Monday, August 20, 2012
Education Business: The Need for Patient Capital
In my quest to get a technology-led global education network off the ground, I have now made several iterations of the business plan, made several presentations and attended scores of meetings, some with some success. Indeed, the ideas that I started with changed somewhat: However, that hurts no one as they have only become better, more road worthy, if anything. After several months of doing this, I feel more wedded to the process than I ever was. But I still I have one reservation which I have to deal with before we end signing up with anyone.
It is that to build an institution of any value, one needs what the silicon valley types will call 'patient capital'. My interactions with venture capital industry have told me a very different story than what I initially signed up to. It is fair to say that the structure of the venture capital industry may have changed since the heady days of dotcom, indeed because of that; it has become more interested in traction and tried and tested concepts than ideas itself. In summary, the VCs have started behaving increasingly like banks. That does not bode well not just for what I am trying to do, but also innovation in general.
I can't complain because this is the way it is. I have interacted people just coming out of business schools, and heading to investment banking, and they accept such thinking as articles of faith. Venture Capital (private equity, more so) is about backing proven management teams with proven ideas in businesses which got traction: This indeed sounds like common sense, except the fact that this misses out on the key purpose of venture capital - to enable ventures - and makes it far more like investment banking. It is unsurprising, because most of the venture capital industry is run by ex-bankers, and rarely by entrepreneurs. This brings the practises of investment banking into the realm of smaller ventures.
Which is about 3 to 5 years pay-off, etc. Initially, I was surprised that these organisations are even interested in Education, which I have always seen as a long term play. I remember being told by one Education entrepreneur that his biggest mistake was to take his company to public capital markets and succumbing to the pressures of quarterly results and the tyranny of the analysts: At the time of our discussion, he was trying to spin off the education division of his company and trying to take it to more long term investors. However, my conversations so far indicate that there is appetite for education businesses among these investors because of two reasons, one, because it is cash generative, as mostly students pay upfront, and two, because the demand is strong and the business model is easy to understand. However, this runs counter to some of the things we definitely know about education businesses: That one needs to create the capacity first, before getting students; that it is quite hard to make money in education and needs continuous innovation and building of reputation, and that usual business models hardly apply in this sector. Often, it seems that these investors are looking at a different business than the entrepreneurs are talking about, and indeed, in these situations, what the investors think is the only thing that counts.
It is fascinating to see that despite all the sophistry of modelling and sensitivity testing, how deeply ignorant most of the analysts are about the fundamentals of the education business. After going through this experience, I am not one bit surprised that BPP, which was acquired by Apollo Group in 2010, was overvalued by hundreds of millions because the business model fell apart in a few weeks, and recently, Montague Capital made a mess of their acquisition of the College of Law, where they paid a premium to acquire 'degree granting power' only to understand that they have only bought the delivery company and 'degree granting power' can not be bought and must remain with the trustee board. These examples aside, it is surprising how little the 'education' investors know about, or wish to know about, the sector they are investing in. The fact that these are actually incredibly smart people make this even more pathetic: One can almost see a narcissistic arrogance of being impressed by one's own smartness and driving through the world blindly.
While such interactions leave me with no doubt about the future of investment banks and the financial service industry in general, my immediate concern is to find 'patient capital', not just in terms of how long the investors want to wait, but also what approach they wish to take to the business. I am painfully aware, having been part of such ventures before, that a business needs to be built for its own sake, and if the key investors are more interested in window dressing from day one intending to sell it off in a few years time, that is a sure recipe for failure. I have, therefore, started talking more and more to individual investors, and even with larger companies, rather than VC or Private Equity funds that would have been the natural port of call as we try to put a Buy-in proposal together.
Despite the mounting criticism of For-Profit education businesses in Britain, I believe these institutions are needed, to offer the required variety in the marketplace and to drive innovation. They are needed if just to challenge the sloth and arrogance in the publicly funded universities. However, in the For-Profit sector, the most important task of an education entrepreneur is to pick the right investors, because, without it, the venture is destined to be a poor one, failing sooner or later. In fact, choosing investment deals is an important part of the education design, I shall say, though this is likely to offend pure-minded academicians. The truth is, we lack sources of patient capital. In fact, I have started to realise that I have better chances of raising the investment with right sort of terms in Asia than in the UK, as the huge market demand and long term potential is more visible there. This makes my already exhilarating journey in search of an appropriate business model for education even more fascinating, but I can't stop worrying about a market full of education outfits backed by private equity.
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How To Live
"Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the grey twilight that knows neither victory nor defeat."
- Theodore Roosevelt
- Theodore Roosevelt
We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.
- T S Eliot
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