When I read this post about VC Angel Investors, by Paul Kedrosky over at “Infectious Greed,” it brought me back to an interview I had with Chris Hoehn-Saric of Sterling Partners about private equity’s role in education. One of the questions I had asked back then was, in so many words: “If private equity could take over what the district controls now, what would it do to manage education in a value add, like a company?”
People have said that education in this country is under-managed. If it could, where could private equity get into the national education picture and better manage it, and improve value and outcomes?
You have a system today that has a variety of constraints, and the system is not aligned to student outcomes. Private equity can work if there is really good clarity in the way you will be measured for success.
Where it doesn’t work as well, is where there is ambiguity in terms of the outcomes.
Systems have obligations to a work force, obligations to unions, or a constraint on where you can draw students, or what types of students. They ultimately clutter. They ultimately constrain you.
You have to have measurable outcomes and whatever way you want to meaure them is fine.
I profess no finance background. I have a healthy curiosity about it, though. When I read the following, from the previous post, I wonder if the VCs are in the wrong business,or if their mentality needs to shift a bit.
- Incumbent VCs in IT running more than a few hundred million dollars, at most, are screwed. The industry is maturing, requiring less capital, and producing fewer IPO winners, and that means the fee game is over, and they can’t produce returns justifying their size.
- Super-seed funds are, in game theoretic terms, a dominant strategy in the current market, one characterized by low capex startups, consumer-centricity, and a general Next Big Thing sensibility.
- Declining average cost of company creation is driving declining average cost of venture firm creation. When companies need less money, their VCs need less money. When VCs need less money, more people get to declare themselves VCs (or at least super-angels).
- More angels means more companies getting funded, and an inflection point in competition for the “best” low-capex deals.
- More companies being funded means more companies languishing, being triaged or looking for growth dollars, as there is simply not enough market space to create and differentiate hundreds of new centi-million-dollar companies in the crowded consumer interstitials being chased by these low-dollar startups.
- More funders of early-stage firms means higher valuations on those deals, which means more risk and lower returns for the people who do the deals (on average).
- Incumbent VCs make up stuff about the inadequacies of super-angel funds. While their small size is a problem sometimes, as is, sometimes, their inability to follow on, their nimbleness, work ethic, and ability to pivot matter more. In other words, saying that super-angels are going to crash says nothing about the raging rigor-mortis-in-the-prime-of-life inadequacies of VC incumbents.
- Venture capital is hard, whether practiced by brain-dead VC incumbents, or by smart and nimble super-angels. Most VCs, and most angels, fail — it’s just that its takes 10 years to kill a VC fund, while angels, like drosophilidae, evolve and die faster, which is a good thing.
When it comes to education, I’ve had people tell me enough to know that funding new enterprises is not going to be about building a new education system from scratch and running it like education is supposed to run.
A healthy and dynamic investing strategy might be to begin with funding technology so that it improves any individual’s chance to recreate education the way it is most useful for education. And then you have to make sure that technology gets in the hands of the people who know best about the hacking that education needs — teachers, students, parents.