THESE TALES FROM the frontlines of educational enterprise span a wide range of subsectors, business models, and ambitions. What they mostly share is a bleak ending. We have seen, however, that in many cases, these endings were not forgone conclusions. Some investors have managed to do just fine operating in precisely the same domains as others who fared poorly.
Chapter 5 focused on the structural commonalities of the best educational businesses and the strategies for ensuring their enduring success. Considered alongside the preceding detailed case studies of financial catastrophe, this framework provides a critical context for distinguishing the avoidable from the inevitable. The perspective provided facilitates the identification of consistent themes from the ashes of the diverse failures. The dozen lessons that emerge are mostly subjective observations rather than fundamental imperatives. They take the form of cautionary reminders, empirical observations, and hopeful exhortations. The themes relate as much to the recurring behaviors and attitudes of education investors as to the industry structures that define the ultimate outcomes. Some of these lessons are education specific, while others are broader principles. Even when the concept is more general, however, its application to the educational domain is colored by the idiosyncrasies of both the structure of the sector and the aims of those who invest there.
The Road to Disastrous Educational Businesses Is Paved with Good Intentions
The idea of doing well by doing good has intuitive appeal and is a venerable American tradition.1 Although true motives are often difficult to discern, most of the money-losing ventures profiled here were animated in part by a genuine desire to improve education. There is good reason to question the sincerity of the distressed debt hedge funds that took control of Houghton expressing only a desire to “educate children in innovative and thoughtful ways.”2 But this is one of the outliers in our pantheon of money losers, and even those funds felt an obligation to articulate high-minded ideals.
There is no reason, however, to question the intentions of controversial figures like Michael Milken and Rupert Murdoch. The former may have been inspired by a quest for redemption and the latter by an unhealthy preoccupation with unions of all kinds, but both had a sincere belief that their investments could profitably increase the productive potential of the population. One could argue whether Chris Whittle and Barry O’Callaghan were just con men. I neither case is such a conclusion fully justified by the facts, although in both cases, the money involved was not mostly theirs. Nonetheless, their pitches to those who parted permanently with their cash tightly tied the ability to generate personal wealth with the ability to improve social outcomes.
Less clear is whether good intentions in general tend to lead to bad results. A review of 167 studies of any link between corporate social performance and corporate financial performance found little relationship,3 but it also did not find that doing good actually led to doing bad. There may, however, lurk a deeper structural danger from actually mixing an investment decision with nonfinancial objectives.
It is hard enough making good investment decisions in the complex education sector without burdening them with additional considerations. As educational philanthropists from Bill Gates to Mark Zuckerberg have learned, it is even difficult to make successful “investments” in education with no expectation of any financial return. In reviewing the anecdotal evidence presented in this book, one gets the strong impression that the personal life experiences of the investors and entrepreneurs present an additional obstacle to clear-eyed thinking. Life experience is often a useful source of investment ideas. This is merely speculation, but it may be that the intensity and transformative nature of youthful educational experiences has often made it difficult for investors to draw the proper business inferences.
Many of the otherwise successful investors and businesspeople who made bad education investments went to elite private universities, aspired to do so, or seemed otherwise preoccupied with securing their imprimatur. These institutions have a number of exceptional qualities, but they are not great organizations with which to do business. First, they represent a tiny fraction of the overall market, which is dominated by heavily subsidized public universities. Second, these institutes are far more interested in protecting their exclusivity than growing and their nonprofit ethos and bureaucratic decision making are a significant additional barriers to finding common cause. Third, and most important, although they are nonprofits, these enterprises themselves have overwhelming barriers to entry, making the outcome of any commercial arrangements ultimately consummated likely to be lopsided in the schools’ favor.
The best evidence of barriers to entry is lack of entry. In the past fifty years, only Stanford University has broken into the top tier of elite U.S. universities.4 First Japan and more recently China and a number of Middle Eastern countries invested hundreds of millions over many decades to establish universities of this caliber, only to discover how deep the moat around this elite group is. The network effect of current and former students and faculty continuing to attract the best and the brightest is an enduring legacy that even bad management, indifferent teaching, and plagiarism scandals cannot undermine.
And yet, educational ventures consistently aspire to secure a pact—or worse, to compete—with a top-tier university at all costs. Like most deals that an investor wants in the worst way, that is precisely the way it comes to pass. As Michael Milken and Andrew Rosenfield learned, when the price of “success” is to provide their prestigious partners with “money for nothing,” failure is actually a better option. The argument that these kinds of deals are loss leaders that will accelerate the ability to attract other, more profitable customers is simply not borne out by the facts. Indeed, as painful as it is to negotiate an agreement with a leading nonprofit university, it is a walk in the park compared to actually working with one on an ongoing basis. Interestingly, the businesses interacting with these institutions that have done well are those that have to capture the loyalty of the most powerful decision makers: the faculty. If a tenured professor has grown accustomed to teaching out of the same textbook, no administrator or procurement officer will ever even try to get that professor to change.
The relative unattractiveness of this end of the market is also reflected in the relative performance of players in the OPM market discussed in chapter 5. 2U has seen its stock flourish as it delivered $150 million in 2015 revenues managing online programs for top-tier universities like Yale and Northwestern. Academic Partnerships, a private OPM company with an investment from Insight Ventures, by contrast, had just under $100 million in total revenues, but more than 2U in the market segment that is its exclusive focus: public universities. The difference in target customer base translates into a very big difference on the bottom line. Academic Partnerships is highly profitable while 2U continues to bleed money.5
Besides the generally unappealing nature of leading private universities as customers, this result is driven in part by two significant aspects of the respective cost structures. First, the upfront costs incurred by 2U on behalf of their demanding clients with myriad bespoke requirements dwarf those of Academic Partnerships, which benefits from the strong similarities in the needs of public institutions. Second, student recruitment—a key component of the overall OPM value proposition—represents a much more manageable cost where students (typically working adults) are overwhelmingly drawn from the local geography. Tuition at public institutions is a relative bargain and the university brand is strong among both students and their prospective employers locally.
