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Published in Print: December 1, 1999, as Entrepreneurs Hoping To Do Good, Make Money

Entrepreneurs Hoping To Do Good, Make Money

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Erik Heyer works in a midtown Manhattan high-rise on Fifth Avenue, flanked by a Brooks Brothers store on one side and the National Basketball Association shop on the other. He usually wears a suit, and his résumé includes an M.B.A. from the Harvard Business School and investment-banking stints at J.P. Morgan and Goldman Sachs.

Not the sort of guy you'd expect to be making a living in education.

But Mr. Heyer, 27, is the vice president of development for Victory Schools Inc., a for-profit education management company that opened its first charter school this fall and plans to open several more in the New York area next year. It's his responsibility to negotiate the deals that get the schools up and running.

About This Series
Part 1: Nov. 24, 1999.
An overview of the new "education industry"
Part 2: Dec. 1, 1999.
The industry's players: from M.B.A.s and CEOs to teachers turned entrepreneurs
Part 3: Dec. 8, 1999.
Inside a public school that's run for profit
Part 4: Dec. 15, 1999.
The bottom line: Is this trend good for students?
Funding for this series is provided in part by the Ford Foundation, which helps underwrite coverage of the changing definition of public schooling.

A decade ago, Mr. Heyer's self-described "dream job" didn't exist. But today, he's just one of many entrepreneurs who are participating in a burgeoning education industry that is very much a creature of the 1990s.

While certain businesses have long profited from education—just think of textbooks, cafeteria food, and school supplies—the new education industry is expanding into the area of instruction itself. Tutoring, college counseling, even running entire schools have all opened up as markets for the private sector.

Of course, such opportunities wouldn't be possible without people willing to create them. Most fall into two categories: educators turned entrepreneurs, and businesspeople attracted to the education market, says Jeffrey A. Fromm, the president of KnowledgeQuest Ventures, a New York-based firm that provides consulting and financial services to education-related businesses.

He describes these entrepreneurs generally as "mission driven" and motivated by a "dual bottom line"—concerned about making a difference as well as making money.

Among those who have approached him for funding, "I haven't run into many crooks," Mr. Fromm said. "I have run into people who have so strongly emphasized just seeing a financial opportunity rather than caring about education. But that's the minority—under 5 percent of the things I see."

Henry M. Levin, an education professor and the director of the Center for the Study of Privatization in Education at Teachers College, Columbia University, says the industry could attract a mix.

"Some people starting for-profit schools or businesses have a very strong sense of commitment to education," Mr. Levin said. "Some may not."

Industry participants interviewed for this article gave a wide range of reasons for why they got into the education business. Some see flaws in their own education or their children's education. Some see the competition they offer spurring improvement in the education system overall. Some see an inherent benefit in opening schools and education-related services to the forces of the free market.

But all see the chance to earn a piece of the estimated $350 billion spent annually on K-12 education in the United States.

'Impact Player'

For Erik Heyer, the lure of joining a start-up company in a nascent industry proved irresistible. And the challenge of taking on and revolutionizing what he sees as a "clearly deficient" education system made it even more so.

"For someone my age to be able to come into an industry and feel like an impact player is really exciting," he said.

After deciding to major in engineering at the University of Virginia, he thought about becoming a teacher. But a summer internship in banking led to a job offer after he graduated, and he left for Wall Street.

"Those plans for going into education kind of drifted away," said Mr. Heyer, the son of a kindergarten teacher. But he stayed connected to education in several ways.

While working in investment banking, he tutored New York City public school students and taught high school seniors in a weekly economics class as a volunteer. Then, before starting business school, he took off a few months and worked at Beacon Education Management LLC, another company that runs charter schools for profit. Once at Harvard, Mr. Heyer helped launch a student club dedicated to education, drawing members from across the university's graduate schools. As part of a field-study project, he worked as a consultant to a Boston charter school run by the New York City-based Edison Schools Inc.

Despite his interest in the field, Mr. Heyer never took a course in education while at Harvard.

"Frankly, I don't think it's necessary," he said. "I'm a big believer in the trial-by-fire approach and learning by doing."

Through a business school professor, Mr. Heyer met Victory Schools' founder and chief executive officer, Steven B. Klinsky, a partner at the leveraged-buyout firm Forstmann Little & Co. and the creator of a nonprofit after-school program for disadvantaged children in Brooklyn. Mr. Klinsky offered him a job this past spring, and he jumped at the chance.

