Education: an in-depth look
Ensuring that children and adults have access to quality and affordable early childhood, K-12, and postsecondary education is critical to breaking the cycle of poverty for future generations. However, during the economic downturn, state and local government budgets were strained. In 2011, the U.S. Department of Education had to cut spending by $1.2 billion. While foundations awarded nearly $5 billion to education-focused organizations and programs, they have not been enough to address all the gaps in making quality, affordable education available to all.
We are beginning to see foundations leverage their investment capital, in addition to grant funds, to test and scale effective solutions. Public-private partnerships are emerging in the form of pay for success models to achieve outcomes of governments and society value with potential cost savings, scale evidence-based programs, and leverage private capital. We are also seeing an increase in educational technology ventures that are working to use data, better provide necessary feedback and instruction to teachers, and reach more students. Eight respondents from our survey indicated having targeted investment activity in education, with early childhood education and K-12 the two most selected sub-impact areas.
Early Childhood Education
What We Know
Investments in high-quality early childhood education yield a 7 to 10 percent per year return on investment, based on increased school and career achievement and reduced social costs.
- As 90 percent of a child’s brain growth occurs between birth and the age of three, early childhood is the most critical period of development for children. However, low-income children are more likely to fall behind during this period, as they frequently do not have access to quality and affordable educational and developmental programs and resources.
- On average, children from low-income families enter kindergarten 12 to 14 months behind their peers in pre-reading and language skills.
- Children who participate in preschool are likely to graduate from high school and 2.5 times more likely to continue on to higher education.
- Once they reach adulthood, children who were in high-quality preschool programs have lower arrest rates, higher income levels, and greater rates of high school completion compared to children who did not attend preschool.
Investments to Scale High Quality Early Childhood Education Programs
Acelero Learning: A For-Profit Company Rethinking Head Start [See case study on page 40.] Acelero Learning is an example of how a market-based innovation can improve efficiency and performance of early childhood programs. Founded in 2001, Acelero Learning serves 5,000 children by providing support to and operating high-performing Head Start programs in Nevada, New Jersey, Wisconsin, and Philadelphia. Acelero’s emphasis on efficient operations, use of data, and high-performance culture attracted private investors and led to a $4 million capital raise.
United Way of Salt Lake City Pay for Success Model: Scaling an Evidence-Based Early Childhood Program Up to 3,500 at-risk youth will have access to high quality early childhood education under the nation’s first social impact bond directed toward early childhood education. The program, launched in August 2013, is overseen by the United Way of Salt Lake in two local school districts, Granite and Park City. It uses a pay-for-success model, in which private funders provide risk capital and recoup their money, with a premium, only if the program is successful and the districts realize savings from the avoided costs of special education programs. The model is based in part on the findings from a longitudinal study of the Utah High Quality Preschool Program that confirmed broader research that targeted early childhood education can help students who would otherwise need special education in primary school and beyond.
The Goldman Sachs Urban Investment Group committed $4.6 million, in the form of an eight-year loan to the United Way. The J.B. & M.K. Pritzker Family Foundation provided an additional loan of $2.4 million to the United Way that reduces the risk to Goldman Sachs if the program proves to be ineffective. The Pritzker investment is part of the Early Childhood Innovation Accelerator, a $20 million initiative seeded by the foundation to increase the quality and availability of early childhood education for disadvantaged children.
The preschool program was a ready model for such a pay-for-success arrangement because it can yield clear and quantifiable results within a relatively short timeframe. If the goals are met, fewer children will need special education, which will create savings for the state and allow the investors to be repaid. Additional savings are likely to accrue throughout students’ school years and often into their adult lives.
What We Know
In 2012, the nation achieved the highest overall high school graduation rate in its history. African-American and Hispanic students are seeing gains but continue to face challenges such as achievement gaps in math and reading compared to white students. Additionally, only a limited number of public high school graduates are prepared for college.
- Earnings increase 1.5 times with an associate’s degree (compared to a high school diploma). Earnings double with a bachelor’s degree.
- In 2012, overall the U.S. high school graduation rate rose to 81 percent, the highest level in the nation’s history.
- For Hispanic and African-American students across the country, graduation rates fall to 76 percent and 68 percent, respectively. However, graduation rates for both groups are on an upward trend, and the overall national gain is attributable to the gains among African-American and Hispanic students.
- Three-quarters of the fastest-growing occupations require education beyond a high school diploma, with science, technology, and engineering careers prominent on the list. Yet only 16 percent of American high school seniors are proficient in mathematics and interested in a science, technology, engineering, and math (STEM) career.
- Three in four high school students graduate college without the appropriate preparedness in the four core subjects: English, reading, math, and science. One-third of students entering college need to take remedial courses.
Investments in Education Technology
As the demand for innovation in education grows, education technology is a growing industry that can attract impact investors. In 2013, the Software & Information Industry Association estimated the value of the educational technology market at $7.97 billion.
NewSchools, a nonprofit venture philanthropy firm working to transform public education for low-income children, is an active investor in education technology and has cited a number of successful market-rate investments. Since 1998, NewSchools has invested $180 million in more than 70 nonprofit and for-profit educational organizations.
NewSchools provides much-needed early-stage capital to high-potential entrepreneurs developing technology solutions for the biggest challenges in K-12 education. According to NewSchools, they “invest in early stage tech tools, applications, content, and services that improve education opportunities for all children. The Seed Fund also acts as a catalyst, inspiring and enabling traditional and non-traditional tech investors to provide capital to the fast-growing ed tech market.”
Carnegie Learning provides teachers and students with classroom tools and software for math education. Founded by scientists and veteran math teachers, Carnegie Learning applies comprehensive research and data collection to continuously improve curricula and provide engaging resources to help students connect with mathematical concepts.
