This story was reported in partnership with the Investigative Fund at the Nation Institute.
In his book, Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow, Michael Moe describes how carefully crafted business strategies have transformed markets to create huge profits in unlikely sectors. The title relates to how Starbucks became a global corporation of almost $15 billion in revenue by capturing and streamlining the café experience. Moe, a former director at Merrill Lynch, wrote that at one point in the United States, even healthcare was an undesirable and difficult industry for investment, and that bankers once worried if profit-making in such a realm was worth their effort. In 1970, healthcare spending comprised 8 percent of GDP, yet market capitalization in healthcare stood at less than 3 percent. That shifted quickly not only as the boomer generation aged, but as a wave of privatization hit hospitals, insurers, and other segments of the healthcare system. More than thirty years later, Moe wrote, healthcare companies are among the largest in the world, and represent more than 16 percent of US capital markets. “We see the education industry today as the healthcare industry of 30 years ago,” Moe predicted.
That book came out eight years ago, before the current wave of education investing, when the prospect for growth seemed dim. Unlike in healthcare, energy and other areas of the economy that have moved from public to private hands, K-through-12 education has stubbornly remained largely out of the control of investors.
Next year, the market size of K-12 education is projected to be $788.7 billion. And currently, much of that money is spent in the public sector. “It’s really the last honeypot for Wall Street,” says Donald Cohen, the executive director of In the Public Interest, a think tank that tracks the privatization of roads, prisons, schools and other parts of the economy.
That might be changing soon as barriers to investment are rapidly fading. As Eric Hippeau, a partner with Lerer Ventures, the venture capital firm behind viral entertainment company BuzzFeed and several education start-ups, has argued, despite the opposition of “unions, public school bureaucracies, and parents,” the “education market is ripe for disruption.”
Hippeau’s vision is the growing sentiment among investors. Education technology firms secured a record $1.25 billion in investments across 378 deals in 2013, while analysts predict that number will continue to surge this year. Since 2010, Moe has led what has been billed as the premiere education investment conference, which takes place annually in Scottsdale, Arizona. The first year attracted around 370 people and 55 presenting companies. This year, that number soared to over 2,000 with over 290 presenting companies and speeches by luminaries including former Governor Jeb Bush, Magic Johnson and Commerce Secretary Penny Pritzker. One of the largest start-ups, a Herndon, Virginia–based company called K12 Inc., a for-profit largely online charter chain, posted nearly $1 billion in annual revenue for its last fiscal year in August.