An even more recent venture backed by Benchmark, one of the most respected venture capital firms in Silicon Valley,6 actually wants to compete with the Ivy League head on. Minerva Project’s well-meaning conceit is that the path to a great education is for students to live in rented housing in a rotating series of major international cities each semester and take their classes through computers.7 Like UNext fifteen years earlier, it boasts a world-class cognitive psychologist responsible for the pedagogy, big-name academics as advisors, and a hyperconfident leader, without much relevant experience, who serves as the “principal evangelist.”8 Much of the diagnosis of the ills of the current system of higher education that Minerva CEO Ben Nelson relates at conferences and in interviews rings true. The noble objectives of focusing on actual learning to solve real-world problems rather than grades and credentials are inspiring. But there is no evidence that these objectives produce better outcomes, and there is plenty of reason to suspect, declarations of “brilliance” by commentators aside,9 that the business model—classes limited to nineteen students, tuition half of competitors’, competing directly with the most selective universities, eschewing all federal funding, building the enterprise on a bespoke learning platform—is not sustainable.
Regardless of any actual correlation between doing good and doing well, with respect to the management of or investment in for-profit ventures, one basic fact is incontrovertible: one cannot do good for very long if the business does not do well enough to survive. Yet there is a sense that some of the investors and operators profiled in this book thought that the mere fact of pursuing a high-minded ideal should allow them to be given a pass on rigorous financial standards. If one truly believes in the ideal, however, that argues for a higher, not a lower, financial standard. Given the risk of business failure to both the ideal and the investors, operating close to the line is foolhardy. Doing well is a necessary but not sufficient condition of doing sustainable good. The possibility of doing good would expand exponentially if more investors and managers shifted their focus even incrementally toward the fundamental question of what qualities are most important in building successful educational franchises.
Beware of Bankers Bearing Gifts
Jean-Marie Messier became a symbol of just how much damage could be done with an investment banker actually running a company.10 His ownership of Houghton Mifflin was brief and represented a tiny fraction of the ultimate value destruction. Notwithstanding that cautionary tale, a surprising number of failed pure education ventures were entrusted to bankers, lawyers, or consultants with big ideas and little business operating experience. Michael Milken put Ron Packard, veteran of McKinsey and Goldman Sachs’s merger department, in charge of online charter school operator K12 Inc. and put Andrew Rosenfield, a university law lecturer, in charge of what started as Knowledge University. Rupert Murdoch gave brilliant litigator Joel Klein carte blanche and a blank check (and a News Corp. board seat) to reshape elementary education. Investors in Edison Schools let impresario Chris Whittle surround himself with lawyers rather than operators—First Amendment expert Benno Schmidt as chair and former White House counsel Chris Cerf as president. In the case of former banker Barry O’Callaghan at Houghton, he at least had some self-awareness—possibly pressed on him by lenders and investors—that he needed to augment his team with a senior operating executive. The problem was that he then appointed his corporate lawyer as president.
As a banker and recovering lawyer myself, I would never diminish the many talents that the finest service professionals exhibit. But running a company well is not one of them. Good lawyers in particular have one notable dangerous quality in business: they are effective advocates for their client, even when their client is guilty. That talent makes the world go round in our system of justice, but when the “client” is a misguided business idea, investors inevitably lose. When I asked a frustrated former executive of UNext to describe the company’s single biggest obstacle to success, he identified the fact that lawyer-CEO Rosenfield “could win any argument.” The exec said that unfortunately, “it didn’t mean he was right.”
There is nothing that makes individuals who began their careers in these various professional roles incapable of one day becoming a CEO. It is just that the functional skills required to excel in each are dramatically different. In addition to raw intelligence and a command of the technical aspects of their chosen profession, the most successful service industry executives shine where it matters most—in sales. Unless you make the cash register ring, the chances of eventual partnership for even the most brilliant professional remain bleak. Salesmanship is certainly useful in a CEO—we have seen how these skills enabled the executives mentioned to successfully attract capital and manage investors. The problem is that this is not the CEO’s core function; managing the operating performance of the business is. To transition successfully from a service role to a leadership role requires development of these very different capabilities, which are only obtainable through operating experience. It is for this reason that public companies almost never appoint a CEO without a track record either in the field or in running another organization—even CFOs rarely get the nod without first being given divisional profit and loss responsibility.
In education, not just good intentions are overrated; so is the ability to compellingly articulate and effectively sell a vision to realize those good intentions. It is in this role that the best lawyers, bankers, and consultants particularly outperform. Instilling a shared mission to the troops is a genuinely important task for a CEO. But no matter how effective at this he or she may be, without the basic tools and capabilities to deliver on that promise, a CEO is destined to breed a culture of cynicism and, ultimately, failure.
It’s the Industry Structure, Stupid
Chapter 5 emphasized the importance of industry structure to building and growing successful education businesses. Warren Buffet famously said, “When a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”11 The failed efforts that populate this book repeatedly ignored this fundamental truth in ways big and small.
To be fair, the structures of the various sectors of the education industry profiled are diverse and complex. Getting one’s arms around industry structure in the first place is not for the faint of heart. In typical media industries, it is not unusual to confront two-sided (consumers and advertisers) or even three-sided (buyers, sellers, and advertisers) markets. In education, twice as many constituencies may have a role in buying decisions: students, parents, teachers, and administrators (at the local, district, state, and federal levels), as well as various political entities. The actual and potential competitive set often includes not only other for-profit businesses but also both public and nonprofit entities and even DIY solutions. Difficulty, however, does not suggest impossibility, though it does reinforce the importance of closely aligning strategies with the nuance of industry structure. All forms of hubris are particularly misplaced in a sector characterized by a multiplicity of anachronisms. At the end of the day, although a convoluted industry structure may be challenging, it is far more likely to yield attractive business opportunities than are straightforward ones. Transparency is the friend of the consumer, not the producer, and barriers to entry are exceedingly difficult to enforce when information flows freely and evenly through the ecosystem.
No amount of brilliance or good intentions can overcome an unwillingness to accept the predominant role of understanding industry structure in achieving superior outcomes. The best evidence of this deep strategic infirmity is the tendency to blame the market itself rather than the inability to effectively serve it. Those responsible for failed businesses often continue to insist that the problem was not the product but the failure of the marketplace to appreciate the wisdom of their approach. This excuse is not unlike the student who brags that he could have achieved a perfect score if only he had studied. In business, being “ahead of your time” is not a legitimate justification but an embarrassing admission. As discussed in chapter 5, there is no such thing as a “first mover advantage.” The relevant question is, When can a significant infusion of investment spending facilitate the acquisition of scale? The evidence is overwhelming that scale is rarely achieved by going first. The strategic challenge is to identify the moment when the market and technology will allow a product to move from serving early adopters to being one of mass adoption. It is not easy to recover from either going too early or waiting too long.
