Venture Capital in Education—Education Technology and On-Line Charters Viewed as Investments

Late last week The Nation posted on-line a series of articles that will appear in the October 13, print edition of the magazine—a special issue on education.  These are in-depth pieces on issues such as the crisis in Philadelphia’s public schools, the role of teachers unions, lack of regulation in charter schools, Eva Moskowitz’s Success Academy Charters, and two articles this blog will explore today on the push by so-called “education reformers” to promote the use of technology and on-line education—including Lee Fang’s blockbuster investigation, Venture Capitalists are Poised to “Disrupt” Everything About the Education Market.  Many of the pieces were originally behind a paywall, but The Nation has now made them accessible to all readers.  As the week continues, this blog will explore some of the other articles in The Nation‘s special issue on education.

“As the articles in this issue illustrate,” write the magazine’s editors as they introduce the special issue, “the strategies pursued by education reformers frequently dovetail with those of austerity hawks.  The latter burnish their conservative credentials by cutting budgets and defunding schools.  The reformers sweep in to capitalize on the situation, introducing charter chains like Rocketship and K12, which produce no real benefits for children.  The chains do, however, generate cash for investors, as a new trove of public money is directed to private coffers.”

Pointing out that in the last quarter century, the marketplace has “carefully crafted business strategies (that) have transformed markets to create huge profits in unlikely sectors”—most notably healthcare—Fang writes, “Next year, the market size of K-12 education is projected to be $788.7 billion.  And currently, much of that money is spent in the public sector. ‘It’s really the last honeypot for Wall Street,’ says Donald Cohen, the executive director of In the Public Interest, a think tank that tracks the privatization of roads, prisons, schools and other parts of the economy.”  Fang quotes a venture capital investor who believes that “despite the opposition of ‘unions, public school bureaucracies, and parents,’ the ‘education market is ripe for disruption.'”

Noting that key staffers came to the U.S.  Department of Education straight from the  “education investment community,” Fang traces the role of the Obama Administration as promoter of the invasion by the private sector into public education.  One enormous market opportunity is emerging, for example, to provide services connected with the Common Core standards, whose expansion across the states will involve the tests themselves developed by two consortia and marketed by publishing companies, aligned textbooks and computer programs, the necessary computers or tablets by which students are to be tested on-line, and the grading and analysis of the tests. (This blog recently covered the ongoing Los Angeles iPad fiasco.)

Fang reminds readers that Ted Mitchell, recently confirmed as Under Secretary of Education, came to the Department of Education from a position as chief executive of the NewSchools Venture Fund.  Jim Shelton, Deputy Secretary, came from the Bill and Melinda Gates Foundation, and before that NewSchools Venture Fund.  Shelton is also “a longtime education investor and the former co-founder of LearnNew, a charter chain that was sold to Edison Learning, a for-profit charter management company.”  Shelton is quoted by Fang as explaining “that the Common Core standards will allow education companies to produce products that ‘can scale across many markets,’ overcoming the ‘fragmented procurement market’ that has plagued investors seeking to enter the K-12 sector.  Moreover, Shelton and his team manage an education innovation budget, awarding grants to charter schools and research centers to advance the next breakthrough in education technology.”  Shelton has predicted that education innovation will spark the next “equivalent of Google or Microsoft to lead the global learning technology market.”  Says Shelton, “I want it to be a U.S. company.”

Fang also traces a changing culture across the states including Democrats and Republicans alike in big city mayors’ offices and state legislatures, a culture that is comfortable “to divert taxpayer funding to charter schools, which are often run as for-profit companies and are more willing to embrace tech-centric classroom solutions….” Fang’s case study is K12, an on-line-virtual charter school,  “a for-profit charter behemoth that enrolls 123,259 students” and that is a darling of Wall Street, despite its notorious reputation.  K12, through its on-line affiliates across the states, enrolls children to study at home on their computers.  Despite that achievement is low and dropout rates are high, state legislators are driving money to such schools at virtually the same rate as to public schools where there is a significantly greater need for staff, transportation, and buildings in addition to other services.

Fang reports that only 27.7 percent of K-12’s on-line schools met the No Child Left Behind Adequate Yearly Progress standard, compared to a 52 percent average at brick and mortar public schools.  In Colorado, Fang reports that one study showed half of the online students at K12 left within a year. Tennessee actually closed K12’s Tennessee Virtual Academy, and recently K12’s largest on-line affiliate, Agora Cyber Charter in Pennsylvania is considering severing ties to K12 due to K12’s manipulation of data to hide the school’s dropout rate.  On Wall Street, however, K12 is promoted as a “solid investment opportunity.”  Baird Equity Research has actively pushed K12 stock because of its potential for growth, based on “K12’s success in working with state policymakers and school districts to enable the expansion of virtual schools into new states or districts.”  Investors are encouraged to learn about the amount K12 spends on advertising and lobbying. “The company has years of experience in successfully lobbying to get legislation passed to allow virtual school to operate,” says Baird in a note to its investors.

