Venture Fund Seeds School Innovations

April 24, 2002

Don Shalvey isn’t easily awed. He spent nine years as a superintendent, opened California’s first charter school, and once introduced President Clinton when the chief executive paid a visit to his district. But when Mr. Shalvey asked the New Schools Venture Fund for $500,000 to build a nonprofit charter school management company, it felt like “four simultaneous root canals,” he said.

On the day he made his pitch, he looked out at a table surrounded by many of the legends of Silicon Valley—people who had breathed life into such enterprises as Federal Express,, and Netscape. Having already assembled thick binders of background information on him, the group grilled him on his business plan, his past accomplishments, and his strengths and weaknesses.

“It really is like a root canal,” said the native Philadelphian, “compared with the way any traditional administrator would write a grant.”

The New Schools Venture Fund is part of a small breed of philanthropies that have sought to distinguish themselves from traditional gift- giving organizations. What makes them different is the degree to which they play an active role in guiding the efforts they support, and the way in which they try to hold those projects accountable for results. How they operate reflects the mind-set of an investor more than that of a grantmaker.

Called venture philanthropists, such groups have also raised a few eyebrows in the foundation world, where some argue that the business-investment strategy is a bad fit for trying to solve social ills like poverty, crime, and inferior education.
But as it now raises capital to expand beyond its initial investments, New Schools points to the success of its ventures as evidence of the value it brings to the table. For instance, less than three years after he won over New Schools with his plan, Mr. Shalvey is helping run six charter schools here in the Bay Area.

“We’d have left a very big hole” if such an enterprise had been allowed to wither on the vine, said John Doerr, who founded New Schools with business partner Brook Byers.

Born Out of Anger
Betting on risks is something Mr. Doerr and Mr. Byers know plenty about. As partners with the venture-capital firm of Kleiner, Perkins, Caufield & Byers, the pair became household names in Silicon Valley by helping to seed many of the country’s most successful high-tech and biotech companies.

Their hope for the New Schools Venture Fund was to harness the same kind of entrepreneurial energy and put it toward improving public education, which Mr. Doerr calls “arguably the largest or second-largest most screwed-up part of our economy.”

“I am very angry about the fact that we kill about 2 million kids in the country every year,” Mr. Doerr hyperbolized. “We permanently limit forever what they can achieve in our system of education.”

The partners’ initiative got off the ground in 1998, after they crossed paths with Stanford M.B.A. student Kim Smith. The daughter of a teacher and an education professor, Ms. Smith had in 1989 helped Wendy Kopp launch Teach For America, the Peace Corps-like program that recruits recent college graduates to teach in urban and rural schools for at least two years.

Ms. Smith, who has worked in both the business and nonprofit sectors since leaving Teach For America, helped flesh out the structure of New Schools. The 34-year-old now serves as the chief executive officer of the San Francisco-based group.

Although a charity, New Schools doesn’t act like one. Its officials talk of a “portfolio of ventures,” not a group of grantees, and key decisions are made by a panel of “investment partners.” Ventures, meanwhile, are expected to yield specific “deliverables” within certain time frames.

But it’s not just the way they talk that makes them different. Like venture capitalists, they look to the efforts they subsidize to meet both long-term and interim performance indicators. And they take a hands-on approach to helping manage the enterprises in which they invest— often putting some of their own officials on the boards of directors of groups that receive money from them.
In another break from traditional philanthropy, the New Schools Venture Fund gives money to for-profits as well. In such cases, it essentially becomes a partial owner of the enterprise, and any returns on the investment go back into the fund to help finance other ventures.

That happened, for instance, when a for-profit charter school chain the fund had supported, LearnNow, was bought by Edison Schools Inc., the country’s largest for-profit manager of public schools. “Our standpoint at New Schools,” said Ms. Smith, “is that we need more good supplies of excellent public schools, period. I don’t care who’s running them.”

Supported by $20 million from initial fund- raising, the current New Schools portfolio includes nine ventures. Some are well-known in the education field. Both Teach For America and the early-reading program Success for All have received support to expand their operations. Others are newcomers, like New Leaders for New Schools, a nonprofit program that trains aspiring principals.

The common thread, explained Mr. Doerr, 50, in a recent interview, is that all are geared toward leveraging large-scale school improvement.

“My view is that all problems in public education are problems of scale,” he said. “We can teach any kid to read; we can make any public school great; we can get a collection of extraordinary teachers who will change lives forever. But doing it in California for 8,000 schools, or in the United States for 80,000 schools, or for the 20,000 schools that are failing our children? It’s a problem of scale.“A Simple Idea
For many reasons, Mr. Shalvey’s plan was a perfect match for the New Schools mission. The former superintendent of the 3,000-student San Carlos, Calif., district wanted to expand a group that manages urban charter schools that he called Aspire. He had already opened one in Stockton.

His philosophy was simple: Set high expectations for students, keep enrollments low enough to ensure both a sense of shared responsibility among staff members and regular communication between home and school.

“What really matters instantly to parents,” said Mr. Shalvey, 57, “is they want a safe school, a school that’s clean and that honors their children, and where they’re pretty sure they’ll get a call back from their kid’s principal or teacher. And then they worry about academics. So it’s providing a sense of efficacy to families who haven’t had that.”

