As the charter school movement continues to grow and mature throughout most of the United States, one important new development has been the increased involvement of for-profit charter school companies. Such companies combine a commitment to improving educational opportunities for America’s children with business models that incorporate distinct advantages such as specialization and economies of scale. The concept is still a new one and profitability remains an elusive goal for all for-profit charter school companies, for now. But having caught the attention (and dollars) of leading venture capital firms, Wall Street analysts, and accomplished executives, the future for these companies may well become closely enmeshed with that of the entire charter school movement.——————————————————————————–
Investing in Charter Schools: “Markets on the Edge of Change”
The growth of the charter school movement across the United States may prove to be the most important story in American education of the past decade. With more than 2,000 charter schools in operation, serving over half a million students in 37 states plus the District of Columbia, the movement has become an unqualified success story.
Charter schools are public schools that have been granted special autonomy, which allows them to avoid bureaucratic rules and contractual agreements in exchange for greater performance-based accountability.
One important recent innovation has been the increased involvement of for-profit charter school companies. Leaders of these companies typically espouse a fervent commitment to improving educational opportunities for America’s children. But they also know that their ability to meet that challenge depends greatly on their ability to succeed not only as educators, but as businesspeople.
“This is a breakthrough business opportunity,” declared J.C. Huizenga, Chairman of National Heritage Academies, which operates 27 charter schools. And an ever-increasing number of investors, analysts, and education professionals are beginning to agree.
Many in this fast-growing sector believe that it will eventually emerge as a highly profitable one. “Education is the only sector of the GDP virtually untouched by competition,” observed Tom Keane, General Partner with Murphy and Partners, a lead investor with Mosaica education.
Jeffrey Leeds, an investor and director with Edison Schools, describes “a classic inefficiency in the marketplace,” a disconnect between public perception and marketplace reality. Many see parallels between the sector and the conditions prior to the e-commerce boom of recent years.
Already the rolls of charter school investors have begun to read like a who’s who of venture capital firms in the United States. The list includes Kleiner, Perkins, Caufield & Byers, J.P. Morgan Investment Corp., Bessemer Venture Partners, Chase Capital Partners, Credit Suisse First Boston Equity Partners, Fidelity Ventures, Paul Allen’s Vulcan Ventures and others.
While still a long way from achieving profitability, leading charter school companies have attracted investors who see the potential for lucrative, long-term returns, the social value of increased educational options for urban children, and usually both. Many are drawn by the dynamics of a sector Christopher Gabrieli of Bessemer Venture Partners describes as typifying “markets on the edge of change.”
The Right Business Model Provides Real
Operating Advantages for Larger Charter Operators
Most charter school companies describe their business models as centered around curriculum. The Core Knowledge sequence developed by E. D. Hirsch, Jr. at the University of Virginia and Direct Instruction, designed in the late 1960’s and early 1970’s by Siegfried Englemann and his colleagues at the University of Oregon, form the basis for many leading models. Larger charter companies are able to employ specialists to develop their own unique curricula based on these and other models.
But for companies that hope to open a large number of new charter schools in different states and over a short period of time, it is important that their product not only be a good one, but that it also be reasonably standardized.
“Scaleability which can be replicated across different sites appeals to investors,” observes Advantage’s CEO Steven Wilson. But for a company with charter schools currently in operation in 8 states and the District of Columbia, it is also essential for growth. He explains that his company’s focus on exclusively urban charter schools is central to its business plan. Wilson cites a high population density, generally high per-pupil spending levels and a prevalence of underperforming schools as crucial factors in the decision.
“One of the nice things about charter schools – or any K-12 schools – is that by and large you know your revenues at the beginning of the year. Of course, you’re not going to have a huge run on your product, like Pokeman,” added Edison Director Leeds.
Advantage Schools’ Chief Education Officer Theodor Rebarber described his company’s approach, “We thought the for-profit culture would create the kind of discipline and focus on execution that nonprofit environments sometimes lack…. It also works well with our commitment to expand. We want to have an impact on education, not just one or two schools.”
But the entrepreneurs who run charter schools understand that while curriculum be a centerpiece of their business plan, it is the bottom line that will ultimately matter.
In a February 2000 interview with Business Week, Edison Schools’ founder and CEO Chris Whittle observed, “We think the estimate that 50% [of the education dollar] is wasted on administration is hyperbole. Our estimate is that about 70 cents [of each dollar spent by the average public school] makes it to the classroom; 3 cents goes to capital goods like textbooks; and 27 cents goes to administrative costs. At scale, we plan to spend just 8 cents on central spending.”1
He added, “At scale, we plan to spend 79 cents of every dollar in the classroom, and 6 cents on capital spending, twice as much as the typical school. After headquarters costs of 8 cents, that will leave a profit of 7 cents.”
On a per-pupil basis, Edison’s hard-fought drive towards profitability continues to make progress. This summer the company reported “On a per student basis for the year, Edison posted an EBITDA loss, net of non-cash charges of $349, a 42% improvement from a loss of $603 per student in the prior year.2
R&D Can Be Crucial
As with other venture capital sectors, research and development can provide important advantages for charter school operators who can afford them. Curriculum development is one obvious area where a charter company can benefit significantly from the effective use of adequate expertise and resources. Individual charter schools can generally ill-afford to maintain full-time experts to develop their curriculum, an advantage enjoyed by larger for-profits. Many point to their specially-designed curricula, created to improve student performance, as central to their entire approach and business plan.
With a fast-growing student population already roughly the size of Boston, New York-based Edison Schools has established itself as the sector leader with the greatest ability to invest in curriculum development and other R&D init
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