In a converting educational landscape, classic personal investment models too fail to aid the groundbreaking startups needed to revolutionize learning.
In the shift toward a more student-centered paradigm, classic investment mechanisms are designed to foster the expansion and sustainability of impact-driven school projects where they can be maximally transformative. New investment models of choice are needed.
Traditional capital markets favor fast and truly large returns and exclude emerging companies with long-term transformative potential. This challenge is especially acute in the field of education, where I have observed the search for good fortune on the margins of small but strong corporations that make a difference.
That’s in part because new innovations in education might take anywhere from 10 to 20 years (at least) to realize their impact. And the most transformational education innovations must take root in areas far outside the mainstream system where they can grow and hone themselves in new value networks where the initial addressable market sizes are small—think microschools in the United States or Imagine Worldwide’s work building literacy and numeracy in developing countries.
Traditional venture capital (VC), however, is structured around quick, big exits, typically within a five- to seven-year window. There’s an argument to be made that the rise of technology businesses that, as Ben Thompson has argued, enjoy “minimal marginal costs” and the creation of VC firms after World War II, were not just synergistic but dependent—in the sense that the outsize and relatively rapid VC returns only worked for businesses that “could earn theoretically unlimited returns at scale.”
This model often doesn’t align with the slow, steady growth outside of the mainstream necessary for meaningful education transformation.
This challenge echoes the “capitalist’s dilemma” that Clayton Christensen wrote about in 2012 in the New York Times (Christensen and I co-founded the Clayton Christensen Institute for Disruptive Innovation together). Its central argument was that the “new financial doctrine,” which measured profitability on the basis of ratios, led many investors to favor investments with a shorter time horizon, which led to greater power and reduced costs. risks, but they did not achieve the enabling inventions that remodeled the measured sectors. over the decades.
Many school marketers face a similar dilemma that, in my view, is far more pronounced than the one Christensen observed: either they meet the demands of venture capitalists and drive immediate and, in many cases, unsustainable growth, or they create nonprofits. and they depend on a perpetual cycle of grants that do not lend themselves to scaling.
The main challenge is that there are as many unicorns or even publicly traded corporations waiting to be created in the school markets as many think, but there are many more school corporations with profits between $10 and $50 million that probably deserve to exist, but don’t. do. the existing investment landscape.
The news is that there have been some changes.
The rise of education-focused VCs has created funds with investors more in tune with the needs of education startups—although founders are still often encouraged to focus on bigger, existing markets rather than emerging ones that will take time to mature. Private equity-type funds like Achieve Partners are able to look at a more diverse set of education companies. Evergreen funds like A-Street solve the time-pressure challenge. Education venture studios have the potential to return a similar level of capital to their limited partners as do VC funds but through smaller exits and a higher rate of success than the roughly 80% failure rate of VCs (a failure rate that isn’t preordained for startups, but is instead built into the VC business model). And outcome-based debt financing models are able to focus on impact.
But more needs to be done to ensure that founders have a variety of characteristics to invest their concepts and increase their chances of good luck and a positive effect on students. After all, even when marketers start out in venture capital studies, for example, the moment they take cash from a classic venture capital fund, their pricing network and cap tables adjust, and time is running out.
That’s not to say that venture capital is right for some school founders. It’s just that it’s the ideal solution for a smaller percentage than we see today. Having a more varied bureaucracy of investment capital can simply increase overall investment in education, while the reaction to each investment need will not be a failure or a quick failure.
In addition to having a more permanent budget and venture capital studies in particular, two other equity models of choice are being explored, either of which relies on a royalty-based model: the equity income model and the dividend model. of capital.
Both models propose a patient capital approach, to encourage long-term inventions in education. They ensure that the startup ecosystem can generate impactful responses without the exaggerated stress of meeting classic venture capital deadlines and expectations.
Arthur Fox pioneered the royalty-based financing model, and his 27-year-old firm, Royalty Capital New England, notes that royalty-based financing “creates favorable engagement between investors and business owners. “Instead of giving investors a classic equity stake, business owners agree to return the initial capital plus a portion of that investment, over a specified period of time, based on periodic invoices (royalties) equal to an agreed-upon percentage of the gross amount. corporate income.
This eliminates the push for an IPO or an exit, as investors receive liquidity sooner and more reliably. And for the entrepreneur, it reduces dilution, which allows them greater control over their business. Which results in more durable businesses in industries that have historically struggled to attract venture capital, like mining, movies, and music—and, one could imagine, education.
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As we navigate the future of education, it is imperative to develop alternative capital models that support the unique timelines and impact goals of education startups. By embracing revenue and dividend capital models, along with evergreen funds and venture studios, we can create an ecosystem where empowering innovations thrive to drive meaningful change in how we educate future generations.
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