Can Venture Capital Unlock Innovation in Education?

Special Focus : The Future of Education: What Role for Private Capital?
World of Work October 06, 2015

Tech investors and entrepreneurs will often tout venture capital as a vehicle to enable innovation in education. But that’s not what venture capital does, although innovation might at times be one of the side-effects. Venture capital is investment, and a particular kind of investment in a particular kind of startup at that.

Venture capital is a type of equity financing – that is, cash (typically) is invested by a venture capital fund in exchange for an equity stake in a young company and a say in how that company will be run. Venture capital funds are pooled resources – investment in turn from corporations and individuals – that are invested by venture capitalists into companies that are too risky for traditional bank loans or other funding methods. That high risk brings with it a promise of a high financial return; and as venture capitalists (VCs) invest in high-growth startups, the expectations are that that some return reasonably come in four or five years – hopefully a high return, severalfold the size of the initial investment – in the form of an IPO, an acquisition, or a merger.

That timeline is just one way in which the expectations of venture capital – its practical functioning, not to mention its philosophy – run counter to those of education systems, which are renowned for moving at a much slower pace. Is it possible for an ed-tech startup to gain significant traction with school districts in that short time period? Can the efficacy – whatever that might mean – of an edtech product be demonstrated that quickly?

Venture capitalists tend to not look at that last question when making their investments. Rather they do not fill their investment portfolio based on what has been found to improve teaching or learning. They look to other signals to identify what they believe is going to be profitable for their investment portfolio – things like the number of users who’ve signed up for an account – often moving in herds to fund startups whose products coincide with certain trends, such as things like learning to code, test prep, learning analytics, and so on. While VCs often have experience as technology entrepreneurs, rarely do they have experience as educators. That means that instead of nuanced discussions about pedagogy and policy, when startups “pitch” their idea to venture capitalists, they must rely on buzzwords and things that might sound right, even if research or practice would suggest otherwise.

Venture capitalists frequently engage in what’s known as “pattern matching” in order to identify the companies and entrepreneurs they believe are likely to be successful. That is, they look at successful companies in the past – and we should certainly debate what we mean by “successful” in education as educators and VCs might not agree on the meaning of the word – and try to identify the similarities across them. Or perhaps they look at their own success as company founders and leaders, and look for entrepreneurs that look the same. Indeed, 76% of venture capitalists are white men, and they often fund young white men in turn. A recent Stanford University study found that women receive only 4.2% of VC funding. Less than .1% of funding in the tech sector goes to black women founders. Again, this investment pattern does not match at all the patterns – the demographics – of those at school, either teachers or students.

Neither the patterns, the demographics, nor the values of venture capital match those of school. And fundamentally, VCs look at education as a market, at teachers and students as consumers. Although arguably they have little care about education policies and practices other than the ones those that boost their investment portfolio, venture capitalists wield a great deal of financial and political power in helping to frame what the future of education might be like. According to investment analysis firm CB Insights, “In the last four quarters, including Q2’15, ed tech startups attracted $2.3B, a jump of 96% compared to the previous four quarters.” Venture capital is shaping what problems get addressed ed-tech; it’s shaping what sorts of technology gets built; it’s helping dictate what companies stick around for a while longer.

And so it matters that the VC culture runs counter in many ways to that of education – it’s one that values the individual, private investment, wealth, and white men for starters. Again, there’s a claim by investors and entrepreneurs that venture capital unlocks innovation. I think that innovation often comes from creating cultural change. So we should ask what sort of culture venture capitalist wants to generate in schools. Whose needs will that culture serve?