Even great businesspeople suffer great business failures. Taking a risk that doesn’t pan out is not necessarily a sign of incompetence or foolishness. The greatest businesspeople learn from their past mistakes to build their most successful enterprises. Conversely, investors in individuals who misdiagnose or refuse to acknowledge the source of their previous failures get what they deserve. Whether it’s Barry O’Callaghan’s post-bankruptcy confidence in the wisdom of his pre-bankruptcy investment thesis or Joel Klein’s insistence that he should get extra credit points just for being “innovative and transformative” after a billion dollars had been lost, these constitute “tells” of the kind that could have saved many of the unhappy investors profiled.
Execution Matters
The importance of the principles pursued by the highest-minded educational ventures has consistently led investors to lose focus on the importance of execution. We have seen one manifestation of this in the decision to place salespeople, rather than operators, at the head of the organizations. Mission-driven organizations may have a structural tendency to devalue execution and overvalue the virtues of being a true believer. What else could explain the ability of Chris Whittle to continue to attract capital in the face of serial financial implosions or the ability of his failed Edison leadership team to easily find high-profile, education-related positions in businesses, government, and NGOs?
Another challenge to effective execution has been to place an entirely different kind of executive at the top of these businesses: the education expert. Former educators or executives involved in curriculum development have a special caché that has frequently led to their elevation to roles for which they are ill equipped. Tony Lucki began his education career as many industry executives did—as an assistant editor. He worked his way up the publishing ladder and was eventually put in charge of the entire education division at conglomerate Harcourt General, before jumping ship to Houghton Mifflin under Bain/Lee after Reed bought Harcourt and passed Lucki over for the top education job. Although Lucki was well regarded as a publisher, he had no experience as a CEO of an independent, private equity–backed company. The complex seasonal working capital dynamics and cash flow drain from plate capital expenditure require careful management in the best of times, and in the context of a business with a substantial debt burden, it is a matter of life and death. The point is not that developing effective publishing programs is not an important part of being a successful educational executive; it is that, like sales expertise, it represents a small part of the CEO’s overall responsibilities.
Although Bain/Lee did well on their investment because of the outlandish price paid by O’Callaghan, the business was absolutely stagnant and paid down no debt under the years of Lucki’s leadership. Lucki had no experience in, nor did he show any apparent aptitude for, managing a highly leveraged educational publisher. O’Callaghan then added both more debt and a series of new, even more significant management challenges. The integration of Houghton first into Riverdeep and then into Harcourt entailed a massive restructuring of both the cost base and the organizational structure. Experience with developing strong publishing programs is of little help in these often-painful exercises. Lucki stepped down from his CEO role less than eighteen months after the Harcourt acquisition closed.
Educational specialists have been responsible for some fantastic products, but ensuring that that those products achieve their full potential usually requires professional management. The parents who founded Renaissance Learning in the mid-1980s did a spectacular job of spreading the word and building the product. After going public in 1997, Renaissance looked like it was poised to hit $100 million in revenues in 2000 and grow to more than $130 million the following year. The business did grow to over $130 million in revenues—but not until a decade later. In the interim, the company was plagued with missed earnings that could wipe out half of its value in a day based on not just the unpredictability of school funding cycles but also poor product rollout planning.
In 2011, private equity firm Permira purchased the business, whose margins had declined over the course of the previous decade. Permira installed Jack Lynch Jr., a respected operating executive hired from Wolters Kluwer, as CEO. Although Wolters is not in the education business, it is a global provider of information, software, and services to law, tax, finance, and health-care professionals. Once installed, Lynch quickly completed the transition to a 100 percent SaaS model, closed a hardware division that had been established through a misguided acquisition by the founders, and focused on managing the core reading and math products effectively. Revenues grew more over the next three years than they had in the previous decade, and profit margins hit all-time highs. After receiving an investment from Google at a $1 billion valuation, Permira quadrupled its original investment when it sold the business in 2014.12
This pattern has repeated itself in many of the more successful education investments profiled. George Bernstein had no significant experience in the education sector when he took over Nobel Learning. Although he had graduated from law school and started his business career as a consultant, Bernstein had held a series of relevant retail operating jobs—most recently as president of Pearle Vision. Current Turnitin CEO Chris Caren was similarly bereft of educational bona fides when he joined the company in 2009 after a career in a variety of relevant management roles at other software businesses, including Microsoft and Oracle. When Apollo looked for a CEO to lead McGraw-Hill Education after the successful completion of its LBO in 2013, they turned to David Levin, a seasoned executive who had run a range of public media and technology companies, but none in education.13
Continuity Counts
The importance of continuity in education manifests itself in a wide range of diverse contexts. Continuity matters in everything from how students actually learn to how school districts make product adoption decisions. As such, accounting for continuity is essential both to building robust educational business models and designing sensible educational public policy. The critical role continuity plays in business resiliency and product effectiveness is inconsistent with a relentless focus on identifying “revolutionary” approaches to education. Indeed, there is a strong correlation between the magnitude of the failure of the ventures profiled in these pages and the extent to which their business propositions required a fundamental transformation of the existing order.
Continuity is central to both establishing and maintaining competitive advantage in business. The key to reinforcing customer captivity is the constant focus on product quality and consistency. Conversely, the fastest way to lose a preferred position is by falling down along these competitive dimensions. Particularly in education markets, in which the teachers and administrators who dominate purchase decision making are notoriously resistant to change, it is always far safer to implement regular, modest product improvements rather than undertaking anything dramatic.
This is true even if the proposed modification would represent a significant upgrade. As an example, even though the legacy Chancery software serving major urban school districts represented a far less robust offering than the PowerSchool product, Pearson (which owned both) made no concerted effort to migrate customers. Distinct from the inherent intransigence of the customer base, more radical changes have a number of other practical obstacles to effective implementation. For example, fundamental retraining of the teaching force responsible for delivering an entirely new educational approach can be fraught with difficulty.
Similarly, the best way to grow a strong existing business is to add adjacent products and functionality that build on the customer’s strong product connection to the core. Nobel Learning has lower customer churn in its early learning business than many peers, and it uses this loyalty to feed its elementary school operations. This task is achieved in part by establishing a consistent overarching curricular framework as well as a continuous mechanism to track students and communicate with parents.
For a new business trying to ultimately displace an incumbent, a Trojan horse strategy almost always beats a revolutionary one—even if revolution is the ultimate objective. Initially offering something to enhance or augment, rather than completely replace, the existing way of doing things is far more likely to secure a hearing. If product consistency is imperative for captivity of current customers, it is even more important to attract new customers. A devoted client may forgive an unusual disappointment, but an unhappy first-time user is unlikely to offer a second chance.
