The Road to Disastrous Educational Businesses Is Paved With Good Intentions


The Road to Disastrous Educational Businesses Is Paved With Good Intentions

By Jonathan A. Knee     Nov 16, 2016

The Road to Disastrous Educational Businesses Is Paved With Good Intentions

The following is excerpted from Jonathan A. Knee’s “Class Clowns: How the Smartest Investors Lost Billions in Education,” reprinted with permission.

Everyone comes to the subject of education with deep preconceptions from their own formative life experiences. Distinguishing which aspects of these personal epiphanies, if any, provide a useful source of investment ideas is a complicated process. To be successful, the underlying analysis must be grounded in an appreciation for the structural aspects of competitive advantage, on the one hand, and an understanding of the structure of the targeted educational industry sector, on the other. Failing to take either into account is a recipe for financial disaster.

The hallmark of successful investment decision making is to approach an opportunity with an openness to new information. It is perfectly acceptable and indeed useful to begin with an investment thesis regarding a particular asset class. But the trick is to be willing to alter the nuances of the thesis as new data arise. Starting out with immovable biases undermines the integrity of the process and will inevitably lead to a flawed outcome. The profound emotional connection many of the profiled investors had to the particular educational investment thesis led to two related “bias” problems.

First, initial investment decisions were made that often had apparent flaws but that were structured to make shifting course later difficult. Both the design of the university “partnerships” and the decision to invest tens of millions in course development before understanding the market appetite made it difficult for UNext to effectively change course later. This troubling tendency to double down on one’s own preconceptions reflects the millions in other people’s money spent by [Edison Schools founder Chris] Whittle to design the “optimal” K–12 school model—which magically produced exactly the model that Whittle thought made the most sense before the expensive masturbatory exercise started.

Second, even when the initial structure does not prove an obstacle, the intensity of belief in the thesis being pursued can lead investors to be dangerously slow in shifting their approach, even in the face of overwhelming evidence of its flaws. Successful entrepreneurs and innovators of all kinds consistently demonstrate the ability to undertake a “strategic pivot” at the right moment. To their credit, both of the leading commercial MOOCs—Udacity and Coursera—have undertaken significant pivots to their initially flawed business models. Time will tell whether these changes were too little, too late.

Even in established businesses, particularly those that have a hit-driven aspect, as many educational content businesses do, the distinguishing characteristics of the best-run businesses are the ability to quickly and mercilessly cut off investment in failed product and to redeploy the capital into more promising ones. The slow, five-year, billion-dollar death march of Amplify could have ended differently if the company had decisively refocused and redeployed its investments in a single domain built around the core Wireless Generation assessment products. The fact that new owner Laurene Jobs Powell insisted that News Corp. fire almost half the staff and reinstall Larry Berger as overall CEO before taking it on provides some hope for a more modest but more successful future.

Adherents of particular educational business models and advocates of particular educational public policy approaches have a tendency to use very similar language in promoting their views. Their favored instrumentality of change is typically described alternatively as “transformational” or “revolutionary.” In both cases, the evidence suggests that a narrowing of focus, a nuanced appreciation of the particular market structure and context, and an emphasis on the importance of effective execution would go a long way toward improving the probability of successful outcomes.

But this is easier said than done. In general, revolutionaries are not known for their humility. Scaling back ambitions and moving from high-minded rhetoric to the gritty operational challenges can have the feel of selling out. When the principles involved are viewed as fundamental, compromise—whether to a business model or to a policy platform—can be anathema. Yet the failure to do so in both instances not only makes the perfect the enemy of the good, but it also threatens to more permanently undermine the potential long-term benefits to both shareholders and the public.

In the public policy arena, there is no better example of this phenomenon than the failed efforts of well-meaning reform advocates to use Facebook CEO Mark Zuckerberg’s $100 million gift to Newark’s public schools to revolutionize urban public education more broadly. As documented by Dale Russakoff in her compelling 2015 book “The Prize,” the Newark initiative was disastrous, leaving little to show for the massive investment. In seeking transformational results that could be used as a template elsewhere, leaders misjudged the political environment, ignored the specific needs of the traumatized local population, and entrusted execution to true believers who did not have the required skills.

It would be hard to argue that the magnitude of this failure has not set back even better-conceived reform efforts. Those most responsible for the Newark debacle frequently invoked jargon plucked from business best sellers to justify their misguided efforts. Given the embarrassing results of many of the “transformative” educational business initiatives—including a number with which the same executives involved in Newark were associated—it is unclear how compelling these references were. More broadly, the failure of these business ventures has given credible fodder to those who resist the active participation of for-profit enterprises in the educational sphere.

The education ecosystem will always comprise a complex network of public and both for-profit and nonprofit institutions. The public sector is subject to political whims, and the nonprofit sector typically relies on uncertain funding from public and private sources. Advocates of for-profit education often understandably emphasize the invisible hand of market forces in improving quality and efficiency. The most constructive role that the for-profit segment may play in the overall educational environment is the unique level of stability provided when it establishes defensible business models.

The most aspirational educational ventures have the virtue of good intentions but often come at the cost of a lack of sustainability. The strongest education franchises benefit from multiple competitive advantages reinforced by a sustained operational focus. These characteristics are structurally difficult to achieve in broad-based revolutionary business models. As frustrating as it may be to an education visionary, both investors and the public will be better off if the innovative ideas are applied to a narrow product or geographic space in which scale, customer captivity, and learning can be practically achieved. Such modest successes can serve as both a platform and an inspiration for broader transformation to come. Without a sustainable business model, however, even the most inspirational educational investors and entrepreneurs will ultimately only build a legacy of disillusionment.

Jonathan A. Knee is a professor of professional practice and codirector of the media and technology program at Columbia Business School

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