April 2011

Steering Capital
Optimizing Financial Support for Innovation in Public Education

Kim Smith and Julie Petersen

IDEAS | PEOPLE | RESULTS

© 2011 Bellwether Education Partners
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April 2011

Steering Capital
Optimizing Financial Support for Innovation in Public Education

Kim Smith and Julie Petersen

First in the series from

This report was funded by The Rockefeller Foundation. The

views and analysis in this report are the responsibility of the
authors alone.
Table of Contents

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Introduction:
Aligning Capital Toward Effective Innovation in Education . . . . . . . . . . . . . . . . . . . . . 1

Defining Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Contributing Trend #1: Social Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Contributing Trend #2: Social Purpose Capital and Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Contributing Trend #3: Public-Purpose Market-Shaping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Analysis:
Comparing Effective Markets with the Public Education Ecosystem . . . . . . . . . . . . 23

1. Clarity and Agreement on the Problems, Goals and Metrics for Success . . . . . . . . . . . . . . 23

2. An Effective Research and Development (R&D) System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3. A Culture that is Evidence-Based, with Incentives and

Infrastructure Aligned for Continuous Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

4. Data that are Transparent, Available, Comparable and Useful . . . . . . . . . . . . . . . . . . . . . . . . 34

5. Robust, Diverse and Aligned Investment Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Creating a better ecosystem for innovation in education . . . . . . . . . . . . . . . . . . . . . . 47

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Acknowledgements

About this PROJECT

It is widely acknowledged that innovation will be necessary to

dramatically improve public services in America. But innovation
in the public sector doesn’t happen in a vacuum; innovation
happens at the nexus of policy, research, capital, and practice. This project looks at one
case study – education – by analyzing some of the key aspects of an emerging ecosystem for
innovation in public education in the US, including the flow of investment capital for such
efforts, the uptake of innovations by buyers and users, federal efforts to stimulate and scale
innovation, and ways that technology could facilitate innovation investment and practice.
Drawing on surveys, interviews, and working groups, the project highlights recent efforts to
fuel and steer more innovation, and frames the remaining challenges that lie ahead for the
public, private, and philanthropic sectors. This project culminates in an analysis of the lessons
and insights drawn from the recent experience of US public education in comparison to the
way leaders are using innovation to address similar intractable social problems in other fields
and in other countries.

For more on this project and its publications, visit http://www.bellwethereducation.org/

innovation-for-the-public-good/.
ii

About Bellwether Education Partners

Bellwether Education Partners is a national nonprofit

organization dedicated to accelerating the achievement of low-
income students by cultivating, advising and placing a robust
IDEAS | PEOPLE | RESULTS community of innovative, effective and sustainable change agents
in public education reform and improving the public and policy
climate for their work.

About the Authors

Kim Smith is a co-founder and CEO of Bellwether Education Partners. After serving as a
founding team member at Teach For America, she went on to found and lead an AmeriCorps
program for community-based leaders in education as well as a business start-up. After
completing her M.B.A. at Stanford University, Kim co-founded and led NewSchools Venture
Fund, a venture philanthropy firm focused on transforming public education.

Julie Petersen is a freelance writer and editor. As communications director at NewSchools

Venture Fund, she led the firm’s marketing and publishing efforts for eight years, including
articles in Education Next, Urban Education Journal and several Harvard Education Press
volumes. She also spent several years covering technology venture capital and entrepreneurs
for Red Herring magazine.
Introduction:
Aligning Capital Toward Effective Innovation in Education

If you’re reading this, you probably don’t need to be convinced that public education is
broken. You don’t need to be reminded that American students rank dismally against other
developed countries on measures like the PISA exam, despite spending more per student than
any country save Luxembourg. 1 Nor do you need to be reminded of the massive achievement
gap that underpins that dismal outcome, with low-income students and students of color
falling far behind their peers on measures of achievement (reading proficiency, writing ability)
as well as attainment (high school graduation, college degrees).

And given recent media attention to the matter, you may not need to be reminded that this
has happened against an important backdrop: global economic pressure and internal equity
and fairness goals have for decades pushed us to continue to ratchet up the demands we are
placing on our public schools. Where we once built public schools to educate a small number
of citizens to a high level – and get the rest culturally assimilated – we’ve since layered onto
those schools requirements like equitable access and funding, concrete academic standards,
and assessment and accountability mechanisms that demonstrate that students are making real
progress against those standards.

And you probably know that over the past few years, in order to provide the skills and
tools our young people need to earn a livable family wage and to succeed in modern life,
2 Steering Capital: Optimizing Financial Support for Innovation in Public Education

we’ve topped off our demands with what is in many ways the ultimate K-12 educational
expectation: that our schools prepare all children to earn a college degree. These demands
are not frivolous nor unrealistic; they are informed by the real needs of our economy and our
society. But expecting a system to deliver at both a higher level and a larger scale – and with
the same dollars, or increasingly even fewer – is the classic definition of a productivity crisis.

Though we are at a moment in which diverse leaders and institutions across the country
– from the private sector (business), public sector (government), nonprofit sector and our
communities – agree on the magnitude of the problems we face in public education, there
is not yet real consensus on the solution. However, there is increasing consensus that the
solution will require significant innovation at scale – which, simply put, is a new approach
that achieves a better result that can be accomplished at scale. Unfortunately, our educational
ecosystem is not currently set up to support the kind of innovation we will need.

This embrace of innovation as a means to improve productivity has long been accepted in
fields like medicine and communications, where major advances in the way we do things bring
great benefits to individuals, the economy and our society. According to Thomas Kalil, deputy
director for policy at the White House Office of Science and Technology Policy, our average
standard of living will double every 23 years if our productivity growth rate is 3 percent, but
only every 70 years if it is 1 percent.2 “The increases in standards of living that we achieved in
the last century were possible only because of the discoveries
and innovation that let new physical capital and new human
While innovation often capital be put to work in high-return activities,” agrees noted
connotes shiny, brand-new Stanford economist and entrepreneur Paul Romer.3
and wildly different, all it
really means is new ways of While innovation often connotes shiny, brand-new and wildly
different, all it really means is new ways of doing things that
doing things that bring about
bring about an improved result. Sometimes those innovations
an improved result.
look quite familiar and other times they feel entirely new and
unique. As innovation writer and professor Clay Christensen
describes, some innovations are “disruptive,” breaking with current practice to serve a new
customer base or to serve an existing population in radically different ways, while others are
considered “sustaining,” making improvements within the existing architecture of the current
system. Education needs both of these sorts of innovations, as well as innovations that span
not only ideas, products and processes, but also platforms – shared conceptual architectures
that include a set of definitions, standards and protocols that allow for the creation and
connection of modular components.
 Bellwether Education Partners 3

Romer has also observed, “The most important job for economic policy is to create an
institutional environment that supports technological change.” Here, he is referring to
“technology” in its original sense of the word – the practical application of knowledge,
not necessarily in a way that is electrical or computerized (although we believe this type
of technology holds significant promise for improving productivity in education). These
two observations from Paul Romer tee up an important set of concepts for consideration
during the strategic inflection point we are facing in education: first, that major productivity
improvements require technology change and innovation; and second, that economic policy
and the institutional context it creates matter a great deal to innovation. In other words,
when considering our educational goals, innovation will be critical to driving the improved
productivity we need, and the policies and frameworks that define the flow of capital and the
investment context can either encourage or inhibit this innovation.

In an earlier paper, we considered in depth the factors that have historically inhibited the
nonprofit and for-profit capital markets from effectively supporting education entrepreneurs
and the important role they can (and should) play in driving a continuous learning and
innovation cycle.4 In that paper, we introduced the broad landscape of relevant players to this
issue, including not only education entrepreneurs themselves – a specific type of innovator
who builds a new organization committed to improving schooling or learning – but also
the foundations and for-profit investors who support those entrepreneurs, the educational
“buyers” and users who purchase or consume their products and services, and policymakers.
We also explained the key barriers that have inhibited the capital markets from fostering
innovation in education, including:

»» An irrational, idiosyncratic philanthropic capital market with few incentives for rewarding
improved outcomes (including little funding for the scale-up of successful organizations),
instead favoring small doses of funding across many organizations, which locks nonprofit
leaders into a constant fundraising cycle that distracts from the real work of innovation
and institutional learning;
»» Significant barriers to tapping private sector innovation, including policies that restrict
the work of for-profit providers in education, ideological and frequent policy shifts that
increase investment risk by creating undue market volatility, massive fragmentation (to
the tune of 14,000 districts, 95,000 schools and 50 different state standards), market
domination by a few large publishers that feel little pressure from competition or from
their customers to really innovate, and a slow, relationship-based sales cycle that rarely
measures or rewards quality;
»» A policy and regulatory infrastructure that favors compliance and hinders the uptake of
effective innovations, rarely allowing state or district buyers to choose flexibly between a
4 Steering Capital: Optimizing Financial Support for Innovation in Public Education

range of high-quality product or service options, inhibiting the flow of information that
would allow buyers to anticipate or measure performance improvements, and offering few
meaningful incentives for these buyers to adopt better products and services;
»» A lack of consistent investment in technology infrastructure, maintenance, upgrades
and training.

This paper will revisit the central question of how to improve the provision of capital for
entrepreneurial change in public education, but will emphasize the innovation ecosystem that
surrounds the capital markets. We will consider capital as one of the most important levers
we need to align in this innovation ecosystem, but as a force that can both influence the
way innovation takes hold – and can in turn be influenced by others in the wider ecosystem,
including public policy.

In the course of this paper, we will briefly define what we mean by innovation and the cycle
of constant learning it requires, and lay out three contributing trends relevant to this context:
social entrepreneurs, social purpose investors and social purpose market steering. We will then
consider the five elements we believe are necessary to enable effective capital market dynamics
to support innovation, including:

1. Clarity and agreement on the problems, goals and metrics for success
2. An effective research and development (R&D) system
3. A culture that is evidence-based, with incentives and infrastructure aligned for continuous
improvement
4. Data that are transparent, available, comparable and useful
5. Robust, diverse and aligned investment capital

We will conclude by offering some recommendations about how we might work together
across the sectors to mobilize public, private and philanthropic capital in ways that harness
the ingenuity and energy of entrepreneurial change agents in service of our ambitious public
education goals.

Defining Innovation
The most crucial element of innovation is not just the spark of “new” or even the “better”
of the initial result, but the way in which we create a continuous learning and improvement
cycle that allows ideas to feed off each other and multiply. This cycle of learning and
 Bellwether Education Partners 5

repeated application of ingenuity as new problems emerge is crucial to inciting and advancing
innovation, and is the engine of what we think of as human progress.

In his recent book, Where Good Ideas Come From: The Natural History of Innovation,
author Steven Johnson contends that environments that foster innovation are those that
support the open connection and reconnection of people and ideas. “When one looks at
innovation in nature and in culture, environments that build walls around good ideas tend to
be less innovative in the long run than more open-ended
environments,” he writes. “Good ideas may not want to be
“The myth of the lone genius free, but they do want to connect, fuse, recombine. They want
having a ‘eureka’ moment to reinvent themselves by crossing conceptual borders.”5 “The
that changes the world myth of the lone genius having a ‘eureka’ moment that
is indeed a myth. Most changes the world is indeed a myth,” agrees Wired magazine
innovation is the result of editor Chris Anderson. “Most innovation is the result of long
long hours, building on the hours, building on the input of others. Ideas spawn from
earlier ideas, bouncing from person to person and being
input of others. Ideas spawn
reshaped as they go.”6
from earlier ideas, bouncing
from person to person and For innovation to take hold in education, we need to make
being reshaped as they go.” some significant changes to the way the education ecosystem’s
–Chris Anderson, Wired magazine wide array of stakeholders do their work, orienting them
toward common goals and providing incentives for all of them
to strive more effectively and collaboratively for approaches
that create better outcomes for children and communities. These stakeholders include:
policymakers who set goals and conditions; practitioners and users who should be helping to
define what kinds of solutions are needed and what will work; researchers who help test and
refine ideas and assess effectiveness; state and district officials who currently make key buying
and procurement rules and decisions; entrepreneurs who translate innovative new approaches
into sustainable and scalable organizations; investors and philanthropists who give people
and organizations the runway they need to pursue innovative activity; and families, students,
communities, colleges and employers who all benefit from better products and services.

The components of an innovation cycle are akin to those of any high-performing system or
organization (see Figure 1). It begins with a clear sense of the most important problems to be
solved, along with an understanding of the barriers that stand in the way of accomplishing
these goals. In the words of John Dewey, “We only think when we are confronted with a
problem.” Such clarity on problems of practice is a critical precursor to the identification
6 Steering Capital: Optimizing Financial Support for Innovation in Public Education

of solutions to those problems. Then, for a robust problem-solving or innovation cycle,

priorities need to be set and significant long-term research and development (R&D) must take
place, including both basic research and intentional activity to develop research findings into
products, services and approaches.

More specifically, the research (R) part of this R&D engine needs to effectively identify and
conduct a significant amount of broad, basic research that is aligned with the biggest future
needs in the field, and then winnow through the research findings to identify ideas and
innovations that merit early-stage development (D). Such development then requires a faster

figure 1

The Cycle of Innovation

Identify Deliberate
Basic Applied Develop Design
Pressing Define
Research Research Solutions
Problems Priorities Field-based
(R) (R&D) (D)
in Field Solutions
Create
Solution

Long-term
Evaluation Develop
and Efficacy
Iterative Cycle Delivery
for Scale
in Small Spaces:
Implement,
Assess Assess, Revise
Market
and Sell

Use
Lessons from small spaces Acquire
inform future needs in Service
field ahead of larger cycle and
Integrate
Support

Source: Bellwether Education Partners analysis

 Bellwether Education Partners 7

learning cycle that iterates within the broad cycle, which includes some “small spaces” for
experimentation, often in the form of entrepreneurial organizations and programs that can
get beyond old rules and norms in order to develop, assess and refine products and services –
which in turn requires a range of forms of capital (including money, of course, but also human
capital and intellectual capital). These entrepreneurial efforts act as labs of a sort whose
practices can then inform future needs assessment for others in the field. Some of these efforts
then lead to wider adoption among other providers, such as states or districts, but only if there
are incentives for improvement and rewards for better performance. When there are incentives
to improve, and thus to adopt better solutions, tools and approaches, those entrepreneurs or
organizations offering the best innovations – those that truly make improvements in practice
and in results – are rewarded for their success, which in turn rewards their investors and
creates a “virtuous cycle” of improvement that aligns capital with the greatest needs at any
given time, and creates an effective ongoing learning cycle for continued adjustments as needs
evolve. When this cycle is in service of a public good, it is either supported or made more
difficult by the regulatory and funding systems that intersect and affect it at every turn.

Education is far from the only social sector grappling with increasingly complex problems and
the need for increased innovation. In the last several decades, many have acknowledged that
the complexity of the problems we seek to solve in the 21st century – ranging from cleaner
energy, to agriculture that meets higher productivity without damaging health or environment,
to health care that is more efficient and more effective at preventing illness, to poverty
alleviation – far outstrips the capabilities of existing frameworks and institutions. Thus,
problem solvers have sought new ways for the public, private and nonprofit sectors to work
together, allowing a greater degree of intellectual, financial and human capital to be tapped in
service of these societal goals. This has led to three important and related trends that together
form a backdrop for social change that we will then apply to education innovation: (1) the
rise of social entrepreneurs; (2) a corresponding increase in social purpose investing; and (3)
intentional market-shaping activities on behalf of the public sector to harness private and
other capital in support of social good.