Chapter 2 focused on Amplify’s overly broad ambitions rather than the relative virtues of its various products. Regardless of these possible merits, Amplify consistently underestimated the structural challenges to convincing teachers, principals, districts, and states to quickly commit to the wholesale adoption of new, untested products. Amplify developed, at great expense, a pure digital-reading middle school curriculum—along with some hybrid reading products for earlier grades and digital supplemental products for math and science—which it introduced in 2014 at the South by Southwest education conference in Austin, Texas. The previous year, it had introduced its custom-built tablets at the same conference, only to have to reimburse its largest customer almost $5 million shortly thereafter due to broken screens and melted chargers. Amplify was thus forced to introduce the new curriculum product at the same time as it announced “a do-over for its brand image” as a provider of “device agnostic” digital content.14
As hungry as some educators are for high-quality digital content, many students don’t have computers, and many schools don’t have broadband access. Even in the best-funded districts with both hardware and network availability, administrators need a solution flexible enough to respond to the inevitable computer system outages. Amplify, however, initially did not have a print companion to its digital curriculum, making it impractical for some of those favorably inclined to adopt it. Amplify suggested to some that teachers should simply print out the interactive digital product, an obviously unsatisfactory solution. Although the company scrambled to develop a hybrid print/digital solution, as one Amplify executive described it, they were “half way along the journey” before they realized they needed to “build print back-up for every lesson.”15 The belated realization of the necessity to design and manufacture a parallel print curriculum for the “revolutionary” digital product had a variety of significant implications. The need to ensure the availability of a ubiquitous “off ramp” from the digital to the print had a huge impact on the anticipated cost. More important, Amplify already had developed a mixed reputation at best for consistency in anticipating schools’ needs. Taking a chance on the company began to look foolhardy.
Finally, teachers themselves are a key constituency in adopting new curricular products. Renaissance Learning succeeded by anticipating teacher needs and providing comprehensive professional development to demonstrate how the products would make their job easier. The teachers became the biggest advocates for the product. Amplify’s product, however, fundamentally changed the teacher’s role in language instruction. One commentator noted that the ability to simply “put their classes on autopilot” with a product that “‘choreograph[s]’ every five minutes of instruction, and often delivers it along with feedback, directly to the student” would, at a minimum, “raise eyebrows” among teachers. Furthermore, Amplify’s sales strategy was focused on the state and district levels, rather than the school level, making it unlikely to attract grassroots support from educators and local administrators.
Some of this, of course, was just poor execution. But much of it reflected a failure to appreciate the importance of all aspects of continuity in attracting and keeping customers. According to an industry trade association leader, “Schools tend to stay with companies and products that they’ve been successful with,” and Amplify “just came in too late to make any real impact.”16 The schools were already using “tablets they liked from tech companies they liked,” and the “curriculum publishers they’d already been working with had started transitioning with them to digital.”
This is not to say that there was no opportunity for disruptive new entrants, but it is useful to contrast News Corp.’s approach to the more successful introduction at around the same time of a pure digital curriculum by another media company, Discovery Communications.17 Discovery had long sold a supplemental science video product, called United Streaming, as a subscription product to schools through its education division founded in 2004. Rebranded Discovery Education Streaming Plus in 2007, the company grew its penetration in schools from 20 to 40 percent nationwide as the product incorporated not just video but also a variety of broader interactive multimedia capabilities. In deciding to enter the core curriculum market, Discovery positioned itself as a solutions provider to help districts manage the transition to digital over time. The company’s initial product launch in 2011 was limited to middle school science, where its brand credibility was highest, using the existing sales force and leveraging its existing content. In addition to embedding significant teacher professional development into the product introduction, the company established the Discovery Educator Network (DEN), an online “global community of education professionals that are passionate about teaching with digital media, sharing resources, collaborating and networking.”18 DEN became an important ally and source of ongoing feedback as Discovery expanded into additional grades and, ultimately, other subjects. The professional development efforts were so successful that these ultimately became an independent source of revenue. Today, Discovery’s science curriculum spans all grades and has been adopted in all fourteen states in which it has competed. It introduced social science curricular product in 2013 and math in 2015. Notably, the overall business is profitable, and the payback on the initial investment in science curriculum was two years.
It is not only in the corporate realm that the significance of continuity in achieving educational success has been underestimated. Although somewhat beyond the scope of this book, educational public policy has also often shortchanged the value of continuity in the effort to achieve laudable goals. The most disturbing aspect of the recent expensive reform efforts in Newark public schools, discussed in more detail later, was their failure to acknowledge the special impact of continuity on the children served, who have suffered unspeakable trauma from exposure to a combination of violent crime, family turmoil, and deep poverty. With all the well-meaning, high-minded talk that accompanied the reforms, remarkably little thought went into the actual effect these policies might have on this population in desperate need of stability.19
The poster child for successful educational reform is the State of Massachusetts. By most accepted measures, student results in the Bay State are not just the best in the nation in reading, math, and science—if it were a country, Massachusetts would be “at the top of the pack.”20 Massachusetts instituted wide-ranging reforms n 1993, and to this day, there is deep disagreement over which aspect, or what combination of aspects, has driven the stunning outcomes.21 What is indisputable is that a central leg of the legislation was the establishment of clear curriculum frameworks in each subject. Well over a decade before national Common Core State Standards were developed, the state provided its own consistent standards. Although a number of factors, both pedagogical and financial, undoubtedly supported the effort’s overall success, it is hard to imagine that the clarity and continuity of expectations for teachers and students did not also play important roles.
Specialization Is the Mother of Invention
McGraw-Hill’s sale of its educational business was not just successful for Apollo; it was also wildly successful for McGraw-Hill. McGraw shareholders valued the company more after the sale of the educational business—not counting any proceeds of the sale. How can a business that Apollo paid $2.5 billion for (and that has grown in value since) have been effectively valued by the public markets negatively inside McGraw-Hill? The answer is the remarkable power of focus. McGraw itself was a professional information conglomerate whose other businesses were characterized by extremely high renewal rates and low capital requirements. Education, with its inherent seasonality and hit-driven adoption cycle, sat uneasily within the portfolio. Although representing less than 25 percent of McGraw’s profit, education was responsible for more than half of the company’s capital expenditures. In addition, the division was a disproportionate source of earnings disappointment and a drain on management’s time.
