as the last rodeo.”⁸⁷ Such pronouncements from Whittle need to be taken with a grain of salt. As one incredulous research analyst remarked a dozen years earlier after Edison had been taken private: “If you look at his history, he’s like a phoenix. Who knows what his next venture will be?”⁸⁸ Indeed, on announcing his resignation, Whittle already was singing a different tune. “It’s in my blood,” he said. “If there’s anything an entrepreneur knows it’s how to begin again.”⁸⁹

The more interesting question is whether sophisticated outside investors would ever back him again. There is a quarter century of evidence that the answer is probably yes. As compared to his other ventures, Avenues for now seems at least a relative success. Notwithstanding the lack of tangible financial or pedagogical proof of actual “success” and the continuing deferral of any international element to what was to be a “global” school chain, early enrollment numbers are genuinely impressive. And although this time the investor who saved the day could only be enticed by the promise of Whittle’s exit from any further management role, the reality is that Liberty appears to have gotten out more than whole for a change.

Take Chris Cerf, the lawyer without any operating experience who was nonetheless chief operating officer of Edison. As the stock collapsed and performance faltered, the company had to hire a different executive to re-engineer the business for efficiency even as Cerf not only remained as COO but got the additional title of president. And Cerf brought in his investment banker brother, without informing the board, to prepare to market the company on behalf of the management team. One Liberty executive involved in bringing on Terry Stecz as COO (notably not reporting to Cerf, who remained briefly as president) described Cerf as a “nice guy” but said that he had “nothing in his background to prepare him to be COO of an organization of that complexity.”

This track record has yielded increasingly high-profile positions. On the public side, he served first as Deputy Schools Chancellor in New York City and then Governor Christie’s Commissioner of the New Jersey Department of Education.90 On the private side, he set up a series of consulting firms in his home but was ultimately briefly hired to lead the U.S. business of an obscure private Brazilian company called Sangari Global Education.⁹¹ After his stint working for Christie, however, Cerf was tapped to run a division of Rupert Murdoch’s unprofitable educational business before it collapsed. From there he was made superintendent of Newark’s public schools.

Benno Schmidt has never worked for any for-profit business not affiliated with Whittle to hire him. But he has secured a number of high-profile appointments in the nonprofit and public sectors that suggest a lack of concern regarding his leadership as chairman of the board of Edison. Most notably, he has served as chairman of the board of trustees of the City University of New York. The late John Chubb was the Brookings Institution researcher who was a member of “Mercury astronauts” who produced the Edison School design. This association did not impede his being appointed president of the most influential national trade association of private schools or being sought for public policy advice by presidents and presidential candidates.⁹²

Part of why alumni of the failed Edison adventure fared so well is that they have positioned themselves as early “leaders” of the so-called school reform movement. Although Edison was much more focused on getting contracts to operate entire school systems, some of their schools were operated under early charter school legislation—when it went public, twenty-four of the first seventy-nine schools were “charter” rather than “contract” schools. In the fifteen years since then, charter schools have become a generic symbolic of efforts to improve public schools outside of the constraints of the existing bureaucracy. As in many intense political battles, the operational track records of fellow travelers are not always examined closely. So Edison alumni have come to be embraced by school reform advocates as charter school pioneers, despite the dramatic public implosion of their business enterprise.

More astonishing are those who have continued to invest with Whittle after having been previously disappointed, sometimes more than once. Even if one were lucky enough to make money with Whittle by getting out early, surely the logical reaction when the inevitable collapse came would be: there but for the grace of God go I. Yet a significant number of investors have come back for more. Liberty only represents the most extreme case. There are many others.

One might think the embarrassing experience of losing clients’ money by vouching for Whittle at two successive institutions would have soured Moe on backing Whittle again. But today Moe is the chief investment officer and portfolio manager for GSV Capital, a public vehicle he founded that buys private stakes in venture-backed companies. Avenues has been one of GSV’s top ten holdings, along with the likes of Twitter and Palantir Technologies, and remains a significant part of the portfolio.93 In addition to the $10 million put into Avenues in May 2012, GSV bought a $1.5 million stake in an Avenues affiliate called Whittle Schools in September 2012. Finally, Moe sought to invest more in the new Avenues deal that Pearson ultimately withdrew from. Since its IPO at $15/share in 2011, GSV shares have traded down significantly, settling between $5–6/share by the beginning of 2016.

The resilience of Whittle after a quarter century suggests that his remarkable marketing and promotional skills are even more effective in the educational domain. Psychological research strongly suggests that we are more likely to believe claims that confirm our previously held views.⁹⁴ This tendency may be even more powerful where these views take on an intense, personal aspect borne of formative developmental experiences.