Contributing Trend #1: Social Entrepreneurship

Over the past two decades, we have seen the rise of the “social entrepreneurship” movement.
This approach to social impact takes a page from the classic definition of an entrepreneur
– one who “shifts economic resources out of an area of lower and into an area of higher
productivity and greater yield,” in the words of French economist Jean-Baptiste Say, who
8 Steering Capital: Optimizing Financial Support for Innovation in Public Education

coined the term entrepreneur – but applies that energy toward solving social needs. “My own
feeling is that ‘social entrepreneur’ conveys the idea of somebody who is highly energized
and determined to achieve impact; who perceives opportunities; who pursues them in an
innovative and resourceful way; who is not bound or stuck by sector boundaries but willing
to use whatever tools are likely to get the job done, including business tools,” notes social
entrepreneurship scholar J. Gregory Dees. Like other forms of entrepreneurship, Dees adds,
social entrepreneurship “is not just a one-time burst of creativity” but rather “a continuous
process of exploring, learning, and improving” – mirroring and indeed modeling the very
dynamics of the education ecosystem we need.7

The social entrepreneurship market has grown in the last decade, as can be seen in the
increased number of fellowships, graduate-level programs and networking opportunities for
social entrepreneurs. Beginning in 1981 with just one cohort in India, the Ashoka Fellows
program has grown to an association of more than 2,000 fellows in over 60 countries.8 The
Echoing Green Fellowship, started in 1987, has invested nearly $30 million in seed grants to
about 500 social entrepreneurs, allowing fellows to advance social change in 42 countries.9
According to the Aspen Institute’s “Beyond Grey Pinstripes” report, the 114 participating
M.B.A. schools in the survey collectively offer more than 130 courses that cover social
entrepreneurship,10 with many such schools establishing centers that go even deeper, such as
Columbia’s Research Initiative on Social Entrepreneurship, Stanford’s Center for Social
Innovation (and its magazine the Stanford Social Innovation Review), Yale’s Program on
Social Enterprise and Duke’s Center for the Advancement of Social Entrepreneurship. In
addition to fellowships and graduate programs, networking opportunities for social
entrepreneurs are rapidly expanding, such as Net Impact, an
international nonprofit organization that connects nearly 260
Social entrepreneurs chapters and 20,000 members worldwide.11
and their movement of
supporters and champions The field of social entrepreneurship occupies a unique place
welcome ideas, skills and at the center of the political spectrum, more motivated by
improved social outcomes than any Milton Friedman-inspired
resources from across the
free-marketer, but also much more willing (in the service
public, private and nonprofit
of social outcomes) to embrace private sector approaches
sectors – sampling from each and to eschew romantic notions of an omniscient public
in order to find the right sector than any traditional progressive would prefer. This
recipe for better outcomes. is embodied in the notion of collective impact, which calls
for deep collaboration by a group of cross-sector actors in
support of a common agenda for solving a specific social
 Bellwether Education Partners 9

problem. “Unlike most collaborations, collective impact initiatives involve a centralized

infrastructure, a dedicated staff, and a structured process that leads to a common agenda,
shared measurement, continuous communication, and mutually reinforcing activities among
all participants,” explain John Kania and Mark Kramer of FSG Social Impact Advisors.12 One
specific example is the new White House Council for Community Solutions, which is engaging
leaders from across various areas of the social sector – including two education entrepreneurs,
Laurene Powell Jobs of College Track and Kristin Richmond of Revolution Foods – to address
community-based problems and engage citizens in the solutions.

Social entrepreneurs and their movement of supporters and champions welcome ideas, skills
and resources from across the public, private and nonprofit sectors – sampling from each
in order to find the right recipe for better outcomes. This openness to contributions from
all sectors will become important later in this paper when we consider the best way to align
capital in support of education innovation.

Contributing Trend #2: Social Purpose Capital and Investing

Meanwhile, over the last half century, there has been a dramatic increase in the number of
investors (individuals and firms) interested in supporting positive social impacts through their
investments. Early efforts focused on “negative screens” initially aimed mostly at avoiding
harmful health or environmental results like smoking or pollution, rather than identifying
positive contributions. Examples of early negative screens include Quakers avoiding “sin
stocks” like tobacco, firearms and alcohol; later examples include Calvert Mutual Funds
and TIAA-CREF, which have both at various points applied negative screens based on anti-
apartheid investment (committing to exclude stocks of companies doing business in South
Africa) and various environmental screens. Later efforts evolved into “double bottom line”
investments where investors who valued a certain social impact chose to track both financial
and social returns and were willing to trade off some financial return in order to achieve this
kind of social impact. These efforts led to opportunities for businesses that created what was
referred to as “pro-social” value, such as developing housing or grocery stores for the poor
– areas in which a legitimate for-profit business could be sustained, but would typically not
generate for an investor the same level of financial returns as those that did not prioritize a
low-income clientele. Early double bottom line investors were often religiously motivated
(Catholics and Quakers) or foundations supporting community economic development goals
(Ford and MacArthur were leaders here), as well as individual investors supporting early
micro-finance efforts like Grameen Bank.
10 Steering Capital: Optimizing Financial Support for Innovation in Public Education

The number and kinds of investors interested in using some part of their wealth to invest in
socially beneficial purposes has been increasing steadily over the past two decades.
“Sustainable and socially responsible investing (SRI) in the United States has continued to
grow at a faster pace than the broader universe of conventional investment assets under
professional management,” notes the Social Investment Forum Foundation’s 2010 Report on
Socially Responsible Investing Trends in the United States,
with assets managed under SRI strategies rising more than
“Government funding, 380 percent over the last five years, compared with a 260
international aid and percent increase in assets managed under any professional
philanthropic donations alone management.13
are insufficient to achieve
The potential sources of capital available for social innovation
the world’s development
range from investors motivated entirely by financial return,
aspirations. Private investment
such as banks and venture capitalists, to donors motivated
capital, therefore, will need entirely by social impact, such as traditional foundations.
to complement traditional On the financial end, traditional investment firms have made
resources to solve problems equity investments in social entrepreneurial organizations that
on a larger scale.” –Judith are just getting off the ground, or lent capital to those that
Rodin, The Rockefeller Foundation are growing, such as Kleiner Perkins Caufield & Byers’ $500
million clean energy Green Growth Fund. Other traditional
institutional investors are motivated by federal Community
Reinvestment Act requirements that mandate that financial institutions provide a certain level
of investment in low- and middle-income communities where they operate businesses, such as
Bank of America’s loans for urban charter school facilities. Other venture capital firms have
a strategic social agenda, such as Pacific Community Ventures, a development venture capital
fund located in northern California that seeks financial returns but invests in businesses that
employ low-income workers, or Ascend Ventures, which invests in early-stage technology
companies but with a goal to support minority- and women-owned ventures.

Meanwhile, on the philanthropic front, there is a great deal of interest in pushing past the
traditional conception of social change as only achievable by nonprofits or public agencies.
“Government funding, international aid and philanthropic donations alone are insufficient to
achieve the world’s development aspirations,” emphasized Rockefeller Foundation President
Judith Rodin recently. “Private investment capital, therefore, will need to complement
traditional resources to solve problems on a larger scale.”14 In addition to making available
much larger pools of funds, finding ways for private capital to support social purpose
organizations might also help reduce the cost of raising money: nonprofits spend $10 to $24
 Bellwether Education Partners 11

for every $100 they raise, compared with just $2 to $4 spent by for-profit companies for every
$100 that they bring in, according to consulting firm McKinsey & Company.15

Other foundations have stepped beyond traditional program funding of nonprofits by

increasing the capital they put to work through program-related investments (PRI) and
mission-driven investments (MDI). Program-related investments, as their name implies, are
program funds – those usually used as grants by the program staff and coming from the 5
percent of overall assets allocated to advancing the foundation’s core mission – but in this
case they are structured as non-grant vehicles, such as loans, equity investments or equity
equivalent instruments. Such PRIs seek below-market-rate financial returns, combined with
their social returns on investment (SROI). Meanwhile, mission-driven investments come
from a foundation’s endowment capital – the 95 percent of foundation assets that are not
required to be distributed toward social impact, which are typically invested in traditional
profit-maximizing ways. But while they generally seek market rates of return, MDI funds are
invested toward a social purpose (as their name implies). According to the 2007 FSG Social
Impact Advisors’ report “Compounding Impact: Mission Investing by US Foundations,”
dollars allocated through mission investments (which they defined as MDIs and PRIs) saw
average annual growth of 16.2 percent during the five years between 2002-2007, compared
with just 2.9 percent during the preceding 32 years.16 Although PRIs have increased steadily –
from $426.9 million in 1998-1999 to $734 million in 2006-2007, according to the Foundation
Center – that still represents only a small fraction of the $91.9 billion in overall charitable
distributions of capital (0.8 percent) and an even tinier fraction of overall philanthropic assets
(0.04 percent).

But there is an increasingly sophisticated and active middle ground in this capital market that
is often referred to as “blended value” investing. An increasing number of so-called “impact
investors” assert that it is possible to achieve both market-rate financial returns and significant
social impact. “The old binary system—the widely-held belief that for-profit investment could
only maximize financial return and social purpose could only be pursued through charity—is
breaking down,” notes the “Investing for Impact” report cited above. The report situates
“impact investment” at a financial return a notch below “financial first” investors though
still with the intent to achieve market-rate returns, and with social impact goals a notch
below “impact first” investors but still aiming to accomplish a strong degree of social good
(see Figure 2). The report was sponsored in part by the Global Impact Investing Network,
whose investor members include “large-scale family offices, institutional investors, pension
funds, investment banks, wealth managers, private foundations and development finance
institutions whose goals lie in the territory between philanthropy and the sole focus on profit-
12 Steering Capital: Optimizing Financial Support for Innovation in Public Education

maximisation, and private foundations.” According to a recent Acumen Fund analysis, there
are now more than 192 of these “impact investing funds17” and JPMorgan Chase thinks this
emerging asset class could eventually grow as large as a $1 trillion market.18

To rationalize and capitalize this emerging industry, a diverse array of intermediaries has also
emerged to bridge the gap between social purpose capital and the social entrepreneurs in need
of start-up, operating or growth funding.20 Some of these are information intermediaries,
who build specialized expertise in particular elements of the market. For example, a variety
of philanthropic advisory firms – including the Center for High Impact Philanthropy (at the
University of Pennsylvania) and Rockefeller Philanthropy Advisors – provide tools, services
and advice to individual and institutional donors. They have been joined by Philanthropedia,

figure 2

Matrix of Social Purpose Investing and Relative Social/Financial Returns19

Segments of Impact Investors

HIGH
FINANCIAL FIRST
INVESTORS
Optimize financial returns
Solely Return – with an impact floor
Maximizing
Investing
IMPACT FIRST
Target Financial Return

INVESTORS
IMPACT Optimize social impact
INVESTMENT with a financial floor

FINANCIAL FLOOR
(nominal principal) LAYERED STRUCTURES
IMPACT FLOOR

Philanthropy
NONE
NONE Target Social Impact HIGH

Source: “Investing for Impact: Case Studies Across Asset Classes,” Parthenon Group and Bridges
Ventures, 2009
 Bellwether Education Partners 13

GreatNonprofits and even classic nonprofit watchdog Charity Navigator, all of whom are
working to put out more useful and sophisticated information about nonprofit effectiveness
than the old standard of judging them based on who had the lowest “overhead” costs. Social
Venture Network has long been convening social entrepreneurial leaders and incubating new
programs and organizations to serve them, including BSR (originally known as Business for
Social Responsibility) and Net Impact (focused on fostering social entrepreneurship among
business school students).

There are also investment intermediaries who look to bridge capital gaps that stand between
investors and innovators. Two examples include firms created by former Calvert Foundation
leader Tim Freundlich: Good Capital aggregates impact investment capital from high net-
worth individuals for social purpose organizations that are growing to scale, and ImpactAssets
provides traditional donor-advised grantmaking services as well as technology-enabled
systems to help donors to make impact- or mission-driven investments with their endowment
capital. They join a range of other financial intermediaries like Investors Circle, which
connects individual investors interested in pro-social for-profit investments with screened
investment opportunities, thereby improving the collective knowledge and investment rigor
among these individuals, and enabling consortia of individual investors to band together with
greater support for early-stage ventures. Since 1992, Investors Circle has facilitated $145
million invested in 220 early-stage ventures with social impact.21 Donor marketplaces like
GlobalGiving, DonorsChoose and Kiva seek to make this kind of matchmaking happen with a
lighter touch but on a much broader scale.

This diversity of investors and investment vehicles, with their different risk/return profiles and
varying degrees of social motivation, has produced an approach to capitalization of social
purpose activity that “layers” or “sequences” capital vehicles of different types to reach a
total package that trades off levels of financial and social motivations and risks. Perhaps the
most robust use of layering different traditional and social investors and financial instruments
is in real estate development. The New York City Acquisition Fund was created to mobilize
private sector capital to address the shortage of property available for low-income housing
development and aims to develop 30,000 affordable housing units in New York City over
the next 10 years. The fund has raised $200 million from both financial-first investors (Bank
of America, JPMorgan, HSBC) and impact-first investors (foundations including Rockefeller
and Ford). The banks provide senior debt as lending capital, while impact investors provide
guarantees and/or low-interest subordinated loans. These layering efforts require complex
financial knowledge and careful attention to balancing social and private returns and
14 Steering Capital: Optimizing Financial Support for Innovation in Public Education

motivations, but they allow social purpose efforts to access much larger amounts of private
capital than they otherwise would be able to.

In addition to layering and sequencing to access more capital, some have turned to “royalty-
based private equity capital,” otherwise known as “revenue capital.” “Revenue capital allows
investors to fund businesses and generate returns based on the venture’s revenue, rather than
via debt or equity,” notes technology executive Safwan Zaheer. “In other words, investors
put cash into a startup, and rather than receiving the company’s stock, the investor receives
a percentage of the business’s future revenue for a period of time.” Zaheer notes that former
Westinghouse and Hewlett-Packard engineer Arthur Fox found success with this model in
revenue-based funds in the 1990s, with internal rates of return greater than 50 percent.22

Another emerging innovation in social purpose capitalization is the use of nonprofit or

“hybrid” equity stakes that bring together for-profit companies and investors with nonprofit
organizations that benefit from the companies’ success. For example, Better World Books is a
for-profit “triple bottom line” online bookseller that seeks to have a social impact (improve
literacy), environmental impact (diverting used books from landfill) and economic impact
(make money). Together with one of its main funding partners, Good Capital, the company
created an Incentive Stock Option program that carves out 5 percent of the company founders’
stock to be granted to five of the nonprofit literacy organizations it partners with. Subsequent
rounds of performance-based options will reward those literacy partners “based upon the
partners’ ability to achieve their own internal metrics for delivering on specified social purpose
goals and objectives as well as how effectively they promote the collection and sales of books
collected in book drives that provide Better World Books with its inventory.”23

Contributing Trend #3: Public-Purpose Market-Shaping

Another relevant development that is part of this convergence of the sectors is the emergence
of intentional market-steering by the philanthropic or public sector in a way that is designed
to engage the private sector in social purpose activities. This kind of market-shaping activity
by government falls under what authors and progressive activists Eric Liu and Nick Hanauer
call a “more what, less how government.” In a recent Democracy article, they lay out
their vision:

A robust state is not mutually exclusive with a free market; it is required for it. This is
why there is no robust private sector on earth that isn’t accompanied by an equally robust
public sector.
 Bellwether Education Partners 15

Societies can be successful only with the civic cooperation, strategic organization, and
economic moderation that activist government provides. And the larger and more
complex a society becomes, the more government must do to provide the basis for
continued success. True prosperity is always a consequence of generalized prosperity,
and only progressive activist government can achieve that. The law of the jungle–market
fundamentalism–brings just one possible outcome: a jungle.