Management’s time and attention are uniquely scarce and valuable corporate resources. Thus, it was perfectly rational for investors to value the McGraw portfolio more without education than with it, simply on the basis that management was liberated to focus on the remaining, more closely linked businesses. In the three years after McGraw’s announcement of its intention to separate its education business, the company’s stock price more than doubled, and its profits soared.
For an independent McGraw-Hill Education, the benefits were even greater. No longer the ugly stepchild that had to beg for a crust of bread, the business was the main event and had the complete attention of senior management and the new shareholders. The impact on its ability to attract and retain talent and reinvest in the most promising areas of growth were immediate and dramatic. The company filed in September 2015 to go public. EBITDA less plate grew from barely $400 million in 2012 when Apollo bought it to almost $500 million in 2015. Revenue, which had been flat, also grew.
It was noted earlier that mission-driven organizations often fail to adequately recognize the importance of operational effectiveness. There are, however, a number of tangible benefits of being a mission-driven organization, particularly in the area of talent management. The more focused the mission, the more powerful these effects. Even the ability to entice attractive educational assets to become part of the company at reasonable prices can be enhanced. Soon after becoming independent, McGraw was able to buy out its long-time partners at ALEKS and Area9 Learning, two adaptive learning companies. McGraw had worked with both companies for a decade, but only after becoming independent was it able to interest the private companies in combining their businesses on acceptable terms.
Specialization also matters for achieving operational efficiency and competitive advantage. The education sector encompasses a vast range of products and services, distribution channels, and end markets. Defining the target market as anything that expands the store of “human capital,” as Milken did, cannot be practically translated into an effective operating model or an effective business strategy. Even focusing simply on the K–12 sector with the objective of becoming a leader in curriculum, software, and hardware, as Murdoch did, is far too broad. Many areas that may seem highly specialized from afar appear much less so close-up. Educational publishing, for instance, is really a collection of smaller markets. Although Pearson and McGraw-Hill operate in both the higher and K–12 education markets, Cengage and Houghton Mifflin do not appear to operate at a disadvantage by virtue of focusing exclusively on one or another of the segments. Although certain advance placement programs and emerging adaptive learning technologies may span the two markets, the core product and distribution infrastructure are quite discrete. Indeed, success is often determined by strength within distinct geographic regions, academic disciplines, or product sets.
The best businesses start by dominating a niche and systematically building around that core franchise. Turnitin started by focusing exclusively on plagiarism software. Once that position was established, the company began to layer additional capabilities around writing effectiveness, online grading and assessment, and long-term progress tracking for students and institutions. But such is the power of specialization that even the most entrenched established franchises remain at risk of being “niched” at the margin, which opens the door to broader attack.
eCollege came out of nowhere to dominate a niche within the LMS market of serving the needs of managing full distance-learning programs. At the time, Blackboard already had relationships with almost all of those who would become eCollege’s core customers. But Blackboard was focused on the much larger market of managing what was going on in the classroom and on various “hybrid” programs. eCollege, in contrast, realized that institutions operating entirely online programs had a wide range of unique needs that required a platform specifically designed for that purpose. Blackboard may have dominated the overall LMS market, but every single public for-profit school that used an outside vendor hired eCollege to manage its online program. More broadly, more than half of the online programs that enrolled over 10,000 students—eCollege’s core target market, which encompassed public and nonprofit universities as well—used the eCollege e-learning platform.
The success of eCollege was possible because specialization facilitates both developing and reinforcing all key aspects of competitive advantage. Scale is more easily established and reinforced within the narrowly defined boundaries of specialization. Deep domain expertise allows the cultivation of intense customer relationships and corresponding captivity through product and service innovation. Focusing one’s energies on a single activity accelerates movement down the learning curve in a way not possible when those energies are dispersed across multiple initiatives.
Finally, from an investing perspective, specialization also matters. Even Warren Buffett’s track record is less than stellar when he strayed into industries in which he did not have deep knowledge of the structure and dynamics—airlines and energy, for example, in contrast to financials and consumer staples. A look at the major LBO restructurings in the education sector just since 2010 reveals billions of losses shared across most key segments of the industry. The investors represent a veritable who’s who of international private equity, hedge, pension, and sovereign wealth funds (see Table 6.1). What most had in common, however, was little expertise in the industry.
Major LBO restructurings in education sector since 2010
| Company |
Sector |
Date |
Key Investor |
Type |
| Houghton I |
K–12 publishing |
2010 |
Istithmar World (Dubai) |
Sovereign wealth |
| Houghton II |
K–12 publishing |
2012 |
Paulson et al. |
Hedge |
| Cengage |
Higher ed publishing (Thomson Learning) |
2013 |
Apax/OMERS |
Private equity/Pension |
| ATI |
For-profit university |
2013 |
BC Partners |
Private equity |
| Education Holdings |
Test prep (Princeton Review) |
2013 |
Bain Capital |
Private equity |
| EDMC |
For-profit university |
2014 |
Goldman Sachs/Providence |
Private equity |
| Edmentum |
Supplemental materials |
2015 |
GTCR |
Private equity |
| Nelson Education |
Canadian textbooks |
2015 |
Apax/OMERS |
Private equity/Pension |
Relatively few private equity firms have actually specialized in the education sector. One that has is Leeds Equity Partners, which was founded in 1993 to focus on investments in education and which raised its first fund in 1995. Leeds is now on its fifth fund, which was raised in 2010. Although not all of Leeds’s nearly fifty investments have been as successful as Nobel—they partnered with Goldman and Providence in the unsuccessful EDMC investment noted earlier—overall the industry-dedicated strategy appears to have outperformed. The latest fund was around $500 million and has achieved returns well above most comparable vintage funds, according to the benchmarks used by Cambridge Associates.22 Leeds is currently raising a new fund that will likely be significantly larger. The spectacular early returns of Rethink Education suggest that specialization is equally valuable in venture investing.23 A number of other broader and larger private equity funds—notably Apollo, Insight, Providence, Spectrum and Warburg Pincus—have also developed significant expertise within the sector. Although it is not possible to identify the returns associated with just their education investments—and, to be sure, not all of them have been winners—a disproportionate number of the most successful private education investments seem to have come from firms with a substantial specialization in the sector.
All Strategy Is Local—Especially in Education
The term specialization generally refers to expertise in a certain product or customer “space.” Of continuing and even greater importance in most contexts is specialization in physical space.24 The power of local competitive advantage, particularly in the ability to build scale, continues to be a key determinant of success in education.
