Getting Smart on Impact Investing in the Education Sector

04/26/2022 | 6 mins

Summary

Three areas—edtech, early childhood, and income-share agreements—provide promising investment opportunities for impact investors interested in the education sector. 

Education influences virtually everyone at key points in their lives—and is tied to a range of positive social outcomes, from health to social mobility to civic engagement. In different parts of the world, public systems, nonprofit organizations, and for-profit enterprises coexist in diverse ecosystems of schools and teachers, student supports, curricula, educational tools, and other services.

For-profit education companies’ contribution to educational achievement can often align with their commercial success. So it follows that education is a rich sector for impact investors, comprising 20 percent of the 1,200 potential investments in privately held companies, mostly in private equity, that we’ve analyzed since 2016.[1]

Over the past several years, our Bridgespan team has worked with dozens of education investors, ranging from large private equity firms to smaller mid-market funds to foundations and philanthropists, from all around the world. Based on that experience, we offer three areas to consider for investors in the education sector.

Hone in on how education technology tools will improve educational outcomes—and for whom

The COVID-19 pandemic made virtual learning an everyday reality across much of the world. Thus, it dramatically accelerated what had already been a growing demand for education technology (edtech) tools. Reach Capital reports that US education providers in 2020 procured nearly 27 million K-12 devices—enabling remote instruction, online tutoring, instructional videos, and more—nearly twice as many as the previous year. However, while it’s great to see innovation and to know that teachers, parents, and students have more choices, it’s important that capital flows to tools that will truly make a difference.

In order to improve student learning, these innovations need to feature quality, vetted content and to engage meaningfully with students. Aiming for students to just sign up for a membership and click a couple times through educational content is not necessarily going to make a difference in someone’s life. Khan Academy found that the students who use its programming for at least 30 minutes a week are the ones whose math achievement really improves.

Thus, to really understand if an educational tool is making a difference, it’s helpful to gauge how much students need to engage to benefit educationally, and then compare that to how they are actually engaging. “Vanity metrics” such as how many users have ever gone to a website or created an account are often red herrings.

Data that are disaggregated by income, race (particularly in the US), or other indicators of historical marginalization (such as place of origin, language, disability, gender, caste, or tribe) where the organization operates are also important. The digital divide is real, and the accessibility of technology tools is a critical issue; it’s all too common to find that those who need tools the most use them the least, because they lack access. So, too, is it important to consider equity in design issues for the disability community or multi-lingual curricula support. Needs will differ by community and they’re revealed more fully with disaggregated data.

Companies such as Vedantu in India—which recently achieved unicorn status as a billion dollar enterprise—are working to make supplemental education available to lower-income Indians who may not be able to afford or access in-person tutoring, especially those living in smaller cities and towns. With a focus on live tutoring and other online products, Vedantu is India’s fastest growing online education company, and the second-largest in primary and secondary education by revenue and number of students. Investors such as Singapore-based ABC World Asia disaggregated user data with Vedantu to help validate the company’s impact. “Vedantu embodies our investment themes of providing better access to quality education and using digital technology to improve lives and livelihoods,” noted Sugandhi Matta, chief impact officer of ABC World Asia, announcing an investment in the company in September 2021.

The rise of independent nonprofit evaluators such as the nonprofit EdReports (funded by the Bill & Melinda Gates Foundation, the Charles and Lynn Schusterman Family Philanthropies, the William and Flora Hewlett Foundation, and the Walton Family Foundation, among others) has also allowed school districts and other buyers to better assess the impact of different instructional materials on student outcomes. Independent assessments, such as those provided by EdReports, can make innovative startups with quality outcomes more visible to potential customers and investors.

Invest in early childhood for its high impact potential

Research has shown time again that the ROI of investing in the early years can be especially high. That’s not only because the formative years of children’s lives are so important to their development. It’s also because the early childhood workforce in the US is made up predominantly of women of color, so the right kind of investments can strengthen and expand that workforce, providing economic benefits to lower-income families and communities. Childcare workers average just over $24,000 in annual salary, and preschool teachers just over $30,000.

Fifty-nine percent of home-based educators live in households with incomes that are less than the national median; for Black educators, this figure is 75 percent. Companies such as Wonderschool provide platforms that help experienced educators operate their own childcare facilities and preschools out of their homes more effectively, reaching more children. Wonderschool assists with licensing, program setup, marketing, billing, planning, taxes, and accounting. Jeff Jordan, general partner at Andreessen Horowitz, one of several impact investors in Wonderschool, likened it to companies like eBay and Airbnb for its potential to create new income streams by “creat[ing] micro-entrepreneurs out of educators” and helping “these educators to become small business owners.” Other impact investors such as Omidyar Network and Rethink Education have also put money into the company.

Consider both the promise and the peril of income-share agreements—a form of education financing

With increasing demand for a trained workforce, particularly in technical fields, there has been a rise in education-to-employment pathways programs (e.g., coding boot camps, online certifications), many of which have employed income-share agreements (ISAs). ISAs are a form of education financing in which repayments on tuition are based on a student’s future income; if students have no income upon graduation, they are not required to make payments.

However, these vehicles should be taken up with caution. ISAs can sometimes cost as much if not more than a traditional loan, their monthly payments can be hard to predict, and there is no tax deduction available. Additionally, consumer protections for ISAs are uncertain and in flux. If the link between revenue and educational outcomes seems tenuous, it could be a warning sign.

However, there are structures that address some of ISAs’ drawbacks that could help them have more unambiguously positive social impact. Merit America, a nonprofit, uses a “success share agreement” which only charges students if they find employment in a relevant field and charges fixed fees so that payments are easier to predict. It also puts a ceiling on the ISA payment, reducing the risk that very successful students might face inordinately large payments. This structure could potentially be used by private sector companies—and make ISAs more attractive to impact investors.

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This is an exciting time for impact investors who are interested in education. Social entrepreneurs the world over are innovating rapidly and the opportunity for impact is as limitless as human potential. The investors who see beyond the new technology, curricula, and financial structures, who are laser-focused on improving educational outcomes in the communities with the greatest unmet potential, will be the ones who make a real impact.

Stephanie Kater is a partner The Bridgespan Group, based in Boston. Kayce Buller and Jack Sullivan are case team leaders at Bridgespan, also based in Boston. Ronak Parikh is a former consultant at Bridgespan.

Notes

[1] Our database is drawn from anonymized engagements for clients on four continents of potential investments around the world. Information about specific companies mentioned in this article is drawn from public information.
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