Government is what turns the jungle into a garden. To govern poorly is to “let nature take
its course,” which results in wild growth by a few noxious weeds and the eventual collapse
of the garden. To govern well is to tend the garden: to weed, to seed, and to feed. We
believe firmly that a market is the best tool ever invented to generate solutions to human
problems. But since there is no such thing as a market without a government, the only
question is how well, to what ends, and with what skill the government shapes and adjusts
the life of the market–how well it tends–so that it yields solutions for the common good.24

This kind of complex market-shaping includes public policies that seek to encourage the flow
of capital toward social innovation, which may prove instructive to education efforts. The
increasing energy around impact investing has led to a great
deal of work on the policy supports that can foster and
Market-shaping policy facilitate such investments. “Policy mechanisms have the
is nothing new for U.S. potential to change the underlying risk/return trade-off and
government agencies, many address structural barriers…and may be a critical lever to
of which have long been motivate massive amounts of capital to engage in impact
using their regulatory power investing,” noted a recent report highlighting this opportunity
to spur the flow of capital for policymakers to steer the social capital market.25 Another
new report on the same topic frames three specific ways in
toward particular outcomes.
which public policy can fuel investment capital in particular:
increasing the supply of capital available “by mandating such
investment or by enticing investors through risk-sharing with government”; directing the way
capital is spent “by adjusting market prices and costs and improving transaction efficiency and
market information”; and building demand for such capital by building the capacity of and
enabling structures for recipients of that capital.26

Certainly, the use of public regulations to help create markets for or steer them toward some
social purpose goal is not a new phenomenon, though the application of these ideas to purely
social service arenas is newer, and will require sophisticated social problem-solving logic
16 Steering Capital: Optimizing Financial Support for Innovation in Public Education

and infrastructure that are different from traditional government intervention in financial
markets.27

But market-shaping policy is nothing new for U.S. government agencies, many of which
have long been using their regulatory power to spur the flow of capital toward particular
outcomes. When the goal has been to advance or steer technology development and adoption,
this has taken the various forms of creating new nonprofit venture capital organizations,
establishing co-investment networks, partnering with existing venture firms or setting up
internal programs that make investments directly into early-stage companies. For example, In-
Q-Tel, established by the Central Intelligence Agency, is a nonprofit venture firm that partners
with the CIA to define the critical intelligence-community needs, source companies and
technologies that are best poised to address those needs; make equity and other investments
to accelerate the development of relevant solutions; and help to match those solutions with
national security and intelligence-related customers. As such, In-Q-Tel connects emerging
technology innovations (the supply side), the most important needs in the field (as defined
by the CIA and others on the demand side) and private investors who bring expertise and
have economic incentives to support these companies. It is interesting to note that a slice of
In-Q-Tel employees’ salaries goes into a fund that matches $1 for every $3 invested by In-
Q-Tel itself – a way of explicitly aligning the organization’s financial gains with employees’
own personal fortunes, similar to a VC partnership. Meanwhile, in 2002 the Department of
Defense (DoD) created the Defense Venture Catalyst Initiative (DeVenCI) program to identify
emerging technologies that might be useful to advancing defense – and the chance to influence
their development. DeVenCI does not make investments, but bridges private sector providers
and public sector demand by brokering relationships between these technology companies and
prospective DoD customers.

When the goal has been to mobilize private capital to grow small business and foster economic
development within specific communities, government agencies have sometimes turned to
bond guarantees, loan guarantees and debt leverage. For example, the Overseas Private
Investment Corporation (OPIC) was established in 1971 as an independent government
agency “to mobilize and facilitate the participation of United States private capital and skills
in the economic and social development of less developed countries and areas, and countries
in transition from nonmarket to market economies.” OPIC does not invest directly. It works
by setting priorities and then selecting relevant expert intermediaries who invest in overseas
markets. OPIC creates market-steering incentives by providing loans, loan guarantees, political
risk insurance and debt capital to these private equity investors who, given this adjusted risk/
return context, agree to invest in specific priority geographic areas.
 Bellwether Education Partners 17

Tax credits are another approach to stimulating investment in priority communities. For
example, New Markets Tax Credits (NMTC) were created to spur investment of private
sector capital in low-income communities by providing a tax credit for those who make equity
investments in Community Development Entities (CDEs), which in turn use investor funds
to make below-market financing available in those communities. To date, the organizations
awarded these tax credits have raised $15.8 billion in investments for these communities,
though they have largely been limited to real estate.28

Some of the most robust examples of public market-shaping for social good can be found
in environmental efforts, where it is widely agreed and empirically established that market-
shaping mechanisms have created substantial impact in environmental outcomes. According to
Robert Stavins, director of the Harvard Environmental Economics Program:

With appropriate rules and oversight, markets have been shown to work exceptionally
well to address environmental problems. They provide key flexibility to regulated entities
to adopt least-cost approaches to emission reductions, while providing powerful incentives
for technological innovation and diffusion, which serve to reduce costs over time.
Real world experiences with using market-based instruments for environmental
protection include CFC trading under the Montreal Protocol (to protect the ozone
layer); SO2 allowance trading under the U.S. Clean Air Act Amendments of 1990 (to curb
acid rain); NOx trading (to control regional smog in the eastern U.S.); and eliminating lead
from gasoline in the 1980s.29

In an effort to reduce emissions, the state of California has spurred solar and alternative
energy investment by steering funds and incentives toward both suppliers and buyers, first
by mandating investment in solar infrastructure by the large investor-owned utilities in 2000,
and later adding the requirement that these utilities provide “net metering” or the opportunity
for solar users to sell back their extra solar-generated energy to the utility at set minimum
rates. The state also added tax credit incentives and rebates to encourage homeowner and
business installation of solar cells. These California alternative energy steps show that in
efforts to support entirely new markets to encourage a social purpose, the government may
have a role to play in stimulating both supply and demand. According to the Clean Economy
Network, California’s progressive environmental regulations have not only created significant
environmental impact, but also created jobs and economic growth in the state. Assessing
some of California’s recent market steering policy activity, Fred Krupp, president of the
Environmental Defense Fund, described it as “a very smartly designed policy mechanism that
18 Steering Capital: Optimizing Financial Support for Innovation in Public Education

gets away from micromanaging the economy and instead leaves folks free to choose the best
way to meet the requirement of lowering emissions.”30

Europe has taken the idea of stimulating supply and demand for the social impact of green
energy one step further by instituting a “feed-in tariff” approach. Utilities are required to
pay above-market rates for green electricity, shifting the burden from taxpayers to electricity
ratepayers. In Germany, where feed-in tariffs have been in place since 1991, about five times
as many photovoltaic panels have been installed than in the United States, though they
still account for only 0.5 percent of electricity in that country. The approach has gained
some attention and early traction in some states here. Describing a feed-in-tariff solar
program implemented in Florida, Boston energy consultant Wilson Rickerson told The New
York Times’ Kate Galbraith that it is helpful policy because in addition to accomplishing
environmental impact: “If you put your money in, you know you’re going to get it back.”31

Meanwhile, in medicine, some government or philanthropic entities have used Advanced

Market Commitments (AMCs) to stimulate the development and manufacture of vaccines
specifically for developing countries. Donors commit money to guarantee the price of
vaccines once developed, thus creating the potential for a viable future market. These donor
commitments provide vaccine makers with the incentive they need to invest the considerable
sums required to conduct research and/or build manufacturing facilities. As part of the AMC,
participating companies also make binding commitments to supply the vaccines at lower and
sustainable prices after the available donor funds are exhausted. An independent advisory
group makes decisions in advance about which diseases to target, criteria for effectiveness,
price and long-term availability.32 In 2009, a variety of international organizations and
finance ministers joined with the Bill & Melinda Gates Foundation to accelerate introduction
of vaccines against pneumococcal diseases in developing countries. The currently existing
pneumococcal vaccine is sold at over $70 per dose in industrialized countries, but as a result
of the AMC, the long-term price for developing countries is estimated to be $3.50. In 2010,
GlaxoSmithKline and Pfizer became the first two companies to make long-term commitments
to supply the new pneumococcal disease vaccines.

Finally, two recent efforts in the United Kingdom demonstrate the next generation of how the
government can use its market powers to engage the private sector in a way that establishes
strong performance incentives for social impact: performance contracts and social impact
bonds.
 Bellwether Education Partners 19

Performance Contracts. Governments have for decades been increasing the use of contracts
with outside providers to deliver social services. While in some cases there have been cost
savings, there have been significant quality issues, and in most cases little or no improvements
in terms of social outcomes. Performance contracts are a way to ensure that public-private
partnership spending is done wisely and in a way that
accomplishes greater outcomes and shares the risk with the
Performance contracts are private sector. Used effectively in roads and construction
a way to ensure that public- contracts, but new to the social service sector, performance
private partnership spending contracts clearly define the intended outcomes (not merely
is done wisely and in a way inputs or processes), with compensation heavily weighted
that accomplishes greater toward the later stages of the work and pegged to the
outcomes and shares the risk accomplishment of the defined outcomes. In the U.K., with 1
in 4 citizens unemployed, in 2010 the Department for Work
with the private sector.
and Pensions was looking to dramatically improve the
outcomes of employment programs. “We must be here to help
people improve their lives – not just park them on long-term benefits,” one industry article
quoted Work and Pensions Secretary Duncan Smith as saying, adding that “he made clear his
intention to increase the use of private providers and the third sector to deliver routes back
into work, but warned the providers would be rewarded for creating sustainable jobs and the
government ‘are not prepared to pay for anything less.’ ”33

They then launched a complicated bidding process for multiple large-scale contracts to help
overhaul the U.K.’s immense and costly re-employment programs. “Payment should be
exclusively or largely for delivering results and that payment should be made after the results
have been delivered,” read government descriptions of the performance contracts. “The price
paid for job outcomes should be set to make it worthwhile for delivery partners to help each
group of customers. We should not specify what delivery partners can, or should, do; they
should have freedom to innovate. And the price paid for the job outcomes should not exceed
the benefit savings that have been generated.”34

These larger, longer-term contracts were appealing to the companies that bid for them, because
of the opportunity to earn profits of as much as 20 percent; but only if the program reached
and sustained impact (as defined by workers remaining one, two and three years or more on
their new jobs) – with little to be gained, and potentially significant investments lost, if results
were not strong and sustained. This approach creates some big upfront challenges to financing
the work, but moves a lot of the risk from the public sector to the private sector, and provides
huge incentives for attention to outcomes.
20 Steering Capital: Optimizing Financial Support for Innovation in Public Education

Social Impact Bonds. Another version of this kind of performance-driven market-making effort
in the U.K. is “social impact bonds.” This approach begins with identifying social problems
whose improvement would save the public large sums of money. In the pilot case, this problem
is prison recidivism reduction. The British government will issue up to 5 million pounds in
“social impact bonds” whose proceeds will finance efforts to tackle this problem by working
closely for six years with 3,000 short-term prisoners in a concentrated region. Compensation
to bondholders is determined by success in producing better outcomes: “The bond gives its
investors a powerful incentive to finance organisations that will turn these ex-jailbirds into
upright citizens,” notes a recent article in The Economist on the experiment. “If they can
reduce the rate of reoffending by at least 10%, the investors will be paid, the amount rising
as the recidivism rate falls. If the payout is triggered—a 10% decline representing proof that
the improvement is due to more than chance—the investors will earn a minimum internal rate
of return of 7.5%, rising to a maximum of 13%, with payments made during years six and
eight.”35

“The current model of private finance for public services tends to focus chiefly on reducing the
cost of the current activity,” notes the Economist article. “Sometimes there are performance
elements, but what is new about the government’s scheme is that it incorporates incentives
for radically improving outcomes into the financing model.” There are some real risks of
perverse incentives in these kinds of performance-driven schemes (such as efforts to “cream”
the easiest-to-serve clients), but also real potential to replace ineffective government and
private spending with outcomes-based programs and flows of capital that accomplish the
social purpose we want from them. This approach is not without risk, nor is it simple. But as
a point of reference to understand why this kind of experiment is worthwhile, it is important
to consider the alternative. For instance, here in the United States, “the state of California
annually spends almost $250,000 on each youth in its juvenile-justice system – and gets an 80
percent recidivism rate,” note Liu and Hanauer. “If this happened one time, with one year’s
cohort of kids, it would be an abysmally poor use of resources; that it happens year after year,
without change or improvement, is criminal.”36

President Obama’s FY 2012 budget, released in February 2011, proposes the “Pay for
Success” initiative, which appears to be based largely on the U.K. social impact bonds model.
A recent Center for American Progress report highlights the promise of this new financial tool
to help accelerate social innovation and improve government performance in the U.S., while
at the same time calling attention to important infrastructure that will be required in order to
implement this model successfully:
 Bellwether Education Partners 21

The United States needs to take three capacity-building steps to create social impact bonds.
First, governments will need to develop or acquire the capacity to write effective pay-
for-performance contracts. Second, a neutral authority to measure outcomes and resolve
disputes, independent of both the government and the bond-issuing organization, will
need to be identified or created. Third, and most important, one or more social impact
bond-issuing organizations will need to be created, with the capacity to raise capital from
private investors, negotiate performance-based contracts with the government, and hire
and manage service providers.37

On February 22, 2011, Social Finance, Inc. announced it is creating a new nonprofit
organization to help enable social impact bonds in the U.S. The combination of the president’s
budget request for “Pay for Success” and Social Finance’s announcement suggests that
performance contracts and social impact bonds will be important elements to consider in a
discussion about ways to encourage more performance- or outcomes-based funding in U.S.
education.

Together, these trends – social entrepreneurship, social purpose capital and public-purpose
market-shaping – form a backdrop for the present opportunities to improve the ecosystem
for innovation in education. The number of education entrepreneurs and the impact and
scale of their organizations have been on the rise over the last two decades. At the Aspen
Institute’s Education Innovation Forum & Expo in January 2011 – an event that would not
have happened 10 years ago – hundreds of capital providers and entrepreneurs convened
to consider how best to spur educational innovation. Meanwhile, the U.S. Department of
Education and other areas of the federal government have also edged closer to more explicit
and well-thought-out market-shaping activity to fuel the innovation necessary to dramatically
improve educational processes and outcomes. The remainder of this paper will consider how
far we have come and what it will take to create a robust ecosystem with an aligned capital
market to support an ongoing cycle of innovation and improvement in public education.
 Bellwether Education Partners 23

Analysis:
Comparing Effective Markets with the Public Education Ecosystem

Social entrepreneurs, social purpose investors and public-purpose market-shaping policies

all hold a great deal of promise for fueling useful innovation in public education – but only
if they are part of an ecosystem that supports and demands constant learning and growth.
Unfortunately, our public education ecosystem today is missing many of the components
necessary to support a continuous cycle of innovation and improvement. These components
include:

1. Clarity and agreement on the problems, goals and metrics for success
2. An effective research and development (R&D) system
3. A culture that is evidence-based, with incentives and infrastructure aligned for
continuous improvement
4. Data that are transparent, available, comparable and useful
5. Robust, diverse and aligned investment capital

1. Clarity and Agreement on the Problems, Goals and Metrics for Success
In the traditional capital markets, it is clear how to “keep score” because success is defined
as maximizing shareholder value, which is calculated in dollars. This simple metric allows
24 Steering Capital: Optimizing Financial Support for Innovation in Public Education

the rest of the system – information, services and regulations – to function in reasonable
alignment, and the calculations leading up to that goal can be understood by all. Similarly,
in efforts to improve energy solutions, it is widely accepted that the major goal is reducing
carbon emissions and developing more effective alternatives to fossil fuels, and there are
widely agreed-upon approaches to measuring success in this effort. For example, the Kyoto
Protocol defined the amount that industrialized countries would reduce their collective
emissions of greenhouse gases (by 5.2 percent by 2012), using common metrics to measure
progress, including greenhouse gas emissions avoided or sequestered, tons of carbon avoided
and megawatts of alternative or green energy produced. Governments are using diverse
strategies to accomplish these bold goals, but they agree on the goals, the problem and the
metrics to measure progress.

