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Knewton’s Double Bottom Line

Posted in CEO Jose Ferreira on December 21, 2012 by

Edtech is booming. In the past decade, VC investments in edtech have tripled from $146 million in 2002 to $429 million in 2011, according to the National Venture Capital Association. VentureBeat says that the market size for U.S. education could reach $1.2 trillion by 2015.

If this were any other information technology vertical market, the issue of incorporation status would be no issue at all. But education is held to a different standard. A higher standard, many would say — and I would agree. But “higher standard” should not be conflated with “not-for-profit tax status.” Certain entrenched interests would like you to do so. You should not.

Especially in education, “not-for-profit” has come to mean horribly bureaucratic, one-size-fits-all, and extremely expensive. Meanwhile, nearly every ed-tech start-up is in fact working to reduce the overall cost of education.

Those who fear innovation — and the change it brings — often invoke “shouldn’t profit from our kids” as an effete rhetorical device against for-profit education companies. But teachers charge for their services, do they not? So do teachers’ unions. So do schools themselves — they charge parents, students, and taxpayers — and they charge them a lot. Universities charge up to $50,000 per year. What matters is the reduction of education’s systemic costs, not the tax status of those who do so.

So let’s get past this simplistic and cynical canard that being a for-profit is morally inferior to being a not-for-profit. What matters, if you are starting an education venture today, is what the right incorporation status is for you.

Khan Academy is a great example of a not-for-profit start-up. It is, at its core, a library of wonderful content with a light technology layer to help increase engagement. It needs cash to create more videos. Its not-for-profit status has helped it get an incredible amount of press and acceptance it would not have gotten as a for-profit. But it will also impede growth. So it’s a mixed blessing even for Khan Academy, and I know of no other organization turning its not-for-profit status into anywhere near the media buzz that Khan gets.

On the other hand, some for-profit higher-ed companies have recently run publically afoul of regulators for pushing sales quotas too aggressively. To their credit, they’ve corrected the problems and are now looking to innovate their way to growth. But we must always remember that education is a special calling. It is a human right and a social good. Putting profits first might be short-term smart, but, in this industry at least, it is always long-term foolish.

I favor a middle ground. Knewton is a “mission-driven for-profit.” We intend to make a return for our investors. But the ultimate goal we measure ourselves against is a social one — our own “double bottom line”: we hope to generate sufficient cash in our core business that we can identify, power with Knewton adaptive learning, and give away the world’s best low- and no-cost education to the developing world and inner city. If we can accomplish that, I’m sure our investors and employees will do fine too.

I chose a double bottom line mission for Knewton because that’s the type of organization I wanted to devote my life to. But it turns out that it also has helped us attract unbelievably talented people who also want to devote themselves to that kind of mission. It’s been a fantastic unifying and motivating force in our organization’s culture. And it has helped us land some critically important early partners, because they believed we were in this for the right reasons.

So consider setting up your education venture as a mission-driven for-profit. It’s the best of both worlds — which is exactly what education needs.

This post originally appeared in the December 2012 issue of Knerd Dispatch, the Knewton newsletter.