Amplify, an independent subsidiary of News Corporation, offers curricula, products, and customized services to help schools and teachers integrate technology into the classroom when teaching reading, math, and science.
Engrade, recently acquired by McGraw-Hill after 10 years of growth, provides “freemium” services to teachers, parents, students, and school districts through web-based classroom management tools. The company has more than 3 million registered users and is used by elementary schools, high schools, and universities from all 50 states and more than 150 countries.
Goalbook personalizes learning plans for students with online tools to help teachers align with Common Core standards while providing specialized instruction. The web-based platform was founded by Daniel Jhin Yoo, a former special education teacher, and Justin Su, a blended learning technologist.
Brightbytes, through its Clarity platform, uses data to help schools map student learning outcomes, measure progress, and implement action plans. Thousands of schools across North America use the platform.
What We Know
Childhood literacy sets the stage for a life of productive citizenship and employment. Though literacy and reading proficiency has improved for children in recent years, there is still much work to be done. In 2013, 66 percent of all fourth graders were not proficient in reading. This number reached 80 percent among lower-income fourth graders, compared to 49 percent for their peers from higher-income families.xxxii Family income and parent involvement are highly influential factors in a child’s literacy. Reading to young children on a regular basis sets the stage for their reading proficiency later.xxxiii
Addressing Illiteracy with Creative Disruption in the Publishing Industry: First Book, a nonprofit that has provided over 18 million books to schools and children’s programs, seeks to improve access to books in an effort to increase literacy, cultural competency, and family empowerment. In the process, First Book has built an effective business model with sustainable revenue, increased its social impact, and attracted impact investors. (See essay by FirstBook President and CEO Kyle Zimmer and CFO Jane Robinson on page 44.)
What We Know
- Parents who complete a college degree double their incomes over their lifetimes. A parent’s level of educational attainment is also a strong predictor of a child’s economic mobility.
- The unemployment rate of high school dropouts older than 25 is nearly three times that of college graduates: 9.1 percent for those with no high school diploma versus 3.2 percent for college graduates.
- The share of U.S. jobs requiring a college degree will increase to 63 percent in the next decade. This will require 22 million new employees with college degrees. At the current pace, the nation will fall at least 3 million college degrees short.
Lessons Learned from Investments
Since education is primarily funded through governments – national, state, and local – there is a need to develop a business model that fits within the existing investment climate, while delivering increased efficiency. In the case of Acelero Learning and Revolution Foods, their product/service delivery was better than what existed, was offered at a lower cost than currently subsidized, and generated improved outcomes for young people, particularly those most at risk.
First Book demonstrates that nonprofits can be sustainable, have positive social and financial impacts, and, more importantly, change markets through dollars and not just advocacy. The First Book Marketplace aggregates users of all types to create the demand from parents, children, and caregivers to change prices and content in the publishing world. By providing access for free or reduced print prices, First Book has been able to disrupt production practices by demonstrating demand for more bilingual books and creating scale that has reduced prices for all consumers.
Education technology has successfully penetrated two key areas of educational success: access and quality. Through the use of technology and multiple distributive networks, ed tech companies have increased access to education in the classroom and beyond. This has allowed parents and students to foster ongoing learning opportunities, tailored to the needs of the individual in terms of time and space. Moreover, ed tech has enhanced the quality of education through the engagement of experts who are able to bring laser focus to the issues of special needs students, bilingual education, and the like, providing much needed content beyond what can and is deployed in a finite class time.
Opportunities for Impact Investing in Education
As government maintains the responsibility to provide education, opportunities related to education access, completion of school, quality training of staff and students, and access to employment beyond graduation remain limited, especially for low-income communities. Too often the challenges to the education system are attributed to politics and financing. However, education impact investing could mobilize new funding, enable private sector engagement in both public and private education service delivery, and introduce and scale approaches or tools to improve efficiency of service delivery, promote innovation in teaching and learning methods, and monitor outcomes and systemic effectiveness.
Impact investing has advanced in many areas but remains nascent in the education sector. Most deals remain small, and investments in schools currently dominate deal making, with more innovative technology and management models beginning to emerge. Private financiers of education have tended to be of two main types: donors focused on reaching the lowest-income populations without expectation of any financial return and finance-first investors who target middle- and upper-class populations. However, there are emerging deals, social entrepreneurs, and impact investors to fill the middle.
The examples provided – from First Book to Acelero Learning to the Utah pay for success model – demonstrate public and private sectors converging to move the needle on education performance and outcomes.
These examples point to three key opportunities in the field:
- Investing beyond school infrastructure to broader educational outcomes. The W.K. Kellogg Foundation investment in Acelero Learning was not based on creating new child care centers but on improving systems that lead to better service delivery, lower costs, and stronger educational performance outcomes. Investing in broader ecosystems disperses investor risk and increases the availability and quality of ancillary services that are often critical to the long-term success of students, particularly those from low-income families.
- Focus on quality and efficiency. The very nature of pay for success focuses on scaling interventions that are proven to work. The investments in Utah should demonstrate that existing interventions, when scaled, will generate greater educational outcomes for K-6 students, while saving money and reducing opportunity costs for the state and allowing for increased investments in related and ancillary services.
- Leverage intermediaries to deploy large amounts of capital effectively. In the case of New Profit supporting ed tech enterprises, and the Social Innovation Fund pay for success model of investing in successful intermediaries like Institute for Child Success or the Center for Employment Opportunities, the use of skilled intermediaries reduces transaction costs and increases the likelihood of success due to the presence of sector experts. Intermediaries reduce sector fragmentation and friction by bringing proven models to investors and help mitigate risk through diverse products across the educational spectrum.