In contrast, there is no universally agreed-upon goal for public education, with warring
ideologies tugging at the edges of any consensus that might otherwise emerge. Education is
both a public and a private good, which introduces a legitimate tension about the extent to
which it should prioritize the needs of society and communities as a whole, versus the needs of
individual students. To oversimplify a bit, one camp prioritizes community and equality above
all (even if that means an equally mediocre standard of achievement) while the other
prioritizes individual opportunity and efficiency (even if that means leaving some children
behind). This ideological struggle plays out most vividly in the school choice debate, with
voucher supporters digging in their heels despite evidence from programs like food stamps that
simply adding a free-market approach doesn’t necessarily lead to better social outcomes, and
defenders of the status quo fending off any increase in
diversity of providers and parental choice despite the obvious
There is no universally low quality of existing options for low-income communities.
agreed-upon goal for public These are deep values-based debates that play out across
education, with warring many issues, from pedagogy to content to management to
ideologies tugging at the governance.
edges of any consensus that
And education is admittedly complex. It is a social good, one
might otherwise emerge.
through which we expect students to master not just technical
skills or knowledge, but also certain social values, cultural
norms and socio-emotional habits – most of which are difficult, if not impossible, to measure.
“Unlike molecules, which follow the rules of physics rather obediently, human beings have
minds of their own, and are subject to many social, psychological, and environmental forces,”
notes Geoff Mulgan, former government adviser in the United Kingdom and now director of
 Bellwether Education Partners 25

the Young Foundation. “Several decades of involvement in evidence-based policymaking has

shown me that although evidence should inform all action, very few domains allow precise
predictions about what causes will lead to what effects. The social sciences (including business)
simply do not have laws in the way that physics has.”38 Therefore, it is very difficult to agree
on one set of educational metrics, because not all dimensions of education’s social value can be
easily quantified. As a result, efforts to become more performance-driven in a social good like
education require a multi-faceted evidence base – a complex but not impossible task.

Although it has been very difficult to prioritize among these competing goals and to keep
public support aligned with reform, pressure from economic stagnation and recession here
in the U.S. – combined with a very tangible sense of competition from abroad – seems to
be leading toward a consensus that all students deserve to be taught to internationally
benchmarked academic standards and must be prepared for college-level work. This builds
on the momentum over the last several decades toward standards and accountability, which
has emphasized outcomes rather than inputs and processes, and has opened the doors for
entrepreneurs and others to try different approaches for accomplishing those improved
outcomes. This momentum is what finally allowed the widespread adoption of the Common
Core State Standards, which consist of both a smaller number and higher level of academic
standards for students than previously embodied in the fragmented system of wildly different
individual state standards.39 While not all states have signed on, and the Common Core State
Standards so far only cover math and reading, they are a giant step toward a broad new
agreement on what we want students to know and be able to do and by when.

Furthermore, when developed, assessments that measure learning against these standards
will similarly help identify common metrics that states, districts and entrepreneurial school
operators can all report against. As wireless technologist Marie Bjerede recently wrote:

Education as a platform must support vibrant innovation in the area of metrics. States,
assessment publishers, web start-ups, researchers, parents and teachers must be able to
experiment with different ways to measure student achievement, and, indeed, with what
things are important to measure. In a world of assessment innovation, a student portfolio
might contain a combination of completed projects in addition to state test results, richer
third-party assessment results, and innovative assessments of non-traditional skills such as
collaboration and creativity. Colleges and employers might value this multi-dimensional
view of a student more than just grades and standardized test results when evaluating
applicants. Parents and students might take ownership of enriching their portfolio of
assessments according to their own values. Publishers of curriculum and educational
26 Steering Capital: Optimizing Financial Support for Innovation in Public Education

experiences might be able to improve their offerings based on a broad set of assessments of
student outcomes – driving innovation in educational content. Administrators and states
might be able to reward teachers for many different kinds of critical achievements.40

This is an attractive picture that both education reformers and traditionalists could get
behind – but must begin with a primary set of clear core goals and metrics, upon which these
additional layers of desired outcomes can be added.

2. An Effective Research and Development (R&D) System

An effective research and development (R&D) system identifies the most pressing problems of
practice, invests quickly in promising innovations and ideas, provides small spaces for
experimentation, and engages entrepreneurs and other innovators in ongoing evaluation to
ensure continuous improvement and learning. This cycle is most familiar in the corporate
world, where companies like Xerox, Merck and 3M have long had an economic imperative to
maintain their competitive edge by investing significant
resources in research and converting the results of that
An effective research research into marketable products that align with significant
and development (R&D) user needs.
system identifies the most
pressing problems of In the public sector, R&D has been used to harness similar
energy to develop solutions and technologies. The most
practice, invests quickly in
commonly cited example of a publicly supported R&D effort
promising innovations and
is the Defense Advanced Research Projects Agency (DARPA).
ideas, provides small spaces Charged with providing advanced research of new technology
for experimentation, and for use by the U.S. military, DARPA typically engages in two-
engages entrepreneurs to five-year projects, with Operational Liaisons from each
and other innovators in military service helping to maintain DARPA’s connection to
ongoing evaluation to ensure real-life problems and also connecting DARPA technology
continuous improvement and back to each military branch. Project funding is milestone-
based, establishing accountability for ongoing evaluation
learning.
and supporting an outcomes-oriented culture. Technical staff
rotates every four to six years to encourage fresh thinking
and risk-taking, and directors have flexible hiring authority. With DARPA as its model, the
Department of Energy recently launched its own Advanced Research Projects Agency-Energy
(ARPA-E) to “bridge the gap between basic energy research and development/industrial
 Bellwether Education Partners 27

innovation.” The agency’s objective is to make technologies market-ready quickly, with

projects ranging from one to three years. Here also, agency directors have flexible hiring
authority, project managers have limited tenures of three to five years and project funding is
milestone-based.

Unfortunately, in education, there has historically been no corollary for effectively identifying
the most pressing problems of practice, or policies designed to arrange incentives and rewards
that will encourage innovation to solve these problems – though both may be changing with
the recent announcement of ARPA-ED, a DARPA-like program for education, and the general
emphasis of the Obama administration on strengthening research and innovation across a
variety of fields. In a sense, education actually has historically had the opposite of a virtuous
learning cycle, where a combination of nostalgia for tradition, misalignment of resources
and the tendency for ideology to trump evidence have together inhibited effective R&D.
Generally, research in education has not been required to connect clearly to the most pressing
and important problems of practice, and has therefore been largely theoretical, ideological and
less than rigorous in its standards for providing useful evidence or a robust and constantly
improving knowledge base for the field. A quick look at the agenda for any American
Educational Research Association conference41 shows that the field is primarily focused on
research about narrow content concerns, rather than on the structures and practices in which
learning happens. Less than 0.1 percent of K-12 expenditures are in R&D.42

Though there is some notable philanthropic support for educational research, the major
driver of educational research spending has been the $200 million budget of the Institute
of Education Sciences (IES) at the federal Department of Education,43 with some related
funding from the National Institutes of Health and the National Science Foundation. After a
brief period of over-correction that sought to push only randomized controlled experimental
studies, IES appears poised to make changes that will bring educational research closer to
problems of practice, and to institute rigorous but multi-level evidentiary standards (perhaps
somewhat similar to the three levels of evidentiary standards employed in the federal Investing
in Innovation competition). “The Institute will encourage researchers to develop partnerships
with stakeholder groups to advance the relevance of the Institute’s work, the accessibility of
its reports, and the usability of its findings for the day-to-day work of education practitioners
and policymakers,” noted IES Director John Easton in a document summarizing the agency’s
priorities. “In addition to supporting new research, the Institute will promote the synthesis
and dissemination of existing and ongoing research to construct coherent bodies of scientific
knowledge about education.”44 If this is done, it would help a great deal to refocus educational
28 Steering Capital: Optimizing Financial Support for Innovation in Public Education

research on more practical and useful work that could in turn help drive a more effective
development and solutions engine.

Meanwhile, the university professors who conduct the vast majority of education research are
not ready for – nor incented to provide – the kind of field-based and problem-based multi-
disciplinary research we need to propel effective R&D in education. “From state standards to
classroom management, from technology to pedagogical issues, education professors pursue
objectives that sometimes ignore – and even contradict – the policies and challenges that their
students will face as actual teachers,” the FDR Group found in a recent survey of education
professors conducted for the Thomas B. Fordham Institute. “Professors appear to be saying
that it is the real world that needs to change, not them. As they see it, each wave of new
teachers they send into the nation’s classrooms should challenge the status quo and provoke
change. Thus, the disconnect between the real world and the ivory tower is not only one of
their own making, but conscious and purposeful.”45 As such, research agendas in education
have often been driven by researchers’ ideology and theoretical interests, rather than by
pressing problems of practice. So, instead of promoting improvements in the way teachers
teach and the way students learn, higher education is generally an inhibitor to sustained
educational innovation.

Because of this historical disconnect between practice and research, education, unlike many
other fields of public import such as medicine or energy, does not have a clearly and widely
accepted knowledge base upon which to build. For years, former education researcher and
professor (and now philanthropic leader) Anthony Bryk has been calling for a “design-
engineering-development” orientation to such research. “A new infrastructure is required,
building its agenda around the core problems of practice improvement rather than isolated
academic theories or currently popular, but ungrounded, policy ideas,” says Bryk. “Productive
innovations need to be co-developed by researchers and practitioners, tried out in schools,
refined and retried. Such work entails an engineering orientation where the varied demands
and details of local contexts are a direct object of study and design, rather than being decried
as a ‘failure to implement properly.’ ”46 One model that Bryk’s Carnegie Foundation for the
Advancement of Teaching and other organizations are considering is the “90-day cycle”
developed by the Institute for Healthcare Improvement (IHI) as a way to accomplish deep,
rapid research. According to Carnegie, the 90-day cycle process consists of: (1) a scan of the
field, distilling the knowledge of scholars as well as practitioners; (2) a focus on particular
front-line theories to refine and test understanding about what works; and (3) working to
ensure the take-up and use of the findings by appropriate parties.47
 Bellwether Education Partners 29

A broken research engine inhibits potential entrepreneurs, not to mention their investors,
who might otherwise leap at the chance to apply useful field-based research to develop
better products or services that could make a difference for educators and students at scale.
Contrast this to the work of DARPA and ARPA-E, where basic research is intentionally
and thoughtfully linked to development activity and investment to help users in the field.
The Department of Education’s recent Investing in Innovation (i3) competition provided a
new “field scan” approach to help elicit innovations from the field that align with defined
priorities. This is a good addition to the R&D cycle, but it should not replace an ongoing
and intentional development cycle that, as Srini Mirmira from ARPA-E describes, reviews the
outputs of research investments and repeatedly asks the question: “What is the best way to
leverage this basic research?”48

This approach may finally come to fruition with the creation of the Advanced Research
Projects Agency-Education (ARPA-ED) within the U.S. Department of Education,
announced in February 2011. Modeled after DARPA and ARPA-E, ARPA-ED will
“develop transformative, game-changing education technologies – technologies that will be
interoperable and build strategically upon one another to achieve progress at scale.”49 The
president’s FY2012 budget request to Congress, released in February 2011, includes $90
million for the agency, provided through a combination of discretionary and mandatory
spending. (The same innovation announcement also cited plans to accelerate the market
for advanced learning technologies by working with the Department of Defense Education
Activity (DoDEA) schools as early “customers” for effective new approaches.)

One other promising effort that could help drive more effective educational R&D is the
National Center for Research in Advanced Information and Digital Technologies. Also
known as the Digital Promise Project, the center aims to provide grants and contracts for
R&D projects that explore the way advanced technologies can support learning in K-12 and
higher education, as well as government and corporate training. The center was first proposed
more than a decade ago by former media executive Lawrence Grossman and former Federal
Communications Commission chairman Newton Minow, who called for a multi-billion-dollar
trust that would act as a “venture capital fund” to research learning technology. Congress
finally approved a $500,000 appropriation for the center in early 2010 (far lower than the $50
million requested when the center was authorized in 2008). Though partially funded by the
federal government, the center is an independent nonprofit organization overseen by a board
of directors appointed by the U.S. Secretary of Education, so it has the potential to bridge
public sector goals with private sector flexibility.
30 Steering Capital: Optimizing Financial Support for Innovation in Public Education

3. A Culture that is Evidence-Based, with Incentives and Infrastructure Aligned for

Continuous Improvement
As discussed earlier, public education has long been mired in a culture of compliance.
Without a clear evidence base, or the commitment to resolve ideological battles based on that
evidence, there has rarely been a real incentive for schools or school systems to change. Unlike
businesses that have an economic imperative to profit or perish, public school systems are
rarely compelled to adopt better practices or tools, and almost never get shut down for failing
to deliver quality educational options, which decreases the willingness of entrepreneurs to
undertake the hard work of producing innovative solutions (and taxes the patience of private
investors and philanthropic funders who underwrite their efforts in the hope that states or
districts will purchase them when they see the obvious value). Even those districts or schools
that truly want to change things for the better often find their hands tied by work rules and
collective bargaining agreements that further calcify compliance norms.

By reducing fragmentation and streamlining goals and metrics, the Common Core State
Standards will simplify development cycles and thereby reduce barriers to entry for new
providers of content and assessments. Performance evaluation systems for educators and
related outcomes-based systems will help to rationalize incentives throughout the system.
Together, these shifts should help to provide incentives for investors, innovators and buyers
to align around these new emerging needs. But this shift must be coupled with robust
investments in the kind of infrastructure – rules, regulations and systems – that will solidify
and reinforce these content standards and related new cultural norms (moving away from
things like a preference for stability over dynamism and peaceful conversation about process,
toward honest conversations about results) into the kind of system we need to foster real and
ongoing innovation. These include new regulations and systems for preparing, evaluating
and compensating educators, and vastly more responsive mechanisms for funding public
education. This kind of shift means directing more funding to things that work, and removing
resources from those that don’t.

Indeed, moving toward a more responsive, dynamic market for educational innovation will
require adopting a culture and infrastructure that aligns financial resources and incentives
in support of improved processes and increased outcomes – and away from things that,
while comfortable, simply don’t work. Federal efforts like the What Works Clearinghouse
and Doing What Works have been somewhat helpful in encouraging this kind of improved
evidence-based practice. But the three levels of evidentiary standards (Development, Validation
and Scale-Up) in the recent i3 competition took it a step further, providing differentiated but
 Bellwether Education Partners 31

rigorous standards for evidence, based on the stage and scale of an innovation’s development.
The i3 competition also helped to improve the field’s base of knowledge by requiring i3
grantees to participate in ongoing evidence-building processes.

