Like most curious minds, I’ve always loved the topic of education. I guess that when you like learning for the sake of it, you like teaching because you can share the pleasure of discoveries, and by extension, you like the field of education.
I’ve long believed the matter too important to be removed from the State (especially for social justice reasons) before higher education. And I’ve also long believed that higher education businesses were noble, yet rather lousy in term of business perspective.
Even business schools, charging high tuition fees and able by nature to leverage many of the strategists in their rank, have experienced difficulties in France. We see many prestigious schools creating Chairs, which could be suspected to arise mostly for economic reasons.
This week I discovered a brand new truth about education: schools can be very profitable businesses, with levels of EBITDA margin I almost never heard of.
Why Are Schools Good Business Opportunities
Groups of higher education are even all rage for private equity funds. This can be understood for the following reasons:
- Their revenues are very easy to predict. Established schools rely on student’s fees and once they’ve discovered the right marketing strategy and have a credible brand, they are able to attract at least as many students each new vintage,
- They have a working capital requirement that any business owner would dream of: almost all their revenues are paid by the year, upfront,
- The longtime value per client is very high since very few students drop out before the full curriculum is completed (to get the diploma),
- They are very resilient even in economic slowdown: young adults don’t take a break when times are less difficult, they just keep on with their education,
- The population growth, coupled with an always increasing aspiration for getting high degrees, lead to a steady increase of students,
- There are some scaling effects:
- most of the costs are buildings and teachers, and managers are able to push the number of students per class and per teacher before reaching the maximum possible,
- functional supports can be mutualized and best practices shared when you have several schools, especially in marketing, which is key.
- There are some network effects:
- the value of a given school is also its network, and especially its network of alumni,
- Bigger schools can easily put in place collaborations with international schools or complementary schools (eg: business, engineering, design).
All of the above explains why we witness M&A transactions, which can reach EBITDA multiple of 14.
ISA: An Amazing Financial Product
I’ve also discovered one very exciting financial product, happening in this very field: Income Sharing Agreement (ISAs). The concept has been developed by Milton Friedman in his seminal article The Role of Government in Education in 1955.
In a couple of words, ISAs are financial products that allow students to repay lenders with a percentage of their future earnings for a certain period, knowing that the contracts are almost always putting a floor (a minimum yearly earning to reach before starting to pay back the percentage, meaning that if you don’t find a job or get out of job, you don’t suffer from the repayment of the debt) and a cap (a maximum you can pay, eg: 120% of the standard fees, for the students who manage to get very high salary).
This is exactly the kind of businesses I Iove: (1) high profitability, (2) large market, (3) empower people, (4) ability to increase the market as a consequence, (5) alignment of interests by design between supply & demand, (5) high virality. It misses only network effects ;)
Primary & Secondary Education
This week I’ve also met an interesting team working on the improvement of primary and secondary education. They discovered that teachers and other education experts have large consensus on what should be done, including:
- Decrease the number of students per class or/and teacher,
- Decrease each class duration (favour blocks of maximum 45 min instead of the standard 60 min),
- Start foreign languages earlier and practice them through discussions, pitches, and debates,
- Leverage findings in the field of memorization (hint: repetition at a decreasing frequency),
- Focus on students’ motivation and allow them to drive their learnings,
- Bring collaboration and workgroup
- Stop teaching for imaginary “average students“.
They’ve estimated a cost of 10k€ per students to be able to do that (with a sufficient latitude in the hiring of teachers and in the creation of the curriculum), while they’ve evaluated a cost of 8k€ per students in middle school today in France.
All these discoveries led me to the following reflexions:
- It’s fantastic to see that education can be beautiful businesses (and not only the marvellous organization Holberton School, in which I’m an investor through daphni, which I believed was a pure exception in that field), with sufficient means and the right alignment of interests between schools (or/and fund providers) and students.
- It’s also very nice to know that significant improvement can be brought in primary and secondary education for “only“ 25% more investment per students. In France, this would increase the cost of secondary school from €72b to €90b, ie €18b on a total budget of 229b in revenue and 338b in spendings in 2019. It seems hard in our economic context but not unimaginable in the longer run with sufficient political will.
- On the contrary, we could regret seeing financial operation demanding an increase of revenue around +10% per year for already very profitable schools (far above 20% EBITDA margins). Finance should not push organizations to maximize their revenue and profits by degrading the quality of their products (it’s precisely what’s happening when you just increase the number of students per sq2 and teacher).
- In the same spirit, I’m afraid that innovation happening in the private sector may not spread easily in the public sector, and not even being able to be scaled to lower costs. If state-of-the-art pedagogy is only accessible for the wealthiest, we’ll only erode further the social ladder and compromise social justice.
- I’m also wondering what will happen to research (and not directly applicable subjects) as more and more people focus on how actionable the teaching is. Today, global standards and rankings make research at the very core of the university, but if engineering and business schools are taking always more room and if students don’t really care about knowledge per se, we could see an increasing scarcity for abstraction (which is, in fact, a requirement for future “concrete” applications).
- There is a big question about what could be designed in terms of pedagogic content for a given school. I’m a fervent believer that:
- human minds are capable of exceptional achievements in the right environment and with the right motivation,
- learning is not a linear function (I don’t think you can really predict someone’s future ability with the current state), nor it is uniform (I could be super good at memorizing readings when you could be incredible at finding fantastic breakthroughs).
However, I’m not sure you can ask anything to anyone (at least at a given time). Some schools are tempted to be willing to take strategic positioning implying teaching matters that may not fit the profiles of their students. Maybe they can adapt over time, but they need at the very least to be fulling willing to.
7. I’m particularly appealed to the question of continuous education. I love schools, but I’m not sure we can or should all stop our work and immerse ourselves full time to training (I’m assuming schools are designing only full-time curriculum). In China, the largest group of students who want to do self-improvement and online education is 26–35, after they graduate college! (And are done through mobile to a large extent, mostly through podcasts!)
If we choose not to go back to school, what’s optimal to keep on sharpening our spirit? We read books and articles. We watch documentaries and movies. We use platforms such as Udemy, Masterclass, Coursera, Khan Academy, Creativelive, or Skillshare (and YouTube, let’s be honest). We listen to podcasts. We visit museums and monuments. We go to conferences. But our choices are often blind bets, sometimes suggested by algorithms, or made after a random encounter (an attracting book cover, a podcast mentioned in an Instagram story…). In an era where we reject institutions and favours networks, where beliefs are put at the same position as science, where speed is flooding us all, where the action is much more valued than reflexion, where individualism has won against collaboration, I wonder what the right answer is to continuous education. It will probably mix social components (we are social animals), machine learning (for scaling and customization), long form (to learn), shorter form (for discoveries, motivation, and memorization), teachers (I doubt machine learning can do it alone), and at least mobile somewhere in the journey.