Investing in Companies That Serve K–12 Schools: Addressing Five Incorrect Assumptions
It is a question that I get nearly every day: What’s happening in the public education world? This is often asked with a smirk, as if to reinforce the common thinking that the K–12 public education marketplace and the companies that serve public schools are stodgy, over-regulated, wrapped up in arbitrary state and federal governmental policy, and fraught with politics of all types.
Unfortunately, these perceptions mask the many opportunities in education at a time when the K–12 educational market is ready to really take off. In fact, solid education-focused companies have been serving this market for years, and very profitably. In an effort to paint a more accurate picture of the K–12 education market, here are some answers to assumptions we often confront.
Assumption #1) The companies that serve K–12 public schools are old and stodgy.
Of all the institutions in the country, K–12 education, and public K–12 education specifically, is one that the vast majority of the adult population has had some personal experience with. This also means that most of us have opinions about public education, in one way or another.
For people like me, middle-aged or older, it is true that the education that most of us received was fundamentally similar to that provided to students a generation ago. While some of us may have had access to computers of some kind, most of us spent our K–12 days in rows of desks with a teacher at the front of the room who gave lessons.
However, this is not true of the children who are currently in school, and it most certainly will not be true for our grandchildren. Walk into any school in this country now, and you will see that while the buildings may be the same as those we attended so many years ago, what is happening in those buildings has changed dramatically. For example, the internet and new forms of education mean that students who are learning about the oceans are engaged not by boring photos in an old textbook but by up-to-date content from expert content providers, like Discovery TV, that may include underwater video from a submarine.
As a result, the classroom teacher is no longer the expert who is providing all the content to students but is instead a facilitator of learning. This has resulted in radical — and very positive — changes for public schools. In addition, public schools have engaged in ongoing, data-driven improvement efforts, and robust and engaging professional development is a critical component of the life of a professional educator.
Think education and the companies that serve the market are boring? Hardly.
Assumption #2) The K–12 education market is fraught with politics.
There’s an old saying that there are no politics like school politics, and there certainly is merit in the adage. Public education is a microcosm of the larger political world in so many ways, and it is the place where big issues are debated. Moreover, new forms of education, including independent private charter schools and voucher schools, are challenging the definitions of public schools.
The smart money in education is going into companies that serve all students, not just the ones in voucher and charter schools (we provide more detail on this below). Education technology, “Edtech,” is big and getting bigger. The same is true of professional development providers, content providers, and a host of other types of companies that serve all students.
Education is political only if you do not understand the pitfalls.
Assumption #3) There is no money in it.
In the U.S. alone, K–12 education is a $634 billion market, according to the Department of Education. This translates to more than $12,500 per K–12 student, with an average of $11,222 allocated to salaries, employee benefits, services, and supplies. A large portion of this money is earmarked for services provided by education-focused vendors. The educational market is huge and still growing.
Assumption #4) K–12 education is a regional activity: There is no scale.
Here’s an interesting fact: The U.S. Constitution makes no mention of education. In the U.S., education is a state endeavor. As a result, for generations, there were huge differences between schools in different regions of the country. Now, however, because of federal educational policies as well as common educational standards, content, and testing, what it means to be a fifth grader in Georgia is not that much different than in California.
At the same time, one-time regional vendors that were successful in one part of the country saw opportunities to scale across the country, creating great opportunities for investors. When it comes to education, there are in fact opportunities as a result of nationalization.
Assumption #5) If there are opportunities, they are in voucher and independent charter schools.
Wrong. This is something we believe strongly and for which we receive tremendous pushback from the charter and voucher school world. Here’s the deal: While private charter and voucher school operators tend to get a lot of ink in the education marketplace, investors are not always keen to put their money into them, and for good reason.
The advent of new voucher policies at the state level presents a model of education that is cheap and easy but not necessarily suited to the needs of all schools or all students. While education is and has always been a hot political area, the politics of charters and voucher schools burn especially bright, adding a great deal of unnecessary risk.
The smart money should be invested in companies that serve all schools, public, private, and everything in between. And there are a lot of them in the marketplace.
Do you have questions about investing in the K–12 educational marketplace? Contact us.
Joe Donovan is the principal of Forward Advisors, a national private equity consulting firm that specializes in the K-12 educational marketplace. Joe can be reached at firstname.lastname@example.org or at (800) 393–5283.