In order to drive deep cultural changes in this compliance-based system, public funding for
schools and students must flow in a more rational and responsive manner, tailored to the
needs of students and administered in a way that can be
adjusted nimbly as needs change. One example of this kind of
In order to drive deep shift in funding is a “weighted student formula” approach,
cultural changes in this which some believe would better create incentives to serve
compliance-based system, students with the greatest needs, by basing funding on a set of
public funding for schools defined student characteristics and needs instead of formula-
and students must flow in a based categorical funding and building-based budgeting that
more rational and responsive directs funds based largely on teacher seniority and choices.

manner, tailored to the needs Another example of how the funding infrastructure needs to
be shifted is the millions of dollars in federal technical
of students and administered
assistance funds that were rigidly defined, and thus unable to
in a way that can be adjusted be re-deployed as states grappled with the challenge of
nimbly as needs change. redesigning their goals and systems to compete for Race to the
Top grants.

“Performance guarantees” also hold promise as an innovative practice that sits where
culture and infrastructure meet, and that might enable more public-private partnerships and
innovation in education. In this approach, public sector decision-makers – such as districts
or states interested in tapping private sector or nonprofit contractors to provide services like
taking over chronically failing schools – could enter into a three-way contract of sorts. As
explained by Bryan Hassel and Daniela Doyle, the contract with the service provider would
stipulate outcomes targets, and the third signatory would be a foundation that would provide
a performance guarantee to the district. Then, if the service provider did not successfully
meet the increased social outcomes/benefits as defined in the contract, the foundation would
repay the funds to the district (or other contracting agency). As the authors contend, this
kind of arrangement might help mitigate the cultural and risk aversion many public leaders
have toward tapping outside providers, and incent both the public agencies and the outside
providers to take more of a leap together on bold goals.50

Another way that the culture of compliance might shift can be seen in the “Red Tape
Reduction Act” in Louisiana, which was enacted in summer 2010 to reduce bureaucracy in
32 Steering Capital: Optimizing Financial Support for Innovation in Public Education

the state’s education system and provide schools the flexibility needed to improve student
performance. The law gives local officials the option of seeking four-year waivers from
various state laws and rules, such as classroom size, instructional time and curriculum, in
order to pursue innovative approaches. (However, as of January 2011, zero districts in the
state had requested the waiver, according to Louisiana State Superintendent of Education Paul
Pastorek.)51

Education is at heart a service business and as such, any conversation about its culture or
infrastructure must address the way its labor is selected, developed and managed. Many
professional fields – including law and medicine – have a segmented system of licensure and
preparation that involves selection criteria appropriate for the type of work being done, and
various levels of advanced certifications. Within the medical field, for instance, there are
different entrance and completion requirements for becoming a lab technician, a nurse, a
nurse practitioner, a doctor, a board-certified specialist, etc. In education, universities and state
licensure systems are rarely selective, and generally do not provide any kind of tiered system
or competency-based assessment, and thus do not provide a reliable pipeline for identifying,
preparing and supporting the kinds of educators we need for this new kind of dynamic,
innovative and performance-based work in education. This has created shortages of effective
talent where it’s needed most (especially in hard-to-staff subjects and schools) and failed to
support and develop those teachers and principals who are most effective, while improving or
counseling out those who are not effective. Furthermore, the National Board for Professional
Teaching Standards (the closest thing education has to an advanced industry certification) has
not been shown to have a strong evidence base for connection to student impact.

While there have been some notable entrepreneurial efforts at innovation to improve talent
development – including not only Teach For America, The New Teacher Project and New
Leaders for New Schools, but also newer entrants like the Academy for Urban School
Leadership (AUSL), Teacher U, Urban Teaching Center and Leading Educators – most of
the traditional talent preparation programs have largely functioned as accountability-free
cash cows for institutions of higher education. Improving this piece of the infrastructure will
require a combination of state policy (including the tracking of which preparation programs
are actually developing teachers who have a positive impact on student learning, as Louisiana
and other states are starting to do) and other ways to connect the preparation, recruitment,
support and ongoing professional evaluation, management and development of educators in
a more systematic way. The recent Newsweek-National Council on Teacher Quality (NCTQ)
partnership to rate teacher education institutions is a sign that the field is beginning to take
quality more seriously.
 Bellwether Education Partners 33

Until this past year when the federal Race to the Top competition inspired dramatic state-
level policy reform, many states not only did not provide incentives to evaluate and improve
instruction, they actually expressly forbade connecting student-level performance data with
teacher-level data. Moreover, the prevalence of “last-in, first-out” layoff policies that are
“quality-blind,” and favor seniority over performance when decisions are made about which
teachers will be let go when budgets are cut, indicate the kinds of cultural and infrastructure
shifts that will be required.52 Many have resisted such moves because they incorrectly
assume improved teacher productivity and teacher job satisfaction are a zero-sum game: you
can either improve teacher productivity or support teacher job satisfaction, but not both.
However, entrepreneurial efforts like School of One in New York are showing how a smart
technology platform can not only customize student instruction and improve learning, but
also enhance teacher effectiveness while simultaneously improving teacher job satisfaction
by allowing teachers to teach what they are best at and only teach students who are actually
ready for that content. Similarly, Rocketship Public Schools in California is using computer-
assisted instruction for some basic skills, and then using the cost savings to increase teacher
salaries without requiring additional funding.

In a labor-intensive field like education, massive productivity gains will also require the use of
technology and an increasing attentiveness to assessing productivity as part of management
strategy. “The return on investment mindset that drives other sectors to replace expensive
labor with technology, and that sees the logic of scaling such efficiencies rapidly, does not
come naturally to K-12 [administrators],” says Wireless Generation CEO Larry Berger,
whose company leveraged its success with preK-3 assessment products into developing
K-12 technology tools for supporting data-driven instructional decision-making before most
districts and states were really ready to adopt them. “The problem for education ventures is
that such administrators will tend to make decisions within their comfort zone – they will
usually choose to solve a problem with additional district people and processes rather than
with tools, systems or outsourced resources – without regard to whether the additional district
people might be the more expensive or less effective option.”53 “In other fields, many of the
compelling applications of technology have to do with making labor more efficient, thereby
enabling a reduction in people or an increase in output,” notes Berger. “Even if the education
sector is not interested in reducing the number of teachers, it would still be good for the
teaching profession, and for the ability of entrepreneurs to articulate their value propositions,
if the education system started to quantify the value of a saved teacher-hour in terms of its
increased instructional output.”54
34 Steering Capital: Optimizing Financial Support for Innovation in Public Education

But resistance to technology in education is legendary. A recent analysis by the Parthenon

Group (funded by the Carnegie and Stupski foundations), investigating next-generation
learning supply-side needs, suggests that this historical resistance may be as much about
infrastructural limitations as about cultural resistance: “The analysis uncovered a surprising
fact regarding technology: education is the only sector where technology reduces productivity,
because it is always additive: when new technologies are introduced, old resources are not
taken away.”55 As such, to be useful in education, new productivity tools must be implemented
in a way that removes old systems while adding new ones, and directs resources away from
ineffective or outdated technologies in support of those that are most needed and useful. This
same report is also helpful in its analysis of infrastructure supports that are required to enable
real “next generation” and “hybrid learning” environments – including knowledge networks,
focused capacity-building intermediaries and more-focused funding resources.

And lastly, this cultural and infrastructural shift toward evidence- and performance-based
practices and incentives throughout the policy and management levels of the education
system would be accelerated substantially by a shift toward a competency-based model for
delivering and measuring students’ academic progress. As Michael Horn, author and executive
director of education for the Innosight Institute, explains the dynamics of so-called disruptive
innovations:

Policies can’t judge the disruption by the old metrics. As long as you do that, the
disruption won’t look particularly good, and you’ll hamstring it in not particularly
productive ways. In practice, this means moving much more to outcomes-based funding
models for this new disruption. In online learning, time can be a variable. But we can hold
outcomes as the constant. The Florida Virtual School is a good example. They only pay
for a course when a student has successfully completed the course. We have to free up all
of our assumptions about seat time. We’ve been measuring the wrong end of a student for
the last 80 years. Free up all those constraints on Carnegie units and seat time. Let creative
solutions come out and just focus on the outcomes that we want.56

4. Data that are Transparent, Available, Comparable and Useful

In education, and indeed throughout the social capital market, social purpose investors
and donors have little access to useful, comparable data that they can use to make funding
decisions or to understand productivity trade-offs in their management efforts. “[Private]
investors can make use of a broad array of data, ranging from reports of quarterly earnings
 Bellwether Education Partners 35

statements to the historical and current prices at which stocks are traded – all based on
standards that are consistent across many industries, markets, and countries,” notes Paul
Brest, president of the Hewlett Foundation. “Based on this information, investors can put
together portfolios that are aligned with their investment horizons and tolerance for risks.
And at the end of the day, or quarter, they will know their actual returns.”57 Whereas
in the education sector they lack not only achievement data, but also reliable and useful
organizational data and financial data.

This is a deeply rooted problem in education, where educators themselves are only now
beginning to become comfortable with using student achievement data to inform their
instructional decision-making. An increasing number of states are investing in student-level
data systems that will enable them to track over time how an individual student is doing,
and adjust interventions accordingly, and a range of technology tools are making it easier for
schools and school systems to track and monitor achievement and other data. While these
improvements have increased the availability of achievement data within districts and states,
it remains difficult to draw comparisons across them or to understand what exactly is behind
these differences – though the Common Core State Standards mentioned above, coupled with
forthcoming new investments in state data systems, will help here. The National Assessment of
Educational Progress (NAEP) helped historically, by providing one legitimate set of sampling
data that allowed comparable analysis and was powerful in pointing out the different levels of
standards set by different states. The No Child Left Behind (NCLB) Act followed, introducing
some important highlighting of educational gaps, but did not improve the quality or utility
of data, and in fact inadvertently created a micro-compliance environment that was in many
ways even less hospitable to innovation.

Recent federal Race to the Top (RTTT) competitions and related state reforms have provided
useful incentives for states to connect data to utility (i.e., student-to-teacher analysis),
which was reinforced by the criteria within the Race to the Top Assessment program,
including interoperability standards for assessment data that could be shared across states
and technology platforms. But we still need tools and infrastructure to allow easy sharing
and comparing of data. These include not only common calculations for metrics like the
graduation rate (an issue the National Governors Association has been pushing, with
about half of states now using the NGA’s formula) but also widespread adoption of data
interoperability standards and easy-to-use open platforms that allow practitioners, researchers,
policymakers and investors to access and compare useful data about student learning.
36 Steering Capital: Optimizing Financial Support for Innovation in Public Education

In addition to addressing academic data, investors – whether private sector or public sector
leaders investing tax dollars – need better access to organizational benchmarks for elements
like program design, staffing and costs. As scholar Marguerite Roza notes, school districts
report certain things in consistent ways, such as the number of full-time employees, but do
not provide reports for more specific things like overall math instruction, remediation or
professional development. “Since education leaders don’t know the costs of their current
efforts, they can’t compare them to potential alternatives,” Roza says. “For instance, in one
district where I consulted, the leaders couldn’t determine what they were spending on foreign
language classes, so they couldn’t be sure if switching to an online language program such as
Rosetta Stone would save them money or not. In another district, officials couldn’t parse the
potential savings to be incurred by adopting a reading program that promised to reduce the
occurrence of reading disabilities.”58

Entrepreneurial organizations are often no better, using their own systems and terminology
to describe programs and to account for their costs. Financial and impact reporting data are
often presented in an inconsistent way that is less than useful to funders, especially those
interested in helping organizations grow to a significant size or achieve a level of sustainability
that decreases their dependence on philanthropy. For example, nonprofits do not account for
their growth capital separately from their general operating revenue, and thus “relatively few
donors and foundations are willing to provide money for growth because it is difficult to track
what their money accomplishes,” says George Overholser of NFF Capital Partners.59 Outside
of education specifically, the social sector has been experimenting with ways of advancing
on this front, with the Global Impact Investing Network developing what it calls “Impact
Reporting & Investment Standards” (IRIS).60 These standards are a set of cross-sector and
sector-specific indicators designed to reduce the reporting burden on entrepreneurs while
increasing the level of comparable information available to impact investors.

Finally, one of the most critical elements of making capital markets work is the development
of specialized intermediaries, who can help investors and others make sense of this data. Some
of these intermediaries trade in knowledge and information, such as bond-rating firms, equity
analysts and consulting firms, while others specialize in funneling investment funds, such as
venture capital firms and investment banks. Because the private capital market is so large and
diverse, these intermediaries develop valuable expertise in particular types of investments,
categories of capital providers or spheres of information, allowing them to add value to the
space between an investor’s capital and an entrepreneur’s business.
 Bellwether Education Partners 37

Because the social purpose capital market in education is young and growing, there are still
a limited number of these independent intermediaries and advisers, and fewer still who are
focused explicitly on education. Thanks to the influx of philanthropic capital into the market
over the last 10 years, several consulting firms have begun to engage with entrepreneurial
clients, including the for-profit Parthenon Group, the Monitor Institute and The Bridgespan
Group, the nonprofit spin-off of consulting giant Bain & Company. There are a handful of
analysts that track industry trends; Eduventures Inc. has been at it for years, more recently
joined by JPMorgan Chase, neXtup (whose founders include longtime education analyst
Michael Moe, formerly of education-focused investment bank Think Equity), Berkery Noyes
and Education Growth Advisors. Newer entrants include a group of technology editors and
programmers building EdSurge, a new tracker of information and news about educational
technology products and companies that would help investors and entrepreneurs navigate this
emerging field. Given the complexity and importance of this industry, this level of attention is
not yet sufficient to grow investment activity to the scale we need.

In addition to information intermediaries, network-building hubs help to build the

knowledge and relationships that are necessary to encourage and sustain innovation in a
field. NewSchools Venture Fund has been hosting its “Summit” for 12 years with precisely
this goal in mind. The Education Innovation Network, co-chaired by Michael Moe, has for
a few years convened entrepreneurs, educators, researchers and investors at its Education
Innovation Summit at Arizona State University’s SkySong Center. Since the last such summit in
2010, 10 of the 55 companies that presented had major investments totaling $110 million, five
companies merged or were acquired, and 19 announced major partnerships. This represents
half of the total investment in education companies of $225 million in that period.61

On the public and philanthropic front, a group of foundations collaborated in 2010 to

quickly create the Foundation Registry to better connect Investing in Innovation (i3) grant
applicants with funders who might provide part of their required “matching funds.” Though
this online platform significantly helped improve the matching fund process, it remains unclear
whether and how it will evolve to meet the future needs of philanthropists, investors and
entrepreneurial organizations.

