Tom Vander Ark: Why Private Capital Wins Out Over Philanthropy in the...

column | Financing

Tom Vander Ark: Why Private Capital Wins Out Over Philanthropy in the Game of Innovation

By Mary Jo Madda (Columnist)     Jun 23, 2015

Tom Vander Ark: Why Private Capital Wins Out Over Philanthropy in the Game of Innovation

Tom Vander Ark has worn many education hats over the years. He’s been a superintendent, worked for the Gates Foundation, and served as a finance guy for a startup. But more recently, he’s got street cred as CEO of Getting Smart and Partner at Learn Capital--and knows a thing or two about funding streams. So when he took some time to sit down with EdSurge for a Q&A, we were curious to hear about his thoughts as a judge on the Digital Innovation in Learning Awards (co-hosted by Digital Promise and EdSurge)--and get his impressions on whether nonprofits models are more successful than venture-backed companies. Here’s what he had to say.

EDSURGE: What’s your background in education and the marketplace?

VANDER ARK: I’m an engineer by training, and moved into finance. Joined a startup, was a finance guy there. After we sold that company, I decided that I wanted to spend the rest of my career in education. I ended up living in Washington as a superintendent, made great progress over the course of five years, and then helped Bill and Melinda [Gates] start the Gates Foundation in 1999.

By 2006, I was a bit discouraged after having worked with 400 nonprofit organizations and having really none of them achieve the sort of scale and success that they had hoped for. I had the sense that innovation and private enterprise and capital were going to be an important part of moving the sector forward. 2008 turned out to be an auspicious time to start a fund, but we pieced together a small fund and started investing and launched a couple of companies--one of them became Edmodo. That fall, we also launched what became Getting Smart.

Let’s talk about that element of private funding and venture capital, for a second. Why do you think that the venture funded-organizations have the most potential, rather than nonprofits or individually bootstrapped projects?

Well, different forms of capital have different advantages. Philanthropic capital has the advantage of being equity-seeking, and has the ability of taking a longterm point of view. Government capital can also be equity-seeking, and highly inclusive. It has the downside of not having incentives for growth. Similarly, nonprofits by definition have a philanthropic or charitable mission, but have weak incentives for innovation and growth. If you run a nonprofit, tripling its size just means you get triple the headache. It’s not like you’re going to make substantially more money; it’s not like the rewards are connected to scale. Private capital, on the other hand, is really good at identifying, producing and scaling innovation.

Now, there is an interesting downside to that. Private capital is sort of ruthless and relentless about following good ideas, and it will abandon a good idea for a better idea. When you’re a venture investor, the company in its second and third round of funding is often very different from the seed company that you invested in. At Learn Capital, we had a seed investment four years ago that was a Facebook app for helping kids apply to college; in its third iteration, and it’s now a company for printing Instagram pictures on Canvas.

Wow, that’s... different.

Yes, it completely pivoted away when it failed to get B to C traction in the college-going space. That happens in the private sector, and almost never happens in the nonprofit sector. So, there are different forms of capital. What’s really important for a sector is to create opportunities where each form of capital has the chance to do what it’s good at. Big advances in society are often created by the partnerships that take advantage of different forms of capital. That’s what I’ve been writing about cities lately and the ecosystems that are created in cities; you often see the right forms of capital being put to use so that government foundations are attacking poverty and creating strong supports for kids and families, and private capital is being aimed at innovations, and both of them are producing a talent pipeline.

Speaking of your Smart Cities coverage, where do you think the most potential for B to C funding is happening? Is it in the Bay Area, or are there other big pockets across the country or internationally?

The Bay Area remains the most important source of innovation on the planet, and that’s true for technology as well as edtech. Each of the cities--Oakland, San Francisco, San Jose, Silicon Valley--are by themselves in the top five or six edtech cities in the country. When you put them together, they’re by far the most important center for innovation on the planet. New York City is second, though some would argue that Chicago is second. Chicago has a really strong corporate education background, so there are a surprising number of startups in Chicago. Those are the big three, and it drops off relatively quickly from there.

Though, I would say… we’ve found seven keys to education, and one is that going forward, what’s going to be super important for ecosystems is that they have the ability to incubate talent, tools, and schools. Right now, 4.0 Schools in New Orleans is the best example of that; they do a great job of training entrepreneurs, incubating startups… and they’ve had good success working with team to develop new school models.

With looking at these schools and looking at these different innovation hubs, I have great respect for what 4.0 Schools does. But at the end of the day, these startups and companies need funding to survive. How do you see the edtech funding landscape at this point?

There are two big complementary changes in the last five years. One is that most traditional VC’s have started to invest in the [edtech] space. From 1 or 2 investors five years ago, there’s now a hundred. Every name-brand VC will invest in education, or have an education partner. There are quite a few though that won’t invest in anything that is sold to a school district. They stay away from what they see as problematic district slog. I would say that most of them don’t have a deep appreciation for education, and just look at edtech as an extension of tech. It’s generally a good thing that the market has gone mainstream.

The second thing is the growth of seed investors; there are now hundreds of seed investors that will make very, very early-stage seed investments. We now see seed rounds often done with convertible notes. Mitch Kapor in Oakland is probably the most important seed investor in the country, and has made a terrific impact in the space.

I’m glad you bring up that idea of “impact,” though I’m thinking specifically of company impact. With the Digital Innovation in Learning Awards, we’re looking to celebrate those companies that are having true impact in the edtech space, aside from just the funding they’re receiving. As a judge, what are you curious to see from our DILA applicants?

What I think we have a glut of is companies that take on small, rearview mirror problems, like where some coder’s sister has an issue and the coder fixes it. We don’t have enough startups based on basic research (invoking something like the “Research at Work” award), and not enough startups solving big problems or taking on the big opportunities.

I’m very interested in tools that help schools create blended, personalized, competency-based environments. I’m also interested in some of the data advances and solutions that combine formative assessment from multiple sources (such as with the “Mindful Data” award). The point there: I think we’re close to the point where a new generation of learning platforms will make it much easier for groups of educators to make extraordinary learning environments. That’s what I’m looking for.

Major thanks to the companies who help make the DILAs possible!

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