Can consumer education businesses deliver impact?
When someone refers to the education “achievement gap”, they are referring to the educational outcome disparity between low-income students and affluent students. In general, education products and services can be “gap widening” or “gap narrowing”; gap widening products and services result in increased parity, and gap narrowing products and services result in a divergence of educational outcomes.
An example of a gap narrowing education product is Civitas, a student retention predictive analytics platform used in higher education. The product analyzes comprehensive data to then supply the names of students that are at risk of dropping out. This product is gap closing because the university pays for it, and typically students who are at the highest risk of dropping out are one or more of the following: low income, first-generation, non-traditional learner, etc.
An example of a gap widening product is pretty much every consumer education product and service. I am sorry if you do not like hearing that! The good news is that there are exceptions. I’ll devote the latter half of this essay to discussing the different forms of either (1) compensating for the gap widening effects of consumer education products and services, or (2) building a consumer education business model that prevents gap widening effects in the first place. But in general, the benefits of a consumer education product or service generally flow in the greatest quantity towards those with the greatest ability to pay (e.g., rich people benefit more).
To illustrate why consumer education products are gap widening, let’s start with a statistic that I cherry-picked to support this argument: In 2018, the Federal Reserve estimated that 39% of Americans do not have enough savings to cover an unplanned $400 expense. More remarkable than that, the median savings account balance among Americans is only $5,200. If you responsible with your finances and are thinking, “Hey, that is rude! I spent a lot of effort saving up my $5,000,” I am actually on your side! I think you should have more money given the amount of work you have done and should not have to spend it for your kid(s) to have a quality education as high as that of any other kid in America!
My point is that many Americans do not have money to throw around haphazardly. Consumer education products cost money and are very often expensive. So, it should not be shocking that many Americans cannot afford to pay for the benefits conferred by spending heavily on consumer education. For example, here is a very common achievement gap widener: during summer months, the achievement gap widens because low-income students cannot afford the same degree of intellectually stimulating summer programming as can affluent students. An example is science camp, which can cost parents thousands of dollars should they so choose to provide their student with an intellectually stimulating summer experience.
The reality is that this is an overall trend; “low income” or “affluent” students do not exist in separate spheres; rather, there exists a spectrum from low income to affluent. As you go farther towards the lower-income end of the spectrum, these students tend to have fewer enriching opportunities as a general trend. This includes access to camps, tutors, and other educational products (e.g., English learning apps, educational games, test prep products, etc.)
I am sure this all sounds pretty wishy-washy! You are probably thinking, “Hmm, low-income families can still afford a $9.99 Duolingo subscription to learn Spanish, $39.99 for group online math tutoring, or $1,000 once per year for science camp for their kids.” Some could afford these expenses, but others may not be able to (recall the statistic that 39% of Americans do not have enough savings to cover an unplanned $400 expense). Nevertheless, let’s ignore those that really cannot afford investing in educational expenses, and consider general buyer trends. Here is an illustrative consumer purchasing behavior chart:
Let’s assume for simplicity sake that each dollar of educational spend represents a “dollar of educational value.” In other words, when you spend money on educational products and services, you get a commensurate amount of value in the form of attaining skills and knowledge — a desirable outcome.
Lower-income households tend to be, in the aggregate, less likely to purchase goods and services than are more affluent households when considering items of the same price, meaning more educational value will disproportionately flow to higher-income families than to lowe-income families. (A $500 education expense for a family earning >$300,000 per year is pretty small, while a $500 education expense for a family earning <$50k per year is a hefty amount!)
How can companies compensate for gap widening effects?
One education company, Outschool, provides students with small-group, synchronous, web-based classes that cover subjects outside of the core curriculum (e.g., not the content that will appear on state standardized tests). If you have kids, you should enroll them in an Outschool class because they will learn subjects that make them more interesting people, which will confer them with the relevant social capital.
Because Outschool is a consumer education business, I would expect that they run into the problem outlined above with disproportionate education gains flowing to those with higher ability to pay. However, Outschool has done what most consumer education companies have not: they have set up a nonprofit entity called Outschool.org that provides “$1,000,000 worth of classes available for free to families in the U.S. who are facing financial hardship.”
This, and buy-to-give campaigns (e.g., Toms; buy one shoe and the firm will donate another pair) are effective ways to compensate for gap widening effects. The core product may still be gap widening; people with more money will spend more on educational goods and services, which will confer them with greater educational value than people who less money who will spend less on educational goods and services.. But Outschool is doing something about it! That is more than most, especially in the age of shareholder primacy.
How do you build a consumer education business model that prevents gap widening effects?
CollegeBacker is an example of a gap-closing B2C business wherein the benefit to the consumer (or consumer’s child) increases with the purchase of the product or service. CollegeBacker is a startup that helps families start saving money for college so their student can avoid taking out, and paying interest on, student loans in the future.
To make money, CollegeBacker charges a monthly fee plus a fraction of a percentage on college savings account expenses. Encouraging participation in the underlying business model will increase access to school, appealing to populations that need this accessibility — namely, low-income populations. A family could choose to invest $100 in a 529 via CollegeBacker, or $100,000. Each incremental dollar they transact through CollegeBacker leaves them better off because that dollar effectively “costs less” in the context of paying for school. In other words, the fee on putting that dollar aside now through CollegeBacker is lower than the interest that will accrue on that same dollar should it be put to work as a student loan.
Impact Investing in Consumer Education Businesses
If you are using impact investing as a form of advertising like many firms on the “market returns” end of the spectrum do (as opposed to the “institutional philanthropic capital” end of the spectrum), then it will likely fit your investment mandate to invest in education companies that may offset gap-widening activities with buy-to-give campaigns or endowed programs to provide free education products and services. Your mandate will likely ensure you are investing in impact sectors (e.g., education) and are having a positive impact (defined loosely) or perhaps are of the “as long as we are not doing any harm, we can market our investing strategy as impact-focused” variety of impact investor.
However, impact investors evaluating with higher standards of impact (e.g., a direct investment by institutional philanthropic capital either as a PRI investment or market return investment), or, say, a government entity (let’s say IFC does edtech investing — I am not sure that they do) will likely be unable to underwrite a consumer product or service that negates gap-widening effects with buy-to-give or endowed provision of free goods and services. They are more likely to invest in a company that has a business model promoting impact directly.
To be clear, consumer education businesses might not lift everyone up equally, but their presence is good in aggregate. If families choose with increasing frequency to spend a greater share of wallet on consumer education products and services, it will mean a greater degree of educational gains will be accruing in the people of our country, which is certainly something to aspire to. And further, the structure of the impact investing industry makes sure that each type of business that needs capital receives it: market return vehicles less interested in impact can invest in pure consumer education businesses, while funds with more strict impact mandates and less strict financial mandates will invest in businesses where impact generation is inherent in the business (regardless of whether or not they are powerhouses of financial returns).
Personally, I would invest in either because I am young and need both the money and investing track record, so if you know anybody looking for a small beans check for their start-up idea, send them my way, please![AN1]