Many treat geography as a passé strategic concept in the emerging global digital economy in which customers, partners, and purchases are all a click away. It is true that digital tools and capabilities have in many cases reduced the impact of local scale or have at least broadened the boundaries of the relevant locality. Thus, for instance, Nobel can now manage most of its marketing budget centrally using various online technologies and services to target the relevant demographics and localities with the right messages. But such examples overstate the impact on local competitive advantage. For Nobel, the marketing budget represents a tiny portion of the cost structure. For any business that relies on expensive mass consumer outreach requiring the use of television, newspapers, billboards, and the like, the cost effectiveness remains primarily a function of local scale. Even for Nobel, whose business (like the sector as a whole) relies overwhelmingly on word-of-mouth referrals for marketing, local density of operations is as important as ever. Being recommended to a family who does not live within a few miles of the facility is a wasted referral.
Even in purely digital businesses operating internationally, local scale often remains the prevalent industry characteristic. Turnitin is a “global” leader in antiplagiarism software. The network effect, however, derives from the tendency of students to rely on unpublished materials submitted elsewhere by a friend or online acquaintance. It is accordingly not surprising that the company’s global footprint is overwhelmingly an English-language one. In higher education, where the lingua franca of many academic disciplines is English, the proprietary database will still be valuable, but overall it will pale in comparison to the worth of a scale database of local language submissions.
Not surprisingly, the global giant Turnitin has few tools to attack markets in which a relatively small, incumbent, local competitor has been able to build a local network, even with far inferior technology. Luckily for Turnitin, this is precisely where inorganic acquisitions can actually create value for shareholders. When Turnitin purchased the leading local European competitor in Scandinavia, the company was able to realize significant fixed-cost consolidation opportunities around technology, sales, and marketing combined, as well as revenue opportunities related to its much deeper product set. What’s more, because Turnitin is uniquely positioned to benefit from these synergies, a reasonable sharing of these will result. For Turnitin’s shareholders, this outcome contrasts quite favorably with a more typical auction dynamic with multiple similarly situated suitors in which the seller is able to capture all of this incremental value creation for itself.
The desire for national or international expansion can lead investors to forget the extent to which local scale barriers are often the strongest. The tendency of digital developments to expand the borders of the relevant competitive markets is generally bad news for competitive advantage. A simple mathematical example demonstrates the point. In a given local market with some barriers, it is typical that a competitor would need to have at least a 15–25 percent market share to operate at an efficient scale, and only a few could achieve this. Once that market becomes national, however, local scale players from around the country can all become credible competitors. The scale requirement in this much-expanded marketplace could easily fall to 5 percent or less. This has two implications. First, one is likely to go from a world of a handful of competitors—with whom the chances of developing a constructive cooperative ecosystem is markedly greater—to one in which twenty or more can profitably be sustained. Second, if it is a sector in which market shares can move 2–3 percent annually, a potential new entrant in a national market could imagine a path to breakeven within a couple of years. In a local market, they would need to expect a cash drain for at least five and maybe as many as ten years.
These observations do not suggest that incumbents should ignore national and international opportunities as the industry structure makes them economically viable. Rather the point is to continue to reinforce local advantages while remaining acutely aware of others to ensure that any new markets provide a viable path to scale. Investing aggressively in adjacencies, whether geographic or in the product or customer space, can play effective offensive and defensive strategic roles. But it can also represent a costly distraction from a core franchise under threat. Which it is in any particular instance requires a nuanced understanding of the sources of incumbent competitive advantage and the potential path for establishing competitive advantage in each relevant market.
Breakups Do Better Than Roll-ups
Chapter 5 noted that acquisitions that build scale can create value for investors if multiple parties that share the same benefits don’t bid against each other for the scale-building target. In practice, however, value is destroyed most often not from overpaying for scale but from misunderstanding what constitutes scale. These kinds of strategic errors take two forms.
First, where variable costs predominate and where competitors can operate profitably at “scale” at relatively low market shares, businesses do not have relevant “scale,” regardless of their size. There are prices at which bulking up is still worthwhile, but it makes no sense to pay a meaningful “strategic” premium for a competitor in a sector in which scale is not a structurally relevant characteristic. The new private equity owners of Knowledge Learning can continue to buy child-care centers, as Milken did for twenty years, but doing so is unlikely to create any more value over the next twenty years than it did in the last.
Second, when one business buys another business, it is not scale enhancing if the two businesses do fundamentally different things. This is true regardless of whether one or the other or both of the businesses has scale on its own. This may seem obvious, but it is the source of much of the foolish deal making in the sector. Somehow owners manage to convince themselves that the relevant boundaries of the sectors within which they play are far broader than in reality. The private equity buyers of Plato Learning thought it was a good idea to buy Archipelago Learning to create a scale provider of computer-based K–12 supplemental learning products. Neither company ever gained much traction on its own in the public markets. The problem was that the specific products were sold through entirely different sales channels—one sold primarily to districts and the other to individual schools. In addition, from a product perspective, they were entirely distinct. The resulting combination took on more debt than it could support and filed for bankruptcy in 2015. It would not be surprising if the new owners, predominantly distressed-debt investors, ultimately decide to sell off the business in pieces.
A number of even less obvious expansions into educational domains have also had poor outcomes. In early 2015, the Advisory Board Company, a health-care research and consulting business, spent $850 million for Royall, a consultant to the higher education sector focusing on enrollment management. The Advisory Board lost almost a third of its overall value after it reported disappointing results for the acquisition only six months later.
Also in 2015, LinkedIn bought Lynda.com, an online video training platform, for $1.5 billion. LinkedIn shareholders should have had a heavy degree of skepticism, even before the disappointing guidance that quickly followed the acquisition announcement.25 The transactions that represent the closest precedents ended badly. In the 1990s, Monster.com, the leading online jobs platform for the previous generation, spent over $1 billion on more than a dozen off-line staffing and training businesses. When it announced the spin-off of these in 2002, in an admission that the combination of businesses made no strategic sense, the stock skyrocketed.26
A year after making the acquisition, LinkedIn shareholders received an unexpected windfall when Microsoft paid a 50% premium to buy the entire company.27 Unfortunately, however, because the company had performed so poorly in the interim, the price was still far below where LinkedIn had traded before buying Lynda.com. Microsoft shareholders should be skeptical of the “big dreams” articulated by management to “transform education” through the acquisition.28
As with the spin-off of McGraw-Hill’s education business and the education separations by Reed, Wolters, Viacom, and others before it, the track record for shareholders from spinning off and slimming down is far better than for bulking up and broadening out. In 2015, Pearson decided to sell PowerSchool for $350 million in a hotly contested auction won by Vista Equity Partners, one of the most successful private equity firms of recent years.29 This decision was not driven by Pearson’s view that this was a bad business. On the contrary, PowerSchool has some of the highest competitive advantages in the sector. Rather it was from the realization of the obstacles to connecting the management of school administration functions to Pearson’s overarching focus on improving student outcomes.
