Universities Are Missing Out on an Explosive Growth Sector: Their Own

Education is on the brink of rapid change that will create a lot of value for innovators. But still sitting on the sidelines? Those who make the decisions and control the purse strings at legacy higher education institutions.

One representative example: April’s Education Innovation Summit, where more than 2,000 people energetically discussed how technology and markets are charting the future of education globally. The summit’s organizers claimed that 80 universities were in attendance, but a closer look at the attendee list revealed only a handful of high-level decision makers — and exactly one university endowment. Most of the attendees from post-secondary institutions were professors or deans of schools of education. Meanwhile, the halls were filled with hundreds of investors and hundreds more entrepreneurs.

I’ll admit that I’m not an entirely disinterested observer when I look upon the $450 billion currently sitting in university endowments in the U.S. I’m a partner at a venture capital firm, and venture capital has long been a key way for the top-performing endowments to deploy capital. But when I talk to general partners at venture capital funds that focus on education — Learn Capital, where I work, Rethink Education, and University Ventures — they report that university endowments have not been nearly as interested as other institutions in the work we’re doing.  One outside manager of many endowments I spoke to confirmed to me that there has been “no mandate” from clients to be investing in the future of higher education.  “I haven’t heard that at all,” was the quote. At the Education Innovation Summit the only university endowment in attendance was the University of Texas‘s UTIMCO.

The business models of universities are being challenged, and it looks like the universities are out to lunch. The transformation in education technology and markets is happening with the business leaders and money-men of higher education barely present. Not only will the spoils of this sea change largely go to private markets, with those spoils will go the prestige and legacy of those who invented the future. This is a tragic waste, given that universities are not only our greatest repositories of educational talent, but among our greatest repositories of investable capital as well.  Those who manage money for higher education, I propose, need to get much more interested in the market they are in.

The challenges to the traditional higher education model are well known.  This summer, a well-produced documentary, Ivory Tower, will likely sharpen the public discussion.  In a nutshell, the credit hour, the seat in the lecture hall, the tenured professor with a two or three course load, the four-year tuition, and the two-year professional degree will all be up for grabs in the next 20 years.  The more astute higher education administrators tell me they can see this happening now: Tuition discount rates are at record highs, and the summer scramble is on to hit admission targets as enrollments drop. Debt levels are unsustainable, for both students and many universities.   Meanwhile, every post-secondary institution in America is scrambling to bring more full-pay foreign students to their degree programs just to make the numbers work.

Many universities will figure out how to thrive under a new world order, but there are not-so-quiet alarm bells that suggest many will not. (See comments by Clayton Christensen and Mark Cuban). There are examples of universities forging ahead. Arizona State University, Southern New Hampshire University, and Abilene Christian University are names that sit alongside the usual MIT and Stanford.  Still, most colleges are lucky if they can afford even a small team charged with developing new lines of business and new business models. One senior administrator with bold ideas lamented to me that the intention and impetus exists at his well-known college, but there’s just no capital to try to experiment, and thus no room for failure. As a result, his university’s business model is in a holding pattern, and so is nearly everyone else’s.

Many universities manage billions in research funding, but there is usually no R&D budget for their own product, namely delivering education to willing buyers. Those administrators in the position to understand the imperative to innovate don’t actually have control over purse strings. Presidents and provosts will tell you: operating budgets are tight.  Institutions have been raising tuition just to keep the lights on.

Meanwhile, trustees control universities’ sometimes-giant endowments, and most often delegate this control to asset managers who treat the endowments as pools of money with the sole purpose of creating more money.  They’re quite good at it, on the whole.  The National Association of College and University Business Officers Study on Endowments reveals that endowments are performing enviably — with returns of near 12% in 2013. Their top-performing alternative strategy for the year was distressed debt (quite the irony, given all the distressed student and university debt out there).

There’s a systemic Catch 22, one outsourced endowment manager told me.  The trustee committees and endowment managers are fine with  making investment decisions about any old asset.  But when it comes to education, they feel like that’s too close to home, so they pass the buck or avoid the decision entirely.  But if you go to the operational side of the institution, they feel investing capital is the business of their money managers, so they in turn pass the buck or avoid the decision entirely.  It’s a game of responsibility hot potato.

Thus, the asset managers are more comfortable with hedge funds, real estate holdings, and trading strategies than in market opportunities in education. This is a mistake from a purely fiduciary perspective — the new market actors in education are making money in droves. More importantly, if the endowment is there to support the future of an institution that will need to reinvent itself, it should be investing in that reinvention.

There is a precedent for endowment managers to see capital as a tool to help the university thrive — investing in local real estate.  Universities have a vested interest in seeing their surrounding communities flourish as a way to attract students and faculty.  Harvard notoriously owns (and manages) much of Cambridge, Mass., but even my alma mater, Clark University, which has a small endowment by comparison, has actively bought up much of the real estate around it in order to make downtown Worcester, Mass., a better place to be.  This has generally been a successful strategy for universities in both financial and strategic terms. But these days the mantra is “more clicks, less bricks,”  and universities should be using their capital to manage their digital surroundings as well.

Instead, innovation in education is mostly happening outside of the university, with entrepreneurs leading the way.  Coursera and General Assembly (both in Learn Capital’s portfolio) have rapidly scaling businesses.  When the Minerva Project can get Larry Summers to chair its advisory board, when Coursera can recruit the former president of Yale as its CEO, and General Assembly can endow a scholarship fund with money from Microsoft and Google, you know that there’s been a real shift in the center of power.

As one university trustee said to me, “We need to get in the game. Right now, we’re road kill.”  It doesn’t need to be this way. There’s a scenario where everyone emerges a winner.  But it requires that we all have a seat at the table, and right now, we’re not even in the same rooms. For universities, joining the league of innovation may require casting aside the firewall between endowment money and innovation in education.

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