For-Profit Impact: Potentially Bigger, Probably More Diffuse
Return-seeking enterprise is an important part of the solution in every sector in society but remain a lightning rod in U.S. education. In this short post, I’ll try to make the case that with an impact focus, a group of for-profit organizations could produce more substantial difference in student outcomes than nonprofit enterprises.
Looking at different enterprises that deliver education services, it is clear that each have very different capabilities to induce change. Government agencies, nonprofit organizations, and private enterprise each have distinct benefits, as shown below:
|Seed||Authorization and appropriation||Grants and donations||Angel and venture investors|
|Operating||Authorization and appropriation||Donations, service fees (occasional)||Sales and profits|
|Scaling||Authorization and appropriation||Grants, usually project specific||Private equity|
|Advantages||Coverage and equity||Targeting vulnerable populations||Efficiency and scale|
|Limitations||Flexibility and responsiveness||Scale and sustainability||Unlikely to target unprofitable markets|
Public delivery systems receive legislative authorization and appropriation to meet the needs of specific populations–a great mechanism for coverage and equity, a bad mechanism for flexibility and responsiveness.
Nonprofits have the advantage of being able to target specific needs often serving vulnerable or underserved populations. Being primarily grant supported, it can be hard to scale and sustain a nonprofit–bigger just means more headaches for leadership.
Compared to nonprofits, private enterprises could realize greater impact because they:
- have stronger incentives for growth and are better positioned to attract and reward talent;
- are more likely to raise money from investors and gain more leverage (e.g., the 7.3x leverage experienced by NewSchools Seed Fund);
- operate efficiently and use lean strategies, and
- are more likely to identify and exploit growth trends and market segments.
Return-seeking ventures may serve the same populations but perhaps not initially. New technologies are usually adopted by well-resourced individuals and organizations but with scale and efficiency (two key advantages of private enterprise), new capabilities become less expensive and become accessible to broader populations. Take cell phone access as a desired outcome—philanthropy could have spent billions to boost access in low income neighborhoods or just waited a few years for the market to solve the problem.
The challenge for impact investors is that the contribution path of return-seeking vehicles may be different in time, consumer segment, and geography than desired—and almost certainly a different path than a direct grantmaking strategy.
For-profit ventures exploit the most attractive market segments and avoid low margin and low growth categories. Impact investors can invest in a new venture—a drug or learning technology—and wait for services to trickle down to lower value segments or they can combine direct investment with market development strategies (i.e., direct support to producers or consumers, advocacy for better policies, or support for pull mechanisms including demand aggregation and prizes–watch for upcoming paper on this topic). An aggressive impact investor may work both supply and demand, for example investing in an EdTech fund and supporting smart demand through a group like the Digital Promise League of Innovative Schools.
Private enterprises often serve global markets. Particularly since the mobile inflection of 2010, it’s common for new applications to gain global viral adoption. In 2012, a philanthropy interested in behavior modification of low income students could have invested $100,000 in a local nonprofit or invested in the seed round of Class Dojo, a mobile app which within months was used by hundreds of thousands of teachers worldwide—yielding less concentrated impact in target markets but several orders of magnitude greater impact than could have been produced through traditional grantmaking.
Investing in education venture funds, particularly those with impact criteria, has the potential for dramatic contribution but it is likely to occur on a less direct and more diffused path. This suggests that a mission related investment (from foundation endowments) in an education venture fund could be an important complement to a grantmaking approach directly attacking problems and inequities of interest. Rather than investing that endowment in consumer products and energy, why not invest in education?
Recommendations for Impact Investors. Impact investors – particularly high net worth individuals, family offices and foundations committed to education — have an essential role to play in advancing education entrepreneurship. Non-profits and government agencies simply can’t make the massive R&D investments to create the learning tools and next-gen schools our kids deserve. Following are five recommendations for how impact investors can make a difference:
- Embrace entrepreneurship: new tools and models often reframe old debates and intractable problems. Impact investing may yield significant public benefit but different in time and place than grant making so don’t apply philanthropic guidelines to mission related investments.
- If you invest direct, hire experienced professionals and plan on a mix of failure (maybe 1/3) and success with some significant follow on investing (maybe 1/3).
- Encourage links between program and investing staff. Create incentive systems that encourage collaboration.
- Support R&D: support advocacy efforts that promote a vision of personalized learning for students and teachers; support basic research in learning sciences; support prizes and pull mechanisms where market blockages discourage later stage R&D; and support early adoption and scaling initiatives.
- Invest in funds: seek out and support experienced and emerging investment managers and support associations of innovators and investors.
Return-seeking organizations have distinct advantages in producing and scaling innovation. When aimed at impact, they can make a big difference for students and teachers. A bundle of impact-focused enterprises could be world changing.
For more, see Learning Returns (and watch for a follow up paper next month) and check out these two books
- Private Enterprise and Public Education, edited by Hess and Horn
- The Profit Motive in Education edited by James B. Stanfield (with a chapter from yours truly)
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