Content Is Not King, and It Is Really Expensive to Develop
In education, as in media, great content and brands are hugely valuable. Unfortunately, there is no barrier to spending large sums of money to try to create such content. As a result, the business of spending money to create great content has never been a very good one. If a movie studio only produced hits or a basal publisher was always ensured its curriculum would be universally adopted, these enterprises would spout unending streams of money. Sadly, although there are anecdotal cases of studios and publishers that had a historic run of success at some point or other, these have all come to an end. And when they do end, no one knows how to replicate those rare periods of uninterrupted prosperity.
The fact that these are both fundamentally hit-driven enterprises does not mean there are not best practices to follow—indeed, the margin disparity between the best and worst run industry players is substantial in both the entertainment and educational sectors. Nor does it mean there is not value in specialization in these businesses—studios do better when they stick to genres in which they have experience, and educational publishers do better when they stick to disciplines in which they are the leader. But the core scale advantage in both of these content-creation enterprises comes from the substantial fixed-cost infrastructure required to market and distribute the product, not from the content creation itself.
To be fair, education publishing is consistently a better business than movie making, in part because there are greater fixed-cost requirements to the content-creation side of educational publishing. Making a new movie is almost entirely a variable-cost undertaking. New curriculum product development, whether for a basal adoption or a new online course, does build on the previous fixed-cost investment in tools and content. That said, hold your wallet close whenever an educational company touts the ability to throw bodies at new content development as its unique competitive advantage—whether it is UNext spending a million dollars per course, K12 Inc. developing an entirely new basal curriculum, or Amplify hiring hundreds of developers in its hip Dumbo offices.
The cost of developing educational content has come down due to the availability of new technology. Although, for a time, the additional requirements of creating hybrid products actually increased costs, the long-term trend is clearly in the other direction. This fact is not good news but bad news for these businesses. The historic strength of educational content businesses relative to pure entertainment ones was precisely the fixed-cost requirements that are becoming increasingly insignificant. Indeed, the explosion of small new entrants on the content side is reflective of this new economic reality.
As the fixed-cost scale components of these businesses decline, the attractiveness of pure educational content businesses will also diminish. Although learning curve cost benefits should be theoretically available to educational content businesses with personalized adaptive learning models, the evidence of these is still scant. Both new entrants and incumbents would do better to look outside of content for opportunities either to establish network effects, as Teachers Pay Teachers or Turnitin have, or for more traditional scale businesses. Such businesses are the ones that provide tools and capabilities—learning management systems and predictive analytic software, for instance—to improve the effective distribution reach of the now relatively less attractive pure curriculum content players.
You Can’t Win If You Don’t Play—Nice
“World domination. The same old dream.”
—JAMES BOND IN DR. NO (1962)
The prospect of total victory can be an inspirational objective for the troops, but it rarely guides a successful strategy. Although natural monopolies exist in sectors with overwhelming scale advantages, few educational verticals appear to have such characteristics. In any market in which profitable scale can be achieved at less than a 50 percent market share, the best strategies revolve around peaceful coexistence, not endless war. Finding a successful equilibrium in educational markets involves identifying the sources of one’s own relative advantages and pressing these, while avoiding those in which others have the advantage. The relevant dimensions of competition can be by geography, product, discipline, customer segment, or some combination thereof. When a competitor violates this unspoken rule, one must retaliate hard in the agglessor’s own most profitable niche—not in anger, but in sadness. It is also critical to signal a willingness to return to the status quo ante by designing a path for a mutually dignified retreat from the unprofitable battlefield.
Achieving some stability and balance in relation to one’s horizontal competitors is only part of the battle. When Pearson, the leading textbook publisher, bought eCollege, the leading manager of online courses for universities, some at the company advocated requiring eCollege customers to now use only Pearson-developed curriculum. Wisely, Pearson leadership realized that the continued success of eCollege hinged on its ability to work effectively with as wide a range of course and curriculum developers as possible. If Pearson had limited access to the eCollege platform, as some proposed internally, Pearson’s acquisition would have created dis-synergies and improved the competitive prospects for all the alternative learning management systems operating without such restrictions. More problematic, such a move would have likely led other publishers and platforms to establish competing exclusive alliances. The result would have been both less profitable businesses and less useful products.
Educational companies operate in a complex, multilayered ecosystem that includes institutional and individual customers, competitors and suppliers, public and private entities, for-profit and nonprofit organizations, current and prospective employers, and parents and interest groups of various stripes. Given the structurally conflicting objectives of many of these constituencies, keeping them all happy all of the time is neither sensible nor possible. Just the same, doing what one can to keep peace in the broader educational cosmos is as important as keeping peace among peers. Blackboard’s failure to do this is what created such an opportunity for Instructure, Desire2Learn, and Moodle. All commercial equilibriums are fragile, and there is nothing like externally imposed tensions to shatter an informal armistice. As Blackboard learned the hard way, it is worse than just bad karma when everyone in your ecosystem is giving you the evil eye. It really is a sign that the end is nigh.
Regulation Is a Fickle Benefactor
Given how much of the educational universe is directly or indirectly funded by public sources, the avoidance of regulation is not feasible. Even a business like Nobel, which has studiously avoided government funds, cannot help but be deeply affected by the regulatory environment. The quality of competing local public schools and preschool funding will necessarily affect their business. Similarly the particular local licensing requirements are likely to circumscribe the possible cost structure, including minimum staffing ratios. The optimal strategies are to use any period of government largesse to build a business model that is robust enough to thrive under a wide range of funding and regulatory regimes. The total collapse of the for-profit university sector suggests that not enough was done in anticipation of changes to the Title IV programs on which the sector relies. Only Grand Canyon University seems to have avoided the temptation to engage in an orgy of unfocused growth in programs, locations, and acquisitions.
