The Impact of a Portfolio
Impact, mission-driven, or mission-related investing begins with discrete social goals and aims to yield tangible, scalable social + financial returns. To me, it is focusing on what you know, what you love, and where you know you can make a measurable difference.
“Impact investing is actively placing capital in businesses and funds that generate social and/or environmental good and a range of returns, from principal to above market, to the investor.”
— The Monitor Institute
Image Source: The Miller Center for Social Entrepreneurship, Santa Clara University
I decided to disrupt myself, to incrementally transition from the classroom to the boardroom in the run-up to the dot-com bubble and was triggered to jump in the summer of 2001, at the height of the downfall. One should make a bold career shift at an economic bottom, because there’s nowhere to go but up, right? Sounds good on paper, anyway. Here’s the Cliff Notes version.
Image Source: Past Life Tourist
My professional journey began with a decade of teaching and coaching in middle and high schools along the U.S. eastern seaboard and with brief stints in the UK and Japan. I felt the pull to impact education at scale. So, how exactly would a classroom teacher put a proverbial dent in the universe of learning? Back then, at the turn of the Millennium, you would likely choose to become an edupreneur, working from outside the system to solve problems. Okay, then would you do this from a single operating platform (for-profit or nonprofit) enterprise — or via a portfolio of enterprises? If you were born and raised in a household of a co-founder of one of the nation’s premiere venture capital firms, you just might choose the portfolio approach. But, how do you get there? You’ve been teaching and coaching for over a decade with parchment that says ‘English Teaching’ and ‘Elementary Education’. The answer for me was apprenticeship in a relationship that I could trust — and a brain rewiring via full-time B-school experience. Sometimes immersion is the only way.
My investing story has evolved considerably over 15 years, but, excepting a few healthcare and enterprise software solutions, has always been headlong in education. The story begins in a unique family office apprenticeship (Bonsal Capital), extends into institutional micro-venture capital (New Markets), includes a few one-off angel investments, and is currently pegged to incubation and innovation cluster support (Towson University). The portfolio below represents my lifetime direct investment experience in early childhood, K-12, and post-secondary education.
Out of 27 investments, there have been 13 realizations (48% of the portfolio, one not yet public), yielding a 3X return on invested capital. These returns are born by three write-offs, five at 1–2x return, two at 3–5x, and three at 6–10x, yielding an 18–20% IRR, which works for most financial investors. 60% of these investments were made at the seed or early stage, 40% at growth or late stage, where the average return horizon was 4.5 years. Put simply, the above returns represent an 89% ‘success’ rate in a half-realized portfolio with 3X cash-on-cash returns. Funny thing is, that success rate is roughly the inverse of the strategy born by ‘swing for the fence’ venture investors, the ‘one in ten’ approach, where one massive winner creates the desired financial return (returns principal), and the laggards and carnage make up the difference and are deemed part of the business. A third of the portfolio written off? Not in education! Carnage and impatient capital need not apply! And even if you wanted to swing for the fence on every company, the problem is two-fold: 1) there are very few unicorns ($B companies) in education and 2) a majority failure rate with end users that are students, administrators, LEAs, IHEs, and even learners on the consumer side of the equation would send the innovation movement backward by a decade.
New Markets’ Education Investment Impact
Okay, but what about the social returns? Honestly, in aggregate, they have not been accurately measured. Approximately half of the portfolio can be pegged to the adjacent image which depicts 2014 New Markets investments. I can emphatically state that tens of millions of students, teachers, administrators, and parents have been happy, recurring customers or end users of products and services from growing, continuously improving enterprises focused on 1) flexible, adaptive, competency-based learning, 2) administrative productivity and accountability, 3) student success in support of diploma and degree attainment, 4) adaptive reading and math remediation, 5) teacher effectiveness, and 6) assessment and evaluation.
The impact value chain in the adjacent image imparts at least a qualitative way to begin measuring impact but is merely based off a 40 year old evaluation of program effectiveness. It is an understatement to say that impact measurement requires institutional discipline and support. Acumen CIO Sasha Dictor imparts, “I’m not sure how far we’ve come on the “actively measured” bit — mostly because it’s really, really hard to measure impact.”
Reflecting back on the early 2000’s, when I made the jump from the classroom, the education investing picture portrayed a mere handful of institutional and strategic investors, with very few investing at the early stages. DHM Arcadia Partners, Ascend Ventures, and the corporate-induced Sylvan Ventures were ramping or cresting. Each of these funds has wound down or moved away from education investing, perhaps worn down by the long tail rigor and often policy-driven challenges associated with investing in edtech, particularly in K-12.
Source: GSV Advisors
In 2015, the world has changed dramatically in education investing. Over the last five years, we have seen a 35% compound annual growth rate (CAGR) in capital flows into education exhibited by 1) the infusion of a number of diversified firms attracted to education and 2) by the creation of brand new funds and firms devoted exclusively to the craft of education investing. See: Learn Capital (2008), New Markets Education Partners, LP (2010), Reach Capital (formerly NewSchools Seed, 2012), Rethink Education (2012), University Ventures (2012), and Owl Ventures (2015).
There are a myriad of private foundations who have tilted to some degree of mission-driven investing in education in addition to true philanthropic grantmaking. The Kellogg, Rockefeller, Dell, and Hewlett foundations are several key leaders in U.S. direct mission-driven investing. The Bill and Melinda Gates Foundation and the Lumina Foundation are grantmaking institutions that have made noteworthy indirect investments in some of the funds in the previous paragraph. These pioneering foundations, and a growing number of others, are proving out the need for mission-driven public-private partnerships in K-20 education like never before.
There are also a growing number of accelerators, incubators, and design studios building, scaling, and investing in edtech: 4.0 Schools (2010), Imagine K12 (2011), LearnLaunch (2012), Education Design Studio (2013), Jefferson Education Accelerator (2014), and EDGE EdTech (2015). The Northeast Corridor has quite a few edtech hubs worth your consideration, not to mention robust activity in Chicago, New Orleans, and, of course, San Francisco/Silicon Valley. Each takes a portfolio approach where the collective impact is an impressive array of solutions aimed at changing and ameliorating education, at all stages and locales.
With a pragmatic, ecosystem-based approach over the last two years at Towson University, my TU Incubator team, associated networks, partners, and I have been working to help entrepreneurs build, validate, grow, and sustain education solutions. From one edtech ‘investment’ in late 2013 to over 1o active edtech companies in late 2015, we have been shaping and supporting a community that cares deeply about impact and sustainability. And, we are just getting started. Our impact? Approaching 100 new jobs, over 250,000 end users, over $4 million in outside capital, and an increasingly positive reputation for solution-building in the Greater Baltimore education innovation cluster.
The above ecosystem efforts are a small but important beginning, and we uphold Margaret Mead’s thesis: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.” As a youth in the 1970’s, the environmentally conscious mantra was to Think Globally, Act Locally. In education innovation clusters, it’s the inverse. Think (and listen, design, learn, and iterate) Locally, and Act (validate and scale) Globally. The world needs your idea, moreover your solution executed upon with the right set of values and rigor. It’s time to get started, because we can’t wait.