5. Robust, Diverse and Aligned Investment Capital

In order to be effective, any capital market must have two things: an amount of capital
commensurate with the needs it is tackling and a diversity of investors. The first half of this is
38 Steering Capital: Optimizing Financial Support for Innovation in Public Education

fairly obvious: a market starved of capital cannot appropriately respond to the needs of
buyers, users, or organizations that seek to start up or scale up to address those opportunities.
Meanwhile, all mature financial markets have some investors who seek high-risk, high-return
opportunities, like venture capital, and others who seek more-stable and lower-risk
investments, like mature utilities stocks or bonds. This kind of
diversity is important to keep a market dynamic and
In order to be effective, any responsive to emerging needs and opportunities.
capital market must have
two things: an amount of Although the social purpose capital market is rapidly
capital commensurate with expanding, it is still relatively limited in terms of the number
of players, their coordination and the types of investment
the needs it is tackling and a
vehicles available – all of which, put together with barriers
diversity of investors.
that inhibit traditional investors, significantly hampers
the growth of entrepreneurial solutions in education. The
responsibility for fixing this is shared among the nonprofit, private and public sectors.
Specifically, the biggest financial challenges facing these entrepreneurs are: too little early-
stage investment capital available to for-profit social entrepreneurs in education; a dearth
of nonprofit capital for organizations that want to grow to scale (at both the early and later
stages); and a shortage of supply-side investing and incentives in this important arena by the
public sector.

Challenge #1: Early-Stage For-Profit Capital

Public education would seem a natural opportunity for private investment: massive and fairly
predictable annual spending, huge needs, many customers, a clear link between improvement
and the larger economic and social benefit. But its ideological and politically volatile nature
has scared away many private investors. Even those undaunted by these factors tend to
mitigate the immense risk (and questionable return) involved in education innovation by
waiting to invest in entrepreneurial organizations until they have made significant progress
developing and selling their product or service. When venture capitalists shy away from
making early-stage for-profit investments in education, promising innovations are starved of
capital to get off the ground and to grow in response to demand. For example, from 2005 to
2010, just 128 education companies received venture capital dollars, totaling nearly $970
million – compared with more than $13 billion to 500 clean technology companies and $41
billion to 1,900 life sciences companies, both sectors that have social impact dimensions.
Investors are not only cowed by the struggle to build strong education businesses, but by the
 Bellwether Education Partners 39

challenge of achieving financial returns through an initial public offering or an acquisition:

over the last 20 years, just 31 venture-backed education companies have gone public (though
many more have been acquired, often by big publishers who quickly assimilate and dilute the
original innovation) – less than half as many as the number of
IPOs from the clean technology sector (65), a sector that
In recent years, investors didn’t even really exist until relatively recently, and just 5
who have long shied away percent as many as the number of life sciences IPOs (665).62
from the volatile education Put bluntly, it’s been hard for investors to make a decent
market have been edging return in K-12 education.
toward making education
In recent years, investors who have long shied away from
investments, particularly in
the volatile education market have been edging toward
technology. making education investments, particularly in technology.
They tend to be intrigued by factors outside of education,
like the reduced cost of technology development (whose potential to improve productivity in
education is largely unrealized) and the shifting economic environment that has put pressure
on education “buyers” (especially districts) to cut costs and boost productivity. They are also
encouraged by education-specific policy changes that are creating a more evidence-based R&D
system, creating a Common Core of State Standards, improving incentives and rewards for
performance, and making data more transparent and useful.

Taken together, these shifts create new opportunities for innovation and make room for a
much more diverse set of smaller players to enter the market on almost equal footing alongside
the traditional publishers. In particular, seed-stage funding by “angel” (individual) investors
has been on the rise, including the recent high-profile example of Reed Hastings’ investment
in Dreambox. “The velocity of the investment in the education industry is rapidly increasing,”
note marketing materials from the Education Innovation Network, based at Arizona State
University. “From April to November 2010, high-profile venture capital firms completed 19
investments with a total value of more than $225 million in education innovation companies.
Investments were made by more than 50 VC firms and angel investors, notably $75 million
for Chegg (online textbook rentals) by Ace Limited, Kleiner Perkins, and Insight, and $46
million for Kno (tablet textbooks) by Andreesen-Horowitz, Silicon Valley Bank, and Triple
Point Capital.”63 But most of these educational technology investments focus on content and
content delivery mechanisms that can tap a mixture of consumer and schools markets, and not
the infrastructure changes required to drive dramatic productivity improvements within public
school systems.
40 Steering Capital: Optimizing Financial Support for Innovation in Public Education

A few new education-focused venture capital firms like Learn Capital (with investment from
Pearson, among others) and others interested in impact investing with the possibility of
education investments, like City Lights Capital, have joined traditional venture capital firms
such as Union Square Ventures, New Markets Venture Partners and higher education investors
such as Salmon River Capital to make early-stage institutional investments in education start-
ups, alongside social-venture firms like NewSchools Venture Fund and Charter School Growth
Fund, who have invested in both for-profits and nonprofits in education. Many are watching
as News Corporation and Google have begun to make strategic investments and acquisitions
here as well, including News Corporation’s acquisition of Wireless Generation for $360
million. This activity is certainly a step in the right direction, but does not yet approach the
scale of the need.

A few foundations have begun to step into this gap, providing some socially motivated
investments in early-stage education companies from their large endowments instead of only
from grant funds. The Kellogg Foundation’s “mission-driven investments” have focused not
on the earliest and most risky, but rather on those that have a solid revenue base, including
equity investments in healthy food service provider Revolution Foods and preK Headstart
turnaround operator Acelero Learning, and a bridge loan to Wireless Generation (prior to its
acquisition by News Corporation). And the Bill & Melinda Gates Foundation has recently
begun to make some equity and royalty-based investments, including support for companies
like Inigral Inc. (which creates online communities) and Tutor.com (which provides accessible
and affordable tutoring), both aiming to improve college success for low income students. The
philanthropic sector is also embracing the potential of competitive “challenges” or “awards”
to support early-stage innovation. For instance, the Next Generation Learning Challenges
initiative from the Gates and Hewlett foundations will provide multiple “waves” of grants tied
to specific requests for proposals that are designed to expand the reach of technologies that
can improve college readiness and completion; individual grants will be between $250,000 to
$750,000 – far less than what venture capitalists might provide, but a start.64

Challenge #2: Philanthropic Capital for Nonprofit Scale

Philanthropic donors are also affected by the lack of evidence-based decision-making in the
public education system. Their coping mechanism is to adopt their own frameworks for
grantmaking based largely on their own unique ideologies (and often those of their endowing
families or individuals) and to hold grantees accountable according to their own specific
metrics. Philanthropy as a field also tends to publicly penalize failure but rarely celebrate real,
 Bellwether Education Partners 41

meaningful successes, leading most donors to avoid risk by spreading funds across many small
grants instead of placing larger bets – which, as noted earlier, forces nonprofits to fund-raise
pretty much constantly.

Even established nonprofit organizations that demonstrate

“At precisely the moment a clear impact find it nearly impossible to raise funds for
when large amounts of growth. This is what Bridgespan consultant Jeff Bradach
capital would flow to a calls the “paradox of success” in the nonprofit sector. “At
proven idea in the for- precisely the moment when large amounts of capital would
profit sector, funders in the flow to a proven idea in the for-profit sector, funders in the
nonprofit sector frequently back away,” he writes. “There are
nonprofit sector frequently
many reasons – donor fatigue, a belief that equity requires
back away.” –Jeff Bradach,
spreading money around, hesitance to make ‘big bets’ – but
The Bridgespan Group the consequence is that proven solutions to pressing problems
do not spread.” Grantmakers for Effective Organizations has
found that foundations provide a median of just 20 percent of their grant dollars to general
operating support, and that the median grant size is just $20,000.65 Sean Stannard-Stockton
further illustrates the challenge of scaling in one of his posts to the Tactical Philanthropy
Advisors blog:

The nonprofit sector suffers from a massive inability to scale. Since 1970, only 144
nonprofits have grown to surpass the $50 million a year in revenue mark. During that
same time, 46,136 for-profits have cleared the $50 million hurdle. There is nothing
fundamental about the nonprofit corporate structure that prevents growth. Yet accounting
standards that fail to recognize nonprofit equity strip away the single most important
building block to growing an organization. Without equity, an organization is forced
to live on the revenue they gather each year and lack the ability to make meaningful
investments in growth opportunities.66

Certainly not all nonprofit investors shy away from providing growth capital to these
organizations. For the last 13 years NewSchools has been aggregating capital from donors
and providing large, long-term grants and loans to a range of nonprofit (and for-profit)
organizations that are trying to grow and serve more students. The Charter School Growth
Fund began to do likewise in 2005, but that is only two specialized intermediary funding
organizations focused exclusively on this incredibly large field. Some newer foundations
established by wealthy entrepreneurs from the business sector – whose founders have an
appreciation for what it takes to grow an enterprise to scale – have been willing to provide
42 Steering Capital: Optimizing Financial Support for Innovation in Public Education

bigger grants to organizations seeking to provide large-scale change, thus allowing those
entrepreneurs to focus more of their energy on running the enterprise. For example, the Doris
& Donald Fisher Foundation (benefactor Donald Fisher founded the Gap clothing empire),
the Bill & Melinda Gates Foundation (created from the massive earnings of Microsoft founder
and former CEO Bill Gates) and the Walton Family Foundation (created by Wal-Mart founder
Sam Walton and his heirs) have all given many millions to the nonprofit charter school
network Knowledge Is Power Program (KIPP) to sustain that organization’s ambitious growth
plans, including at least $40 million from the Fisher Foundation, $17 million from the Gates
Foundation and more than $25 million from Walton. And other foundations are beginning to
support the kinds of systems that growing nonprofits need in order to successfully grow with
quality, instead of considering all operational support as “overhead,” such as the Michael &
Susan Dell Foundation’s grants to districts and charter school management organizations for
performance management systems and a similar grant by the JPMorgan Chase Foundation to
Friendship Public Charter School.

In a bold move, some exceptional foundations, including the Atlantic Philanthropies and
the Gates Foundation, have announced that they plan to “spend down” their endowments.
Rather than allocating only the minimum legally required amount of 5 percent of their assets
each year, they have set a deadline by which all of their funds will be put to use. This strategy
stands in sharp contrast to the vast majority of foundations, whose growing endowments
allow them to grant more money to nonprofits but also to support enormous staffs and
occupy lush office buildings and operate in perpetuity. The decisions by Atlantic and Gates
to spend down their endowments will no doubt increase the amount of philanthropic capital
available in this century, but because just a small percentage is expected to flow into public
education, this will not come close to filling the gap of nonprofit growth capital for social
entrepreneurs in this market.

Foundations can take a number of steps to address this shortcoming. The simplest is to
recognize the capital needs of social entrepreneurs and provide them with larger, longer-
term grants. Further, more foundations could take a page from Atlantic and Gates by either
spending down their endowments, or at least increasing the percentage of their assets that
is used to create social impact through a variety of “program-related investments” or PRIs.
The past decade has seen a slow increase in foundations willing to use PRIs for supporting
growing nonprofits. The Gates Foundation established a pilot program allocating $400 million
for PRI opportunities, including debt, equity and guaranty investments67 and recently made
its first such direct equity investment (as noted above), providing $2 million of a $4 million
round of financing to Inigral, a for-profit developer of social applications for increasing college
 Bellwether Education Partners 43

enrollment and engagement. 68 In 2010, The Annie E. Casey Foundation approved expanding
its social investments to a total of $125 million, or 5 percent of the philanthropy’s $2.5 billion
endowment. The increase from the endowment would not be included in the annual grant
payout rate of almost 8 percent (3 percentage points higher than the federally mandated 5
percent).69

Foundations could also learn from the experience of the Kellogg Foundation. In 2008,
Kellogg announced plans to invest $100 million of its $9 billion endowment in mission-driven
investments in the U.S. and Africa, committing $75 million domestically.70 MDIs seek near
or market returns, but are made in efforts that generate social impact and are done as a way
to ensure that at least some portion of the foundation endowment funds activities aligned
with the foundation’s mission (whereas most of the more than half a trillion in foundation
endowment assets71 is invested solely in traditional profit-maximizing investments).

Foundations have also partnered with other investors to “layer” or “sequence” capital for
promising education efforts. One way “layering” is being used is to make charter school
facilities development – one of the most expensive aspects of operating a charter school
management organization – more affordable and attainable. For example, Aspire Public
Schools secured $93 million in a tax-exempt bond issuance with $8 million apiece from the
Gates Foundation and the Charles and Helen Schwab Foundation (structured as program-
related investments that acted as unfunded loan guarantees), a $1 million funded guarantee
by NCB Capital Impact (a nonprofit lender that will also manage the PRI) and $4 million by
the Sequoia Union High School District.72 Meanwhile, on the sequencing front, NewSchools
Venture Fund provides patient, impact-first capital to early-stage education entrepreneurs
(including both for-profits and nonprofits), allowing them to progress far enough in their
development to attract traditional private sector investors in later rounds of financing (for
for-profits) or to persuade foundations to support growth of new markets (for nonprofits).
For example, healthy food provider Revolution Foods received early investments from
NewSchools and other impact-first investors and has recently secured a significant financing
round ($20 million) from traditional venture capital investors impressed by its early results
and interested in encouraging its scale.

One of the easiest ways for philanthropies to provide more growth capital to nonprofits is to
use “recyclable grants” for expanded operating capital. These interest-free, long-term loans
could be allocated to nonprofits that generate fees for their services (such as charter school
management organizations) and could therefore repay those loans over time, allowing the
same grant capital to be “recycled” and provided to other organizations. Another approach
44 Steering Capital: Optimizing Financial Support for Innovation in Public Education

would be to create an “equity equivalent” that would allow foundations to provide nonprofits
with growth funds without saddling them with debt liability that reduces their access to
private sector debt. Although such a tool might look much like a recyclable grant or loan, it
could be structured so that it would be accounted for and function more like equity (only to
be repaid if certain financial accomplishments were met). Still another way to use PRIs is to
invest in independent intermediary organizations that could then specialize in selecting and
supporting higher-risk early-stage organizations – whether for-profit or nonprofit – within
areas that complement the work of foundations themselves. These intermediary firms could
then leverage these funds with later-stage funds from the private sector or from foundations.

Meanwhile, several newer firms have emerged to help social entrepreneurs in their quest for
growth funds, including the previously cited NFF Partners, founded by George Overholser
within the Nonprofit Finance Fund, and SeaChange Capital Partners, which was created
by two former Goldman Sachs partners with a $5 million initial contribution by Goldman
Sachs itself. These organizations perform extensive due diligence to choose nonprofits that
are poised for growth, present the opportunity to their network of donors and raise capital
from those donors as NFF describes it, “without major restrictions and with an expectation
of return measured by social impact.” This approach has helped NFF Partners raise more
than $40 million for two education nonprofits, College Summit and Teach For America.
Also in this realm, the Growth Philanthropy Network is working with funders and nonprofit
organizations to try to create a national marketplace to provide the growth capital and other
resources needed to take nonprofits and programs to scale, including venture fairs and more
informal connections.73 But more of this kind of activity is needed, given the extent of the
problems we face.

Challenge #3: Public Sector Investments

As discussed earlier, public sector financial support to encourage social purpose innovation can
take the form of regulatory-based incentives or contracts or subsidies, actual market making
and/or direct investment activity. Historically in U.S. education, most of the public sector
activity has been in the form of regulatory systems to provide revenue-side incentives for
private sector entrepreneurial activity, as opposed to any direct investment in spurring on the
supply of innovation per se. Regulatory demand-side support includes things like the revenue
streams created by the supplemental service providers provisions of NCLB. The few historical
examples of supply-side support include the federal charter schools program start-up and debt
enhancement funds, and access to state bond revenue for financing charter school facilities.
 Bellwether Education Partners 45

However, the Obama administration has begun experimenting with more-direct efforts to
invest in and support innovative providers. As a result of federal stimulus dollars, including
the Race to the Top competition (RTTT and RTTT-A), the Investing in Innovation (i3)
funds and the Teacher Incentive Fund (TIF), the U.S. Department of Education has recently
engaged in direct funding of infrastructure reform incentives and innovative ventures to the
tune of more than $1 billion ($330 million for RTTT-A, $650 million for i3 and $442 million
for TIF). Along with building a stronger evidence base, these investments mark significant
progress toward growing and steering the markets for innovation in education. Coupled with
the recent development and adoption of the Common Core State Standards, this two-year
period has been perhaps the most extraordinary public investment in education innovation
in our lifetime. If this momentum is sustained, it could provide the opportunity to reframe
entirely the landscape for innovation and continuous improvement in education. However,
given the powerful interests that are lined up against these structural reforms and cultural
shifts, this momentum should not be taken for granted.