A visit to Monarch Academy in Oakland, Calif., shows his theory in practice. One of five charter schools he’s started since Aspire became part of the New Schools portfolio, Monarch sits in a neighborhood that is known as one of the city’s most thriving crack markets. Street signs near the school are tagged with gang graffiti, and Principal Kendra Barr says she knows which vans parked nearby are used by prostitutes practicing their trade.

Inside Monarch Academy, it’s another world. The bright interior of the building, a former parochial school, is painted in soothing tones of salmon, cream, and periwinkle. Stylish chrome- colored light fixtures hang down over the foyer instead of the industrial-grade fluorescent ones found in most schools. Each classroom is named after a university, like Princeton and the University of Michigan.

Ms. Barr, who grew up in Oakland, says her students have enough chaos in their lives; they don’t need more at school. The K-8 school’s total enrollment is 400, about half that of the typical Oakland public school.

By design, the intimate size allows greater opportunity for teachers to work with, and learn from, one another. Each classroom houses students from two grade levels, so children stay with a teacher for more than one year. That sense of familiarity throughout the school, said Mr. Shalvey, is the secret of its success.
State test results show the Aspire schools far outperforming most California schools serving similar numbers of students from low-income families. Next fall, the chain plans to open its first high school.

Mr. Shalvey said he couldn’t have gotten near this far without New Schools. The fund not only made a critical financial investment, but lent significant technical support. Lacking that, he said, “we would have made 100 more mistakes, and they would not have been learning experiences; they would have been fatal.”

New Schools put two of its own people on Mr. Shalvey’s board of directors: John Stremple, who once ran the U.S. Department of Defense school system, and Steve Merrill, a former venture capitalist who also contributed some of his own money to Aspire. Such clout and expertise were major assets, for instance, when Aspire arranged for the issuing of $17.5 million in private municipal bonds to pay for construction.

Bottom Lines
Just how New Schools engages in the work of its ventures varies considerably. In the cases of Teach For America and Success for All, which were already in existence, Ms. Smith said her organization did not place new members on their boards. When LearnNow was just getting started, New Schools put the company in touch with other investors and with local officials in St. Paul, Minn., where the company wound up opening its first charter school.

“They were willing to commit the time to actually make sure that the investment was successful,” James Shelton, who now leads the LearnNow division at Edison, said of New Schools.

Not everyone, however, is so comfortable with that level of involvement.
One skeptic toward venture capitalism who has made his concerns known in the nonprofit arena is Bruce Sievers, the head of the Walter and Elise Haas Fund, a San Francisco-based foundation. Although he isn’t very familiar with the work of New Schools, what worries him about similar organizations is the way they apply business strategies to the enterprises they support.

For instance, while venture capitalists play an active role in the groups they invest in, foundations more commonly stay at arm’s length, in part to give greater freedom to the programs they underwrite and to ensure some objectivity when it comes time to evaluate their success.

What’s more, Mr. Sievers contends, the business-world focus on the bottom line doesn’t translate well to the nonprofit world and could be counterproductive. His concern is that, in their focus on performance, venture philanthropists may lead the groups they support to concentrate too narrowly on delivering easily measurable results.

“My point is that the nonprofit world in general does not have anything equivalent, and should not have anything equivalent, to a bottom line,” said Mr. Sievers. “That is not to say there are not useful ways to assess performance, like tests and so forth, but if you overdo it, then you have exactly the problem that people have all over the country, which is teaching to the test.”

For their part, the leaders of New Schools says the fund doesn’t measure the success of its ventures solely based on student performance. Many of the “deliverables” expected of a venture often involve demonstrating progress toward setting up a new organization—like hiring a staff or opening a school.

And when student achievement is part of the deal, Ms. Smith said, there is room for some give and take. “It’s not a black- and-white case,” she said, “where we simply look at a page and say, ‘You didn’t hit it,’ and walk away.”

New Schools officials say the kinds of enterprises that come to them want high levels of involvement from a funder because they’re either new or aiming to expand their general operations. Such groups, they say, generally have been less successful at securing the support of more traditional foundations, which tend to favor financing existing organizations in carrying out special projects.

Ms. Smith said she ran into that herself before coming to New Schools.

“One of our frustrations as social entrepreneurs is that we would often have discussions with philanthropists who liked what we were doing, but didn’t want to fund our general operations,” she said. “And yet, I knew I couldn’t manage a successful organization to have a strong impact without having a strong organization.”

New Investments
The venture fund’s niche in education is nowhere near filled, the New Schools organizers say.

Ms. Smith is now in the throes of a $50 million fund-raising campaign to support additional ventures. A major portion will be set aside for a special “charter accelerator fund,” to support up to six nonprofit charter school management firms.
Based on their experience with Mr. Shalvey and others doing similar work, New Schools officials say such efforts represent one of the best promises for touching the most students.

Within 10 years, the goal is to have spurred the creation of as many as 150 more charter schools, a big enough pool to serve some 55,000 students in such independent public schools and perhaps leave a mark on the regular public schools with which they’ll compete. This month, the Los Angeles- based Broad Foundation pledged $10.5 million.

“ We know there are a lot of people building great schools out there,” Ms. Smith said. “But we know that we haven’t seen the growth in the nonprofit sector, because frankly the nonprofit capital market—the foundation world—hasn’t stepped up to invest in these institutions. So we’d like to try to motivate them to do that.”