Rethinking the for-profit model

April 19, 2011

For many years, for-profit education organizations have faced fairly pervasive skepticism. Why? In part, you can blame the very mixed performance of for-profit school operators. Some, understandably, wonder whether every possible dollar is being directed toward the benefit of students (although it’s important to note that for-profits typically have to raise private funding, which results in more dollars over time being used for education). Yet for all that skepticism, it’s seems there’s a change afoot, toward a greater acceptance of for-profit efforts. I’ll use Wireless Generation as an example of how, and why, the mood is changing.

Wireless Generation’s Honeycomb is an interactive visual map of what students need to learn in a given subject in a given year.

Wireless Generation, a company that helps teachers use data to assess student progress and deliver individualized instruction, is broadly recognized for its impact in helping schools better serve students in low-income communities. In November, Wireless Generation was acquired by News Corp. for an estimated $360 million, an extraordinary result for the entrepreneurs and investors. Very few would disagree that Wireless Generation’s for-profit structure was vital in making its impact and growth possible. For-profit ventures often have a greater potential for scale and long-term compensation—two factors that make it easier to attract talent–particularly in the technology field. Over the last decade Wireless has been able to attract talented engineers and developers to the company and thus to work in education. This is no small feat and has allowed Wireless to innovate and build products that meet the needs of students, teachers, and districts, not just in affluent communities but in some of the most challenging public education systems in our country. In short, Wireless has had a meaningful and important impact.

Wireless Generation’s trajectory will have an impact far beyond its own work. Today, we are seeing an awareness of the role that technology can play in helping schools meet the needs of students. That awareness is fueled in part by Wireless, as well as by outstanding new organizations such as Rocketship Education, a high-performing charter school network with an innovative online learning component, and Education Elements, a young firm that builds the technology platform for schools that integrate online and face-to-face learning. Further, because the for-profit structure is often (not always) more suitable to bring certain types of products to market, I expect we will see school superintendents, policymakers, and the public getting more comfortable with for-profit players delivering a range of services to schools. In addition, the story of an innovative education company providing high-quality services to all students, including low-income students in urban and rural districts, creates momentum that will increase the number of investors willing to take risk.  Because of this improving acceptance and increasing amount of capital, the number of entrepreneurs interested in starting for-profit education ventures will increase. As a nonprofit firm that invests in both nonprofit and for-profit organizations that improve public education for low income children, NewSchools Venture Fund welcomes this development.

Indeed, throughout its history NewSchools has made grants to nonprofit organizations, as well as investments in for-profit ventures. This flexibility allows NewSchools to back entrepreneurs best able to start and grow transformative education organizations, regardless of corporate structure, that can create change for underserved communities. Over the past few years we have had the privilege of funding and working closely with some great for-profit companies during their seed and start-up phases, including Acelero LearningBetterLessonTeachscapeRevolution Foods, Wireless Generation, and others.

A few recent developments among NewSchools portfolio companies are worth sharing as they help illuminate the important role for-profit entrepreneurs can play in the transformation of public education and underscore the importance of funding for early stage ventures.

  1. NewSchools recently joined Catamount Ventures as Series A funders of Presence Telecare, a start-up company that delivers high-quality services over the internet to students with special needs. Presence TeleCare is poised to help districts across the country address a critical shortage in speech therapists. Perhaps more important, the company has the potential to demonstrate the importance of using technology to improve the quality of SPED services and drive down cost.
  2. Revolution Foods, a NewSchools portfolio venture, recently added a number of major new investors, including most prominently Oak Ventures, a premier venture firm with a specialization in food services. Revolution Foods is serving nutritious meals to students in underserved neighborhoods across the country and is poised to expand to Houston in the near future. The addition of top-line investors reflects great optimism in the company’s future and demonstrates that as a company proves its model, “impact-first” investors like NewSchools — which prioritize benefits for students or impact on a particular problem over financial returns — can be followed by more traditional investors that enable greater scale.
  3. Acelero Learning, which starts up new Head Start programs in areas where Head Start contracts have been revoked for poor performance, recently added Philadelphia as a new market, joining Camden, Middlesex, and Monmouth, New Jersey as well as Clark County, Nevada. Acelero has developed a strong reputation for quality and has consistently increased teacher salaries 20% over the previous provider, all with the same amount of federal funds. Acelero has now reached such a significant scale it no longer requires any additional capital from investors. Acelero Learning’s financial and programmatic successes clearly illustrate the positive contributions a for-profit can make, even in businesses serving exclusively low-income communities.

These are only a few data points, but they raise an intriguing and exciting possibility: that attitudes among the public and investors are shifting, and that support for new organizations will be based less on the question of for-profit versus nonprofit, and more on the good they can do for students and the changes they can bring to public education.