Furthermore, these efforts, while potentially game-changing, suffered from two serious
problems that direct governmental investment in innovation faces. First, departmental
investments generally require peer review processes, and the “peers” doing the selecting are
generally inexperienced with identifying promising
innovations. Second, public grant processes – even those with
Without more (and substantial degrees of freedom and competitive systems like i3
better aligned) private, – are still affected by their surrounding political environment.
philanthropic and public For instance, the recent i3 competition did not allow for-profit
capital moving into and companies to compete, which significantly reduced the pool of
through the system, the prospective organizations and talent. As discussed earlier,
innovation cycle in education effective innovation requires a close connection to real
problems of practice and a rapid, nimble learning cycle – none
simply won’t turn at the
of which lends itself to annual peer-reviewed RFP cycles. In
pace we need to meet the
order to build on this early momentum, the public sector
challenge of preparing all should supplement incentive-based funding like RTTT and
students for college success direct investments in nonprofit activity like i3 with other
in the 21 century.
st
activities that encourage private sector investments and
entrepreneurial activity.

Without more (and better aligned) private, philanthropic and public capital moving into and
through the system, the innovation cycle in education simply won’t turn at the pace we need to
meet the challenge of preparing all students for college success in the 21st century.
 Bellwether Education Partners 47

Creating a better ecosystem for innovation in education

What would it take to create a dynamic, responsive education system that encourages
innovation and strives for continuous optimization of outcomes – with incentives and rewards
aligned to those desired outcomes? Some signals may be found in the fact that this goal is
similar to the classic definition of a market, and should be treated more as such. Of course,
this is not a naïve call for a simplistic free-market system, but rather an acknowledgement
that certain kinds and degrees of market forces are vital for accomplishing the ambitious goal
of improved academic outcomes for students – and recognition that all sectors, including the
public and philanthropic sectors, have a vital role to play in organizing that market.

In simple terms, a market is an economic ecosystem in which demand (those that “buy” or
use) and supply (those that provide) meet and exchange something of value. Within any
market, suppliers and consumers each attempt to maximize their own gain for the lowest cost.
There is an implicit assumption that buyers and sellers are able to make choices – suppliers
have some choice about what segment to focus their supply on, and buyers can choose freely
from among a range of suppliers (or choose to exit the market). Together, these dynamics put
pressure on suppliers to respond to the demand side’s needs and preferences so they can
compete effectively with other suppliers. Some useful benefits result from allowing these forces
to play out, but they must be balanced against other societal values. As economist Arthur
48 Steering Capital: Optimizing Financial Support for Innovation in Public Education

Okun has explained, a market “responds reliably to the signals transmitted by consumers and
producers. It permits decentralized management and encourages experimentation and
innovation. Most important, the prizes in the marketplace provide the incentives for work
effort and productive contribution.” The flip side, Okun says, is that markets are not in and of
themselves set up to ensure equality of opportunity or of
income. Therefore, Okun says, capitalism and democracy
“[Capitalism and democracy] “need each other – to put some rationality into equality and
need each other – to put some humanity into efficiency.”74
some rationality into equality
and some humanity into Scholars Mark Schneider and Paul Teske have pointed out
that “schooling is characterized by only an indirect link
efficiency.” –Arthur Okun,
between the payment for and the receipt of the service, which
economist
blunts some of the power consumers have over private goods,
such as the ability to withhold payment.”75 Another dynamic
that distorts the system is the lack of a user- or learner-centric approach in policies and buying
decisions. For example, state textbook adoption processes and purchasing cycles often adhere
to timelines and criteria that reflect the state’s ability to consider or purchase materials, rather
than the pace of change in the content or the needs of teachers – let alone student utility.
Finally, markets work best when buyers have the option to make other choices – otherwise,
while there will still be suppliers and users, there will be little dynamic or responsive
interaction. It’s not just the abstract system that benefits, though – individual participants reap
the rewards. Organizations simply work better when the people who gather within them agree
on a common purpose and approach. Choice also increases the agency of the stakeholders
who make these choices. Research has shown that the very act of choosing leads people to
demonstrate an “escalation of commitment” to what they have chosen.

Whether we like it or not, these market forces – and the capital that goes along with them – do
run through education. Money flows up from taxpayers to state and local governments, and is
used to pay for a variety of resources in education, ranging from teacher salaries and
instructional supplies to buildings, food and transportation. Thus far, efforts to harness
“market forces” on both the demand and supply sides in education have been somewhat
simplistic and rarely took into account the complicated intersection of these forces in the lives
of children and their communities. On the demand side, charter school policies in most states
were initially too permissive, incorrectly assuming that quality public outcomes – and school
operators – would arise purely from consumer demand. “Early hopes that charter and voucher
schools would be so obviously great that no finely calibrated outcome measures would be
needed to prove it have been dashed,” says Paul Hill, director of the Center on Reinventing
 Bellwether Education Partners 49

Public Education at the University of Washington. “So have hopes that families and
communities would be willing to wait until children had completed school to make judgments
about school performance.”76 More sophisticated approaches like the portfolio management
model taking hold in large urban school districts such as New York or New Orleans require
the city agency to engage in purposeful market-making by contracting with multiple school
providers to create and manage a diverse portfolio of educational offerings that better meet
community needs, tap different pools of talent and allow more parental choice. When this
kind of activity works, scholar Jeffrey Henig finds, “public
managers are not simply listening carefully to markets or
Harnessing market applying a set of technical administrative criteria: they ‘do
forces for social good is more than steer a market process, they balance technical and
complex and requires very political concerns to secure public value.’” But he also points
thoughtful, equally complex out that this kind of judgment implies a need for a different
and constantly evolving kind of public sector leader who is able to “judiciously and
regulatory systems. But effectively intervene, and do so not only whenever required,
but also only when required, to maximize the public good.”77
we can also see that not
harnessing these forces has On the supply side, the recent debates over the role of
left us with a system that for-profit higher education providers have shown us how
is stable and comfortable important it is to carefully and explicitly define success
for our current educators in terms of real outcomes metrics and not merely process
indicators like seat time or course registration, and to
to manage, but incapable
effectively design incentives and enforcement infrastructure
of reaching the dramatic
for providers. We can see from experience both in education
productivity improvements and other fields that harnessing market forces for social good
we need. is complex and requires very thoughtful, equally complex
and constantly evolving regulatory systems. But we can also
see that not harnessing these forces has left us with a system that is stable and comfortable
for our current educators to manage, but incapable of reaching the dramatic productivity
improvements we need.

How can we create better and more powerful market dynamics in education that align public,
private and philanthropic investments and resources with public goals? And what is the right
role of the public sector in this kind of market-shaping effort? Below, we offer some initial
recommendations to begin addressing this enormous and complex question.
 Bellwether Education Partners 51

Conclusion

The ambitious goal of college-level attainment for all of our students creates a massive
productivity challenge for public schools and school systems. We know from historical
observation that these kinds of productivity gains will require tremendous innovation if they
are to be accomplished without huge increases in funding – not a likely scenario given the
current economy. And we have posited in this paper that the kind of focused and sustained
innovation we need requires a major cultural and infrastructure shift in our educational
ecosystem. This kind of fundamental shift is significant: it requires moving from a culture and
system of compliance to one that is adaptive and responsive to emerging needs, and based in
cycles of constant learning, with incentives and rewards aligned to our greatest needs, effective
metrics and oversight to ensure high quality and diverse suppliers of goods and services whose
incentives are aligned closely with our public goals and priorities. It will require sophisticated
skills and significant resources from across the public, private and nonprofit sectors in order to
design and deliver this kind of new educational ecosystem.

How might the sectors contribute to solving this challenge, based on their strengths and
weaknesses?

Public Sector. The public sector has a responsibility to define and ensure the public good. Its
job is to set the “rules of the road” and define and focus the ecosystem on priorities through
52 Steering Capital: Optimizing Financial Support for Innovation in Public Education

policy and regulations, and to police or ensure the delivery of public goods. The sector should
do so in a way that creates the strongest outcomes, by balancing its oversight and control
needs with providing flexibility for high performers and
innovators who can help move the system forward. The
“Government should do more strength of the public sector is its clear mandate to prioritize
what, less how: a stronger the public good, while its weakness is risk aversion, which
hand in setting great national comes partly from the political process itself and partly from
goals and purposes; a lighter ideological pressures. “Government should do more what, less
touch in how we reach those how: a stronger hand in setting great national goals and
goals.” –Nick Hanauer and Eric purposes; a lighter touch in how we reach those goals,”
authors Liu and Hanauer have challenged. “Government
Liu, authors
should be… less wielder of stick than of carrot; less the parent
than the coach; less the vending machine than the toolkit for
civic action. A more what/less how government should set the bar high and invest fully in a
great springboard – then let people, through dedication and practice, compete to get over the
bar.”78 “Governments and other non-market institutions have long suffered from the
innovation malaise of top-heavy bureaucracies,” agrees author Steven Johnson. “Today, these
institutions have an opportunity to fundamentally alter the way they cultivate and promote
good ideas. The more government thinks of itself as an open platform instead of a centralized
bureaucracy, the better it will be for all of us, citizens and activists and entrepreneurs alike.”79

Philanthropic and Nonprofit Sector. The philanthropic and nonprofit sector was created to allow
individuals to pursue public good outside of the rigid constraints of the governmental
infrastructure. As an “independent sector,” foundations and the nonprofit organizations they
support have the ability to be quite nimble, adaptive and future-oriented, in a way that the
public sector cannot easily do. There are few real constraints on philanthropy, and little of the
short-term-only pressure that is put on the public and private sectors, due to the fact that the
sector faces few constraints other than avoiding fraud and lobbying. The philanthropic and
nonprofit sector also have an ability to focus on and subsidize those products or populations
that the private sector has incentives to avoid, such as “orphan drugs” or hard-to-serve
student populations. Their weaknesses (with a few notable exceptions) include an unfortunate
aversion to risk, a slow pace of activity given that only 5 percent of their capital is required to
be mission-focused in a given year and an idiosyncratic, often ego-driven culture that can be
resistant to aligning with others’ goals or priorities. The goal of those in philanthropy in this
period should be, as philanthropic leader Paul Ylvisaker described their potential: to be
“society’s passing gear80” – that is to use their unfettered position to get out ahead of the curve
 Bellwether Education Partners 53

to invest in building innovative supply that will be needed down the road but doesn’t yet have
broad public appeal or awareness, and to accelerate key cultural and infrastructure changes
that are already in process but moving too slowly. Given their ability to focus on the future
and long-term benefit, they also should play an important role
encouraging or demanding that public sector leaders pay
As an “independent sector,” attention to and invest in long-term benefits, instead of only
foundations and the short-term electoral political pressures.
nonprofit organizations they
Private Sector. The private sector is generally acknowledged
support have the ability to
to excel at competition – and the rapid innovation and
be quite nimble, adaptive
development cycles that often stem from that competitive
and future-oriented, in a way
drive – as well as at efficiency, access to specialized talent,
that the public sector cannot and quicker growth than other sectors. The weaknesses of
easily do. those in the private sector include: defining success through
simplistic financial metrics, impatience for financial returns,
an increasing push for growth above profitability (with “value investors” the exception),
and (left to their own devices) a strong tendency to pursue efficiency over effectiveness. Their
focus in this time of transition should be to expand the pool of capital focused on early-
stage educational innovation, and to broaden the diversity and scale of capital by creating
new layering and sequencing approaches that combine traditional, impact and philanthropic
capital to better meet the needs of the field for risk and growth capital.

Recommendations
We shared this paper with a set of participants at the cross-sector Education Innovation
Forum & Expo, presented by the Aspen Institute in cooperation with the U.S. Department
of Education, in January 2011. These conversations helped to refine our own analysis and
informed the recommendations that follow.

1. Continue the culture shift toward performance and away from compliance. It is important
for policymakers to continue to push away from a rigid compliance culture and toward
a more performance-based culture and system – at every level, including federal, state,
district and school/classroom. These shifts are not easy and no one knows exactly how
to do them correctly, but it is crucial we don’t lose sight of the end goal in the face of
legitimate implementation challenges. Specific areas to focus on include:
54 Steering Capital: Optimizing Financial Support for Innovation in Public Education

a. Leadership. There is an enormous need for more and differently prepared leaders –
including policymakers and educators – who are capable of functioning in this new
environment. Some attention is being paid to rethinking teacher evaluation and
preparation, but far too little attention is being devoted to cultivating a pipeline of
managers and leaders, let alone adjusting the way they are prepared, licensed and
evaluated.
b. Assessments. It is critical that we accelerate the development of better assessments
that really measure what we care about and that provide rigorous data (including
for the many “untested subjects”) that can be used in performance-evaluation
systems.
c. Data. It is important to support the development of technology platforms that act
as the “backbone” or “middleware” for allowing practitioners, researchers and
policymakers to access disparate types of data (achievement, financial, operational,
programmatic) in order to conduct productivity analyses and identify the most
effective ways to invest their resources.

2. Enable faster and continuous learning cycles. As part of this shift, new mechanisms are
needed to support and encourage faster and continuous learning cycles to better inform
practice at every level, like that exemplified in the “90-day” cycle explained earlier.
Another promising idea would be the identification of a diverse set of what we call
“subsidized beta networks,” where a group of like-minded practitioners provide extra
access to researchers and developers in exchange for early access to new tools and funding
subsidies that would make adoption low-cost. These networks of subsidized early-
adopter customers would provide small learning spaces to help inform practice, accelerate
development and attract investors. We believe these networks might function best if each
shared a set of common pedagogical, philosophical, and technological elements, but
there would then need to be a diverse set of such networks to learn about applications in
different kinds of environments.

3. Invest in identifying and cultivating “smarter demand.” As we have laid out in a previous
paper, in most markets, suppliers listen to the needs of their customers to figure out
how to create appropriate products and services. In education, practitioners are often
overwhelmed with information and grappling with changing demands on them and their
craft, and they rarely know what is possible in other fields that might be useful to them, let
alone how they might assess the quality of what’s available in their field.
 Bellwether Education Partners 55

a. Early adopters. Like the “specialized beta networks” idea above, it would be
helpful to identify people and organizations willing to act as “early adopters” in
education – to try out and help refine new products and services before they are
widely available, and to inform innovators, investors and policymakers about their
needs in ways that will help steer resources toward solutions that improve their
practice and optimize student outcomes.
b. Aggregate demand. We need ways to aggregate the demand of thoughtful, cutting-
edge buyers, so they can help drive the market forward. Some, including Thomas
Kalil of the White House Office of Science and Technology Policy, have suggested
that adopting something like the Advance Market Commitment tool used in global
health might allow small groups of practitioners and funders to aggregate their
buying power in favor of developing innovative new solutions.
c. Information to inform smarter demand. Education practitioners need Consumer
Reports-like information to help them make sense of the available tools and
services, and to allow them to compare quality and price. The What Works
Clearinghouse was an effort in this direction, but perhaps more valuable still
would be an independent arbiter that can combine information and services to
coordinate the purchasing and sales process inside states and districts, in order to
make the buying process more effective for both practitioners and high-quality
providers.

