CLASS CLOWNS

Why can’t Johnny make a buck in the school game? Perhaps because, though the potential earnings are huge, the barriers to entry are formidable, as a former investment banker and current business professor charts.

“Some of the most respected minds of our generation have invested many billions of dollars in for-profit education enterprises,” writes Knee (Professional Practice/Columbia Business School; The Accidental Investment Banker: Inside the Decade That Transformed Wall Street, 2006, etc.). “And, with surprising regularity, they have lost their shirts.” One of the four case studies is that of Chris Whittle, the media maven–turned–educational entrepreneur: “What is surprising, even shocking, is that for over twenty years, in the educational arena, Chris Whittle has been able to continue to separate sophisticated investors from their money despite a plethora of red flags that in any other context might be viewed as disqualifying.” Even so, Whittle’s venture into the educational market had a solid basis, if you consider that the sector amounts to something like $1.3 trillion, mostly funded from government sources. That explains why sullied investor Michael Milken turned to the education market with an enterprise that, it seems, failed to recognize what to Knee seems obvious: that some markets, especially higher education, are tough to crack, such that only one school, Stanford, has managed to join the world’s elite institutions in the last half-century. The author’s dissections of various sectors of the market, from textbook publishing to child care centers, point to a common lesson, namely that most of it does not respond to the traditional economics of scale. School governance tends to be intensely local, for instance, and thus “a major textbook publisher must produce literally hundreds of thousands of SKUs of its core products to respond to local requirements.” It’s a hard arena even for a giant to make a living in, much less smaller players, no matter how good and noble the intentions.

A tough-minded study that shows there’s gold in them there halls, but getting to it is a problem—or, an entrepreneur might say, a challenge.