Rick Hess: Fueling the Engine (Book Excerpt)

Frederick Hess has put together one of the more important articles so far this year about the need for strong venture capital interest in education innovators. It’s not just about the money. It’s about whether our business culture and our investors understand the importance of funding this backbone of our economy. And whether reformers are mindful enough to be able to convince them of how to do so, with rigor, evidence and an open approach to funding.
As the intro describes:

The challenge for reformers is to recognize that enabling such providers is not just a matter of promoting “school choice,” but also of freeing up the sector to a wealth of different approaches and cultivating conditions in which problem solvers can succeed and grow.

Hess describes in eight pages from his new book, Education Unbound, that the mentality that drives investment in education innnovators is limited by anti-risk and an assumption that, at least on the non-profit side, that once a non-profit grows successful, it’s achieved its mission and no longer needs “fuel.”
This mentality blinds would-be investors to the radical potential embedded in this sector. An unwillingness to tread in to the greenfield and get behind start-uips and non-profit entrepreneurs; an discomfort with seeing non-profits grow; and the general fact that non-profits don’t operate like companies floated on the street rounds up to a basic apoplexy of funding. That means its paralyzed.
It means, it puts people trying to drive the companies and organizations that bring great change and opportunities to education of their game.

… [N]onprofits scramble to offset the loss of philanthropic support by finding ways to sell their services or by finding new funders, while for-profits seek to achieve a scale that makes them economically viable.

Neither succeed often.
Hess points out that it’s rare to have large foundations or big names to put themselves on the block for start-ups in education. It was only recently that foundations invested venture capital into non-profit start-ups at all, and did so with conviction and mind to the long term.
But as Hess says, that’s pretty much it:

Nonprofit education entrepreneurs generally raise their start-up capital from venture philanthropy firms like NewSchools Venture Fund and the Charter School Growth Fund, or from individual donors and foundations. Only a few foundations are comfortable with taking a risk on entrepreneurial education organizations. Those that do make these early funds available—usually multi-million dollar grants over the course of several years—tend to be younger foundations, like the Eli & Edythe Broad Foundation, the Milton Friedman Foundation, the
Michael and Susan Dell Foundation, and the Bill & Melinda Gates Foundation, that have embraced the modern school of venture philanthropy.

Outside big names and encouragement from these relative few, investors still can’t seem to stomach the risk or comprehend it.

Those who worry that greenfield efforts may not be publicly run, or who are hesitant to give funds to new ventures with unproven quality, often overlook the fact that competition for venture funding in the private sector comes with intensive screening. In a community like Silicon Valley, as a general rule only 10 percent of business plans that venture capitalists receive warrant any response at all, and only 1 percent are ever funded. To be sure, venture investment also has its share of blemishes. During the late-1990s dot-com bubble, for instance, investors frequently left their skepticism behind as they flocked to a slew of dubious ventures. So, it is not that this process is flawless, but only that it tends to exert a healthy discipline overall.

Hess tells an accurate tale. It’s not an industry without scars, but venture capital investment in anything that does a service or produces a good usually picks a good thing. And they are backing people who are tested by their own experience and by the ultimate risks that they have to take to get things done.
At the end of the day, it’s hard to fathom why people can’t get behind education as the sector for investment dollars and appreciation of risk. At the end of the day, it’s the people who drive entrepreneurial organizations that embody the life values of our market.
An entrepreneur assesses her previous experience and measures the best of outcomes, the mid-range of outcomes, and then the worst of them. She then adjusts her thinking to always endure to achieve the best outcome and takes emotion, or fear, out of the equation. If it’s a reasonable idea to pursue, she pursues, knowing something tangible and good will come from the pursuit and the implementation of her drive to succeed.. The more risk she takes, the more experience she gains. And the more experience she gains, the more staying power her company will achieve. It will grow, not because it has the money. The money comes because she has the vigilance and the attitude to stay behind something that will obviously grow.
Investors, it seems, don’t think that way. They take a lot of convincing.
But if you think about it, the entrepreneur attitude is exactly what education needs.
You can read the full article from Fueling the Fire at Education Next.
You can also watch a video of Rick Hess and Mike Petrilli, Vice President for National Programs and Policy at the Thomas B. Fordham Institute discuss the article in a video segment called “Venture Philanthropy and Investing in Innovation.”