Early impact investing lessons in ed tech

This is part of a blog series that focuses on how the Michael & Susan Dell Foundation approaches impact investing. In this series, you will read about the foundation’s investment strategy in a particular ed tech solution, and each company’s mission to solve an existing problem in education. You can find the full series here.

The foundation’s approach to impact investing has grown and expanded over the past several years.  Our U.S. Education practice has been part of that growth by expanding the number of financial instruments used  – from grants to equity and convertible debt (to learn more, Stanford Social Innovation Review recently published an article New Approaches to Ed tech Funding that highlights some of this work in the U.S.).

When we first began considering investing in U.S. education technology companies, we had two beliefs:

  1. Appropriately designed ed tech can act as a tool for social progress – and that entrepreneurs creating new ed tech tools needed committed investors.
  2. The foundation was uniquely positioned to nudge ed tech entrepreneurs to “do the right thing” and serve low-income schools across the country.

Those beliefs still remain true for us today.  In fact, they have morphed into one primary goal: ensuring the highest quality instructional tools are designed for and accessible to educators in all schools –especially schools that serve a high percentage of low-income students.

So, is there any evidence of positive social impact that we’ve been able to achieve through our investments in the ed tech sector?  The answer: yes.

Our lessons learned

Below are three major lessons we’ve learned from our impact investing to date.

We have evidence the tools we’re backing are reaching educators in low-income schools. The good news is that the companies we’ve backed (either directly or via funds) are reaching educators in schools that serve a high percentage of low-income students. On average, roughly 50 percent of the students served by our partners qualify for the federal Free & Reduced Lunch (FRL) designation. We’ve proven that, with encouragement, when ed tech companies scale, their customer demographics can reflect the national average of FRL students and not skew toward higher-income populations.

We’ve witnessed how flexible investment tools accelerate social outcomes.  As a mission investor with an impact-first lens, the financial tool we select is carefully chosen to maximize social impact and to match our investees’ needs at specific times in their lifecycle. We’ve used both grants and equity investments strategically.

For example, in order to catalyze the portion of the U.S. ed tech market focused on improving teacher effectiveness and student learning, in 2013 we provided a grant to the non-profit New Schools Seed Fund (NSSF). NSSF worked to identify and seed invest in promising companies addressing intractable problems in public education.

We have evidence the tools we’re backing are reaching educators in low-income schools.

Over three years, NSSF invested in 42 promising, early stage companies. In 33 of these companies, the fund was “first money in” – or the first outside investor. 18 companies in the portfolio were founded by an educator with direct instructional experience. While NSSF invested $8.5 million in these companies, the companies secured $153 million in follow-on capital. Millions of educators and students were provided access to these new technologies.  With its success, NSSF fund decided to relaunch as a for-profit fund named Reach Capital. The new fund maintains its social impact focus, but provides an investment opportunity attractive to a diverse array of investors beyond foundations with highly flexible, risk-tolerant capital. The foundation made an equity investment into the fund and helped articulate the social outcome requirements for Reach’s work.

We have experience to show impact and commercial capital can work together. As any investor will tell you, the focus on growing sustainable, scalable businesses is tough work.  We know that companies must develop operational excellence in order to deliver on their social impact potential. As such, we’re working in close partnership with traditional venture capital firms to help our investees succeed.

Despite the difference in the impact-seeking vs. profit-seeking orientation, the early partnerships have proven productive. The diverse investor perspectives at the board of director’s level has proven advantageous with insight from our different vantage points enriching the advice we’re able to provide our investees. And, we’ve learned venture capital and venture philanthropies have a similar approach to active investment management. Contrary to a common perception of philanthropies, the foundation takes an active role in all investments we make – and early stage ed tech companies require a high degree of partnership beyond financial investment.

What’s next?

The ed tech sector has proven fast moving and dynamic – we’ve witnessed a wave of capital moving into the sector and, now, a possible retrenchment.  This environment requires the foundation to consistently reassess where and how our financial and intellectual capital works best to maximize social impact for low-income students across the country. Thus, our capital will shift as the market shifts.

We also recognize that product efficacy – and transparency of product efficacy for educators – matters greatly. We believe there is great potential to improve information available to users and purchasers of ed tech and are working to identify the smartest thinkers and organizations in this space.  Stay tuned.

 

Other blogs in this series:

Putting the ‘impact’ back in impact investing