While Fang traces the waste of public funds and failure to educate children in for-profit, on-line schools, in  What Happens When Your Teacher Is a Video Game? Gordon Lafer explores the operation of Rocketship Education, a company that has been expanding from California to Texas, Tennessee, Wisconsin, and Washington, D.C.  “Corporate lobbyists are increasingly promoting a type of charter school that places an emphasis on technology instead of human teaching… Rocketship’s model is based on four principles.  First, the company cuts costs by eliminating teachers.  Starting in kindergarten, students spend about one-quarter of their class time in teacherless computer labs, using video-game-based math and reading applications.  The company has voiced hopes of increasing digital instruction to as much as 50 percent of student learning time.  Second, Rocketship relies on a corps of young, inexperienced, low-cost teachers… Third the school has narrowed its curriculum to a near exclusive focus on math and reading.  Finally, Rocketship maintains a relentless focus on teaching to the test.”  Rocketship investors include Reed Hastings, CEO of Netflix, and venture capitalist John Doerr.  Hastings has become well-known as a national spokesman for the elimination of locally elected boards of education, and Lafer explains the reason: “As Hastings explains, ‘School districts [are hard] to sell to because [they] are really reacting to voter forces more than to market forces.'” “By contrast, public-school curricula are set by officials who are accountable to a locally elected board prohibited from any financial relationship with vendors.”

Lafer emphasizes that experimentation with technology-driven schooling is currently an inner-city phenomenon:  “Sixty years after Brown v. Board of Education, a new type of segregation is spreading across the urban landscape.  The U.S. Chamber of Commerce, the American Legislative Exchange Council (ALEC), Americans for Prosperity and their legislative allies are promoting an ambitious, two-pronged agenda for poor cities: replace public schools with privately run charter schools and replace teachers with technology… The destruction of public schooling starts in poor cities because this is where parents are politically powerless to resist a degraded education model. But after the industry has taken over city school systems, it will move into the suburbs.  Profitable charter ventures will look to grow indefinitely, until there are no more public schools to conquer.”  “As Rocketship co-founder John Danner explains, critics shouldn’t worry about charter schools skimming the best students, because eventually ‘we’re going to educate all of the students, so there’s nothing left to skim.'”


Chicago’s UNO Charter Scandal Tarnishes Luster of Arne Duncan’s Hands Off Strategy

A dozen years ago, President George W. Bush and Secretary of Education Rod Paige, the former superintendent of the Houston Public Schools, brought us all the test-and-punish “Texas miracle” in the form of the No Child Left Behind Act.  We all know what happened to that so-called miracle.

Now several years into Arne Duncan’s tenure as U.S. Secretary of Education, we continue to learn more about the “Chicago miracle” brought to us by Duncan, the former Chief Executive Officer of the Chicago Public Schools, and the man who has infused into federal education policy the “miracles” of innovation and freedom from too much red tape.  These were the signatures of the school reform he presided over in Chicago in the form of Renaissance 2010, a decade-long program that closed public schools and launched a vibrant charter sector.

We can now watch the results quietly playing out in the U.S. Department of Education. According to Education Week writer, Alyson Klein, for example, yesterday San Antonio, Philadelphia, Los Angeles, Southeastern Kentucky, and the Choctaw Nation were designated as “Promise Zones.” Klein notes that future funding for this program is unsure: “The roughly $60 million Promise Neighborhood program was initially pretty popular in Congress.  But it has faced pushback, as lawmakers have questioned whether it makes sense to dole out a bunch of planning grants to finance programs that may or may not come to fruition.  So far, most communities that have gotten ‘planning grants’ haven’t made it to the implementation stage.”  There are similar questions about the effectiveness of the Race to the Top grants and the School Improvement Grants program, which is currently undergoing a formal re-evaluation.

Questions about the local impact of Duncan’s programs in Chicago have exploded into an enormous scandal around Chicago’s best-known and fastest growing local charter chain, the UNO (United Neighborhood Association) Charter Schools.  This week, Chicago Magazine published The Rise and Fall of Juan Rangel, the Patron of Chicago’s UNO Charter Schools, an extraordinary investigation of one of the biggest and supposedly most successful charter empires nurtured throughout Duncan’s tenure as CEO of the Chicago Public Schools.