Public authorities can offer a business more than cash. The imposition of license requirements on all industry participants that track investments made by a particular incumbent clearly benefit that player. Indeed, incumbents have every incentive to encourage ever more costly regulatory burdens that are consistent with their own investment strategy to both give themselves a head start and eliminate the possibility of low-cost competitors. More broadly, compliance requirements typically define the magnitude of fixed-cost investment needed to participate in an industry and accordingly imply the level of scale needed to operate profitably. In the extreme, it could ensure a “natural” monopoly or even make it impossible to economically provide the particular service.
But any educational business lucky enough to benefit from the protection provided by regulatory requirements that constrain competition should prepare for a change in regime or, potentially worse, complete liberalization. The best defense for such an eventuality—in addition to aggressive lobbying—is to build not just relevant scale but also customer captivity in every way possible in the interim: contractually, by integrating the product into the customer work flow, and by creating such a uniquely comprehensive integrated package of products and services that finding an alternative provider (or even a group of providers) would be difficult. In short, rather than letting the protection provided by the high government barriers lull management into a false sense of security, the time should be used to establish the business an indispensable partner to its customers. If successful, the loss of those government barriers will only reveal a more permanent set of competitive advantages.
When the Facts Change, Change Your Mind
“Humility is really important because it keeps you fresh and new.”
—STEVEN TYLER
“It ain’t the heat, it’s the humility.”
—YOGI BERRA
Everyone comes to the subject of education with deep preconceptions from their own formative life experiences. Distinguishing which aspects of these personal epiphanies, if any, provide a useful source of investment ideas is a complicated process. To be successful, the underlying analysis must be grounded in an appreciation for the nature of of competitive advantage, on the one hand, and an understanding of the structure of the targeted educational industry sector, on the other. Failing to take either into account is a recipe for financial disaster.
The hallmark of successful investment decision making is to approach an opportunity with an openness to new information. It is perfectly acceptable and indeed useful to begin with an investment thesis regarding a particular asset class. But the trick is to be willing to alter the nuances of the thesis as new data arise. Starting out with immovable biases undermines the integrity of the process and will inevitably lead to a flawed outcome. The profound emotional connection many of the profiled investors had to a particular educational investment thesis led to two related “bias” problems.
First, initial investment decisions were made that not only had apparent flaws but were structured to make shifting course later difficult. Both the design of the university “partnerships” and the decision to invest tens of millions in course development before understanding the market appetite made it difficult for UNext to effectively change direction later. This troubling tendency to double down on one’s own preconceptions reflects the millions in other people’s money spent by Whittle to design the “optimal” K–12 school model—which magically produced exactly the model that Whittle thought made the most sense before the expensive masturbatory exercise started.
Second, even when the initial structure does not prove an obstacle, the intensity of belief in the thesis being pursued can lead investors to be dangerously slow in shifting their approach, even in the face of overwhelming evidence of its flaws. Successful entrepreneurs and innovators of all kinds consistently demonstrate the ability to undertake a “strategic pivot” at the right moment.30 To their credit, both of the leading commercial MOOCs—Udacity and Coursera—have undertaken significant pivots to their initially flawed business models. Time will tell whether these changes were too little, too late.
Even in established businesses, particularly those that have a hit-driven aspect, as many educational content businesses do, the distinguishing characteristics of the best-run businesses are the ability to quickly and mercilessly cut off investment in failed product and to redeploy the capital into more promising ones. The slow, five-year, billion-dollar death march of Amplify could have ended differently if the company had decisively refocused and redeployed its investments in a single domain built around the core Wireless Generation assessment products. The fact that new owner Laurene Powell Jobs insisted that News Corp. fire almost half the staff and reinstall Larry Berger as overall CEO before taking it on—and has continued to refocus the business since—provides some hope for a more modest but more successful future.
Adherents of particular educational business models and advocates of particular educational public policy approaches have a tendency to use very similar language in promoting their views. Their favored instrumentality of change is typically described alternatively as “transformational” or “revolutionary.” In both cases, the evidence suggests that a narrowing of focus, a nuanced appreciation of the particular market structure and context, and an emphasis on the importance of effective execution would go a long way toward improving the probability of successful outcomes.
But this is easier said than done. In general, revolutionaries are not known for their humility. Scaling back ambitions and moving from high-minded rhetoric to the gritty operational challenges can have the feel of selling out. When the principles involved are viewed as fundamental, compromise—whether to a business model or to a policy platform—can be anathema. Yet the failure to do so in both instances not only makes the perfect the enemy of the good, but it also threatens to more permanently undermine the potential long-term benefits to both shareholders and the public.
In the public policy arena, there is no better example of this phenomenon than the failed efforts of well-meaning reform advocates to use Facebook CEO Mark Zuckerberg’s $100 million gift to Newark’s public schools to revolutionize urban public education more broadly. As documented by Dale Russakoff in her compelling 2015 book The Prize, the Newark initiative was disastrous, leaving little to show for the massive investment. In seeking transformational results that could be used as a template elsewhere, leaders misjudged the political environment, ignored the specific needs of the traumatized local population, and entrusted execution to true believers who did not have the required skills. It would be hard to argue that the magnitude of this failure has not set back even better-conceived reform efforts. Those most responsible for the Newark debacle frequently invoked jargon plucked from business best sellers to justify their misguided efforts. Given the embarrassing results of many of the “transformative” educational business initiatives—including a number with which the same executives involved in Newark were associated—it is unclear how compelling these references were. More broadly, the failure of these business ventures has given credible fodder to those who resist the active participation of for-profit enterprises in the educational sphere.
The education ecosystem will always comprise a complex network of public and both for-profit and nonprofit institutions. The public sector is subject to political whims, and the nonprofit sector typically relies on uncertain funding from public and private sources. Advocates of for-profit education often understandably emphasize the invisible hand of market forces in improving quality and efficiency. The most constructive role that the for-profit segment may play in the overall educational environment is the unique level of stability provided when it establishes defensible business models.
The most aspirational educational ventures have the virtue of good intentions but often come at the cost of a lack of sustainability. The strongest education franchises benefit from multiple competitive advantages reinforced by a consistent operational focus. These characteristics are structurally difficult to achieve in broad-based revolutionary business models. As frustrating as it may be to an education visionary, both investors and the public will be better off if the innovative ideas are applied to a narrow product or geographic space in which scale, customer captivity, and learning can be practically achieved. Such modest successes can serve as both a platform and an inspiration for broader transformation to come. Without a sustainable business model, however, even the most inspirational educational investors and entrepreneurs will ultimately build only a legacy of disillusionment.