4. Strengthen the R&D continuum. It is crucial that we invest more resources in a robust R&D
system, and do so in a way that capitalizes on the experiments and lessons of other fields.

a. Anchor in problems of practice. Create more-effective ways to identify emerging

problems of practice in the field, and ensure those problems influence the way
R&D resources are allocated.
b. Build the evidence base. Consider investing in a “knowledge scan” each decade,
as the National Aeronautics and Space Administration and National Science
Foundation have done, to measure progress and define collective priorities for
further knowledge development.
c. Connect research to development. Develop an R&D entity that functions much
more like DARPA in its independence from bureaucracy but tight connection to
problems of practice and fast learning cycles. ARPA-ED may be this entity.
56 Steering Capital: Optimizing Financial Support for Innovation in Public Education

d. Improve development. Multiple pathways are needed to develop solutions at the

early stage and at scale, some based in innovations from the field and others
intentionally harvesting insights from basic research. It will be important to tap
private sector expertise and solutions wherever possible, rather than excluding this
important source of innovation.

5. Align capital with the desired impact. We need to create mechanisms to better align
capital – private investment and philanthropy – with our goals for student achievement
and attainment.

a. Maximize available capital. We should continue to support the “sequencing” and

“layering” of private capital so that investors with different risk/return profiles
can combine their efforts in ways that lead to much greater investment activity
aimed at significant social impact. Technology could help coordinate these diverse
investor syndicates (and reduce the burden on entrepreneurs) if used to share
information (e.g. case studies, sample term sheets, diligence documents, common
reporting frameworks).
b. Create common metrics. To increase and improve private and philanthropic
investment activity and ensure that it is aligned in support of improved educational
outcomes, we must create clear and consistent metrics that incorporate the various
types of impact, including quality and quantitative metrics, as well as metrics that
integrate outcomes with return on investment, productivity or value assessments
(i.e., outcomes per dollar spent).
c. Invest in data infrastructure. Improved metrics will be overwhelming at best – and
meaningless at worst – if not accompanied by improved infrastructure and easy
to access and use tools that allow investors, innovators and educators to better
understand the data that are collected and to use that data to inform decision-
making.
d. Support intermediaries. Specialized intermediaries can take some of the burden
off foundations and investors, and provide targeted support – whether guidance,
information, funding or some combination of the three – to education innovators,
policymakers and even to investors themselves.
e. Align incentives with outcomes. We should invest in experiments that better
align investment incentives with desired outcomes, such as foundation-backed
performance guarantees, public sector investment incentives to attract capital to
 Bellwether Education Partners 57

key areas of need (such as rural success, English Language Learners or Special
Education) and performance-based contracts. Another idea would be to develop
a “patient capital” tax credit for education investments – similar to New Markets
Tax Credits – to attract more long-term capital to education investments.

Taken together, we believe these actions would begin to steer the educational capital markets
in a more productive direction: toward the rapid and widespread educational innovation and
improvement that our economy so desperately needs and that our children so clearly deserve.
58 Steering Capital: Optimizing Financial Support for Innovation in Public Education

Endnotes
1
Organisation for Economic Co-operation and Development, “Strong Performers and Successful Reformers in Education:
Lessons from PISA for the United States,” July 2010. http://www.pisa.oecd.org/dataoecd/32/50/46623978.pdf
2
Thomas Kalil and John Irons, “A National Innovation Agenda: Progressive Policies for Economic Growth and Opportunity
Through Science and Technology,” Center for American Progress, November 2007.
3
Paul Romer’s thinking and analysis of innovation is not disconnected from an interest in education: his father, Roy Romer, has
been actively engaged in educational reform and innovation for decades, first as governor of Colorado and later as superintendent
of the Los Angeles Unified School District; and Paul himself founded an online higher education company (Aplia).
4
Kim Smith and Julie Petersen, “Social Purpose Capital Markets in K-12,” as published in The Future of Educational
Entrepreneurship: Possibilities for School Reform, ed. Frederick Hess (Boston: Harvard Education Press, 2008).
5
Steven Johnson, Where Good Ideas Come From: The Natural History of Innovation (New York: Riverhead Books, 2010) 22.
6
Chris Anderson, “TED Curator Chris Anderson on Crowd Accelerated Innovation,” Wired (January 2011); http://www.
wired.com/magazine/2010/12/ff_tedvideos/all/1
7
“The Past, Present, and Future of Social Entrepreneurship: A Conversation with Greg Dees” (Developed as pre-reading for
the New Profit Gathering of Leaders 2006, http://www.caseatduke.org/documents/deesinterview.pdf); J. Gregory Dees, Kauffman
Center for Entrepreneurial Leadership. “The Meaning of Social Entrepreneurship,” October 1998.
8
http://www.ashoka.org/fellows
9
http://www.echoinggreen.org/
10
http://www.beyondgreypinstripes.org/index.cfm
11
http://www.netimpact.org/
12
John Kania and Mark Kramer, “Collective Impact,” Stanford Social Innovation Review (Winter 2011).
13
http://www.socialinvest.org/resources/pubs/trends/documents/2010TrendsES.pdf
14
“Investing for Impact: Case Studies Across Asset Classes,” Parthenon Group and Bridges Ventures, 2009; http://www.
parthenon.com/ThoughtLeadership/InvestingforImpactCaseStudiesAcrossAssetClasses
15
William F. Meehan et al., “Investing in Society: Why we need a more efficient social capital market – and how we can get
there,” Stanford Social Innovation Review Vo1. 1, No. 4 (2004).
16
Sarah Cooch and Mark Kramer, “Compounding Impact: Mission Investing by US Foundations,” Social Impact Advisors
(March 2007).
17
http://blog.acumenfund.org/2011/01/11/generosity-and-patient-capital/
18
http://www.jpmorgan.com/pages/jpmorgan/investbk/research/impactinvestments
19
“Investing for Impact: Case Studies Across Asset Classes.” Page 7.
20
For a more detailed description of these three different kinds of capital (start-up, operating and growth), see Smith and
Petersen, Social Purpose Capital Markets: Financial Capital for Social Entrepreneurs in Education, 2007.
21
http://www.investorscircle.net/
22
Safwan Zaheer, “Revenue Capital and Disruptive Models: Venture Funding Tools for Developing Nations,” MIT
Entrepreneurship Review; http://miter.mit.edu/article/revenue-capital-disruptive-models-venture-funding-tools-developing-nations
23
“Better World Books Creates Unprecedented Financial Incentives for Non-Profit Literacy Partners” (press release from Better
World Books, May 2009); http://www.betterworldbooks.com/custom.aspx?f=equity
24
Eric Liu and Nick Hanauer, “The ‘More What, Less How’ Government First Principles: The Role of Government,”
Democracy, Issue #19 (Winter 2011): 28-29.
25
Jessica Freidrich and Katherine Fulton, “Investing for Social and Environmental Impact,” (New York: Monitor Institute,
January 2009), 66, 68.
26
InSight at Pacific Community Ventures and The Initiative for Responsible Investment at Harvard University, “Impact
Investing: A Framework for Policy Design and Analysis,” January 2011, 26
27
Note here that we are not including the government’s extensive role in overseeing the traditional financial markets, even
though that clearly includes a social purpose aspect (balancing the profit-making interests of corporations and individuals with the
need for economic growth and stability).
28
“Demand for New Markets Tax Credits Remains Strong” (press release from the Community Development Financial
Institutions Fund, U.S. Department of the Treasury, June 2010); http://www.cdfifund.gov/news_events/CDFI-2010-18-CDFI-Fund-
 Bellwether Education Partners 59

Announces-Opening-2010-NMTC.asp
29
Robert Stavins, “In Defense of Markets,” September 14, 2010; http://belfercenter.ksg.harvard.edu/analysis/stavins/?p=775
30
http://www.nytimes.com/2010/12/17/science/earth/17cap.html
31
Kate Galbraith, “Europe’s Way of Encouraging Solar Power Arrives in the U.S.,” The New York Times, March 12, 2009;
http://www.nytimes.com/2009/03/13/business/energy-environment/13solar.html
32
http://www.gavialliance.org/vision/policies/in_financing/amcs/
33
http://www.personneltoday.com/articles/2010/05/27/55750/welfare-policy-to-be-overhauled-by-government.html
34
http://www.dwp.gov.uk/do cs/work-prog-event-slides.pdf
35
“Social financing engineering,” The Economist, March 23, 2010.
36
Liu and Hanauer, “The ‘More What, Less How’ Government First Principles: The Role of Government,” Democracy, 27.
37
Jeffrey B. Liebman, “Social Impact Bonds: A promising new financing model to accelerate social innovation and improve
government performance,” Center for American Progress, February 2011.
38
Geoff Mulgan, “Measuring Social Value,” Stanford Social Innovation Review (Summer 2010); http://www.ssireview.org/
images/articles/2010SU-Feature_Mulgan.pdf
39
As of December 2010, 43 states had promised to adopt these emerging standards.
40
Marie Bjerede, “Education as a platform,” O’Reilly Radar, September 2010; http://radar.oreilly.com/2010/09/education-as-a-
platform.html
41
American Enterprise Institute policy scholar Frederick Hess and his pseudonymous colleague Francesca Pickett highlight
some of the most outlandish session titles each year. Here’s the 2010 edition: http://blogs.edweek.org/edweek/rick_hess_straight_
up/2010/04/making_the_most_of_the_first_day_at_aera.html
42
“An Interview with Tom Kalil: Where Politics, Policy, Technology, and Science Converge.” ACM Publication, January 2004.
43
http://ies.ed.gov/aboutus/
44
“Director’s Final Proposed Priorities for the Institute of Education Sciences,” November 1, 2010; http://ies.ed.gov/director/
board/priorities.asp
45
Steven Farkas and Ann Duffett, “Cracks in the Ivory Tower? The Views of Education Professors Circa 2010,” Thomas B.
Fordham Institute, September 2010; http://www.edexcellence.net/publications-issues/publications/cracks-in-the-ivory-tower-1.html
46
Anthony Bryk and Louis Gomez, “Ruminations on Reinventing an R&D Capacity for Educational Improvement”
(prepared for the American Enterprise Institute Conference, “The Supply Side of School Reform and the Future of Educational
Entrepreneurship,” October 25, 2007). Revised January 2, 2008.
47
“90-Day Cycles and Improvement Research,” Carnegie Foundation for the Advancement of Teaching, January 2011.
48
Interview with the author, January 2011.
49
“Appendix C: Catalyze Breakthroughs for National Priorities,” in “Strategy for American Innovation: Securing Our
Economic Growth and Prosperity,” White House, February 2011; http://www.whitehouse.gov/innovation/strategy/appendix-c
50
Bryan Hassel and Daniela Doyle, “Shifting Risk to Create Opportunity: A Role for Performance Guarantees in Education”
(Working Paper 2010-02, Future of Education Project, AEI).
51
http://www.2theadvocate.com/blogs/politicsblog/112128734.html
52
“A Smarter Teacher Layoff System: How Quality-Based Layoffs Can Help Schools Keep Great Teachers,” The New Teacher
Project, March 2010; http://www.tntp.org/index.php/publications/issue-analysis/quality-based-layoffs/
53
Larry Berger and David Stevenson, “K-12 Entrepreneurship: Slow Entry, Distant Exit” (prepared for the American Enterprise
Institute Conference, “The Supply Side of School Reform and the Future of Educational Entrepreneurship,” October 25, 2007);
http://www.aei.org/docLib/20071024_BergerStevenson.pdf
54
Ibid., 16.
55
The Parthenon Group, “Next Generation Learning Supply Side Supports,” November 2010.
56
“Disrupting How and Where We Learn: An Interview with Clayton Christensen and Michael Horn,” Phi Delta Kappan
(December 2010/January 2011): 38.
57
The William and Flora Hewlett Foundation, “Annual Report,” 2006, xi.
58
Marguerite Roza, interview with the author, January 2011.
59
Ben Gose, “Accounting Helps Charities Raise Growth Funds, for a Price,” Chronicle of Philanthropy (September 6, 2007).
60 Steering Capital: Optimizing Financial Support for Innovation in Public Education

60
http://iris.thegiin.org/
61
http://edinnovation.asu.edu/sponsorship/
62
National Venture Capital Association’s NVCAccess site: Spotlight on Education (http://nvcaccess.nvca.org/index.php/topics/
commentary/151-nvca-spotlight-on-education.html), Spotlight on Clean Tech (http://nvcaccess.nvca.org/index.php/topics/nvca-
news-a-initiatives/153-spotlight-on-clean-tech.html), Spotlight on Life Sciences (http://nvcaccess.nvca.org/index.php/topics/nvca-
news-a-initiatives/154-spotlight-on-life-sciences.html)
63
“Education Innovation Network Case Statement.” http://edinnovation.asu.edu/blog/wp-content/uploads/2010/12/pos_
statement.pdf
64
http://www.gatesfoundation.org/press-releases/Pages/next-generation-learning-challenges-101011.aspx
65
http://www.geofunders.org/the-money.aspx
66
Sean Stannard-Stockton, February 16, 2011, comment on Tactical Philanthropy Advisors. http://www.tacticalphilanthropy.
com/ 2011/02/philanthropic-equity-performance-report.
67
http://www.gatesfoundation.org/about/Pages/program-related-investments-faq.aspx
68
http://www.gatesfoundation.org/press-releases/pages/inigral-receives-investment-110209.aspx
69
http://www.aecf.org/Newsroom/NewsReleases/HTML/2010Releases/~/media/PDFFiles/Newsroom/FINAL%20% 20%20
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Steven Godeke and Doug Bauer, “Philanthropy’s New Passing Gear: Mission-Related Investing: A Policy and Implementation
Guide for Foundation Trustees,” Rockefeller Philanthropy Advisors, 2008.
71
http://foundationcenter.org/findfunders/statistics/pdf/02_found_growth/2008/06_08.pdf
72
“Aspire Public Schools Secures $90 Million Bond Financing for Permanent Facilities with Guarantees from Gates and Charles
and Helen Schwab Foundations,” May 6, 2010; http://www.gatesfoundation.org/press-releases/Pages/expanding-aspire-public-
schools-pri-100506.aspx
73
http://www.growthphilanthropy.org/about.cfm
74
Arthur M. Okun. Equality and Efficiency: The Big Tradeoff. Brookings Institution Press, 1975.
75
Mark Schneider, Paul Teske, and Melissa Marschall, Choosing Schools: Consumer Choice and the Quality of American
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76
http://www.edweek.org/ew/articles/2007/09/05/02hill.h27.html
77
Jeff Henig, “Portfolio Management Models and the Political Economy of Contracting Regimes,” in Between Public and
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78
Liu and Hanauer, “The ‘More What, Less How’ Government First Principles: The Role of Government,” Democracy, Winter
2011.
79
Johnson, Where Good Ideas Come From, 243.
80
See Paul Ylvisaker, “The Spirit of Philanthropy” (address to the 38th Annual Conference of the Council on Foundations,”
Atlanta, GA, March 1987); reprinted in Virginia M. Esposito, ed., Conscience & Community: The Legacy of Paul Ylvisaker 346
(Peter Lang: 1999).