In addition to his job with Victory, Mr. Heyer plans to help manage a private equity fund Mr. Klinsky is putting together to invest in education and training.

While Mr. Heyer says it was tough to sit back and watch B-school classmates take jobs in more traditional areas such as banking and consulting—which often offer six-figure starting salaries and hefty signing bonuses—he thinks his choice will pay off in the long run, both financially and personally.

"The opening price of an initial public offering you're working on in banking is a little different motivation than the fate of 250 schoolkids in the worst district in the Bronx," he said. "Yes, I'll be paying down my business school debt a bit slower. Yes, I could be making twice as much on Wall Street now. I guess it's a Gen X'er mind-set of do what makes you happy, not what pays you the most."

He hesitates for a moment. "But if there were no money to be made, I wouldn't be here."

'Guilt Factor'

Three years ago, Paul Wetzel left the job he'd done for a decade—teaching at middle schools in Greenville, S.C.—and set up shop tutoring out of his home.

Today, Wetzel Educational Services operates out of a 1,200-square-foot office in a suburban strip mall next to H&R Block and State Farm Insurance. Mr. Wetzel employs 28 part-time and three full-time workers offering test preparation, individual and group academic tutoring for middle and high school students, and English-as-a-second-language instruction to area businesses.

Chris Yelich, the executive director of the Association of Educators in Private Practice, says there are plenty of "little people" like Mr. Wetzel in the education industry.

"But they're not the ones making the headlines, it's the Edisons," Ms. Yelich said.

A former high school science teacher, Ms. Yelich says that while the number of known educators-turned- entrepreneurs is larger at the decade's end than its beginning, it's unclear whether their ranks have truly grown, or whether they're just more comfortable coming out of the woodwork with their for-profit businesses.

For whatever reason, Ms. Yelich's Watertown, Wis.-based group has swelled from 16 members in 1990 to 750 in 1999.

"In the beginning, we had a hard time even explaining to people who we were. They just didn't get it," Ms. Yelich said. "The whole notion that teachers are professionals and can hang out a shingle was so foreign."

Mr. Wetzel says he is content with being a "little fish" in the national education industry.

For years, he says, he felt more like "a factory worker and a babysitter" than a teacher. He chafed at lacking the power to make key decisions and having to follow someone else's rules. He'd tutored students for extra income for years and liked the idea of being able to work with them one-on-one or in small groups instead of in a class of 34.

And he was frustrated, with a decade of teaching experience and a master's degree, to be making $32,000 a year.

"I really wanted a better challenge. And to take on a risk and get compensated for it," the 34-year-old father of two said.

Mr. Wetzel acknowledges that the money-making side of his business took some grappling with initially. He says he had a hard time charging fair-market prices for his services, because of what he calls the "guilt factor."

"You know, the idea that it's obscene to charge money for this. It took a year or two to realize I was in business to make money," he said. "The idea is kind of ingrained in you as a teacher, that it's a public service. It's almost like a ministry. Doctors and lawyers who go to school for eight years can make money, but you can't. So it was a different feeling, and a hard one. But you know, I'm here to make a living, too."

Today, Mr. Wetzel still works directly with students, but that piece of his job is growing smaller as he hires more instructors.

"I'm much more of a businessperson now than a teacher," he says. "But I feel like I'm in this for much the same reason I was as a classroom teacher. It's the people. And the teacher-student relationship is very fulfilling. I still feel that with my instructors now, too."

"I never thought I would wind up doing this as a business when I was in ed school. Never," he said, chuckling softly. "It makes me wish I quit teaching a long time ago."

The Businessman

J.C. Huizenga readily admits that he's a businessman, not an educator. The 48-year-old has turned a hefty family inheritance and some savvy investments of his own into a small empire of manufacturing and financial businesses.

In 1995, Mr. Huizenga expanded into education by founding National Heritage Academies, one of the nation's largest for-profit education management companies operating charter schools.

"It wasn't until my son was born that the motivation really came into play," he said of 5-year-old David.

He and his wife, formerly a teacher at a Christian school, discussed the options for their son: public school, private school, or home schooling.