Reporter Cassie Walker Burke with a team from the Better Government Association spent months investigating the crisis in the United Neighborhood Organization and its charters: “A torrent of bad publicity about insider contracts, nepotistic hires, and political cronyism at UNO.  Millions in grant money yanked from the organization and its network of 16 charter schools.  A U.S. Securities and Exchange Commission investigation into one of the bond deals that helped drive UNO’s rapid expansion.  And, of course, Rangel’s December departure from the juggernaut he had built…”

UNO began opening charter schools in 1997, benefiting from the array of funding streams available in Chicago to entrepreneurs who wanted to enter the charter sector.  According to Chicago Magazine, UNO charter schools have received $280 million in public money in the past five years. “CPS, like many authorizing districts around the country, gives charter operators a guaranteed base allotment per student—in Chicago, that amount currently ranges from $4,140 to $5,130.  On top of that, charters get additional public funds for facility rent and maintenance and even more if they teach large numbers of kids who are poor or are learning English (as UNO schools do).  And that’s not all: there is a blend of local, state, and federal monies dedicated for lunch programs, special education, teacher training, and a long menu of services.  Charters also attract serious dough from certain foundations.  The Dell Foundation has given UNO at least $1.5 million, and the Walton Family Foundation has forked over more than $3 million.”

In 2009, the Illinois legislature awarded UNO a $98 million grant to build more schools, but the grant’s requirements specified that UNO “must immediately notify the Illinois Department of Commerce and Economic Opportunity that administered the grant in writing of any actual or potential conflicts of interest.”

Beginning in February of 2013, the Chicago Sun Times exposed, “a long line of contractors, plumbers, electricians, security firms, and consultants tied to many of the VIPs on UNO’s organizational chart….  Rangel spelled out in tax documents and in later bond disclosures that the construction firm d’Escoto Inc.—owned by former UNO board member Federico d’Escoto, the brother of Miguel d’Escoto—was the owner’s representative on three projects funded by the grant… The vendor lists were peppered with other familiar names: a $101,000 plumbing contract awarded to the sister of Victor Reyes, UNO’s lobbyist, who helped secure the state grant; a $1.7 million electrical contract given to a firm co-owned by one of Ed Burke’s precinct captains; tens of thousands in security contracts to Citywide Security, a firm that had given money to Danny Solis, and to Aguilla Security, managed by the brother of Rep. Edward Acevedo, who voted for the $98 million for UNO.”  The list of conflicts of interest continues page after page.

Today UNO’s schools serve 7,500 students.  While UNO’s programming may be innovative and the facilities gorgeous, the students’ future is also connected to the shady business practices that threaten the ongoing operation of their schools.

According to Cassie Walker Burke: “UNO and its CEO thrived mainly because of gaping loopholes in the charter school system.  While UNO has received a staggering $280 million in public money over the past five years to spend on education, neither Chicago Public Schools nor the Illinois State Board of Education provided enough oversight.  Without that, insiders say, UNO developed a free-wheeling culture that was ripe for abuse.”

William Lager and Ohio’s ECOT: Parasite Feeding on Tax Dollars

In Ohio’s First Public School Hundred-Millionaire: ECOT Founder William Lager, Plunderbund, the Columbus Ohio blog, continues to track the riches in tax dollars being siphoned by William Lager, owner of the Electronic Classroom of Tomorrow (ECOT), Ohio’s largest on-line academy, and the two private companies Lager owns that provide all curriculum and services for ECOT.

ECOT’s 13,836 students fare poorly on standardized tests, and its four-year graduation rate is only 35 percent, rising to 38 percent in five years.  Plunderbund has updated all numbers as of the end of 2013.  Since 2000, William Lager’s political donations to Ohio legislators total $1,444, 242.46.

Altair Management Company and IQ Innovations, Lager’s private companies that provide services for ECOT have each received over $50 million in tax dollars since 2001.  In December of 2013, ECOT won an Ohio Straight-A Fund innovation grant of $2,951,755, approved by a State Control Board, three of whose members, according to Plunderbund, have shared $57,000 in campaign contributions from William Lager.

In Ohio political contributions continue to protect ECOT at the expense of traditional public schools.  Ohio’s school funding takes from state and local tax dollars for traditional public schools to support charters including the on-line academies like ECOT; see this post.  And the federal government that has created incentives for the authorization of a growing charter sector has at the same time made no attempt to regulate them.