"I said, wouldn't it be neat if we could come up with the best of all worlds," said Mr. Huizenga, who recalls with fondness the tight-knit community and disciplined environment of his own education in private Christian schools. "And out of that came the thought of, 'Gee, we'll apply for a charter and see what happens.' "

What's happened is that in the four years since its inception, the Grand Rapids, Mich.-based company has grown from one charter school with fewer than 200 students to 22 charter schools with 7,900 students in Michigan and North Carolina. National Heritage Academies plans to add roughly 15 more schools over the next two years and is eyeing other states, such as New York.

Mr. Huizenga hired education experts to write National Heritage's curriculum and oversee the schools, but he played a role in setting the broad mission of the schools, all of which, he says, offer a back-to-basics education with a heavy dose of "moral-character development."

"People used to pour their lives into their students, and I think to a certain degree when the government gets involved in things, they get more impersonal and institutionalized," Mr. Huizenga said. "Our desire was to bring back that intimacy of education. Not only do the teachers care, the parents care, and the students start to care."

Some parents and the American Civil Liberties Union of Michigan, however, have accused National Heritage Academies of crossing a line. A lawsuit pending in U.S. District Court in Grand Rapids accuses one of Mr. Huizenga's charter schools—which are publicly funded—of promoting religion. He denies the charge, saying "there's nothing remotely religious" about his company's program.

Mr. Huizenga's own $40 million investment in National Heritage, plus $50 million raised from well-to-do friends and family members, have fueled the company's expansion. (One cousin is billionaire H. Wayne Huizenga, the chairman of the auto-retail giant AutoNation Inc. and the owner of the Miami Dolphins football team.)

Mr. Huizenga ticks off several factors influencing his decision to launch an education company: The chance to offer a private-school-quality education for free. A deep belief in the power of the free market. A desire to bring customer service and choice to education. And, of course, the potential to create a profitable company.

"The bottom line is, we see a huge market here," Mr. Huizenga said. "We see a certain amount of dissatisfaction with some ways education has been delivered. And that translates into a high probability for success."

One Click Away

Sean Muller is going online to stake his claim in the education industry.

The 25-year-old techie from Redmond, Wash.—home to technology giant Microsoft Corp.—has created what he hopes will become "the Amazon.com of education," a Web business called EduClick Inc.

His family used to run a general-interest bookstore in a nearby town, which eventually closed. Last year, Mr. Muller parlayed his family's know-how and contacts into an online book-selling business.

Many of the service's customers, it turns out, came from schools—teachers, parents, curriculum directors, librarians, and administrators. That's how Mr. Muller got the idea to spin off EduClick, an education-specific online seller of books, software, audio tapes, and video products. The purchasing system is designed for educators, so customers can use school purchase orders instead of plunking down their own plastic.

"What I saw here is a market that needs better service over the Internet. And I knew we could put together something better than what's out there," said Mr. Muller, who studied cell and molecular biology in college, but decided to forego medical school to pursue online commerce.

"I see great opportunity in this education market. But for me, it was definitely E-commerce first," he said. "I didn't say I wanted to get involved in education first and figure out how to do it. It was definitely the other way around. I wasn't aware even of how big this education industry was until I really started talking to our customers."

Mr. Muller knows it will take some time before EduClick turns a profit, and he's currently seeking investors. In the meantime, the young entrepreneur has been making the rounds to area schools to drum up business among what he calls "a great and loyal market."

"They really like the face-to-face contact," he said. "And I like that, too."

The Investor

To be as successful as he hopes, Mr. Muller will probably need help from people like Frances McCaughan.

Ms. McCaughan is a venture capitalist at Tribune Ventures, the investment arm of the Tribune Co. in Chicago. In addition to its core newspaper-publishing and media business, the company has become one of the leading publishers of supplementary educational materials over the past decade.

Tribune Ventures, which pumps roughly $40 million a year into new or young companies in the entertainment, information, and education arenas, is one of a growing number of venture investors in for-profit education. In the first seven months of 1999 alone, $400 million in private capital was invested in education-related companies, according to Banc of America Securities.

Ms. McCaughan, who holds a Ph.D. in engineering, is one of the people at Tribune Ventures responsible for selecting promising companies. Unlike banks, which lend money and are repaid a fixed sum with interest, venture capitalists take an equity share in the new business. The investments are riskier, but if the business takes off, the venture capital firm can make huge profits.

"I'm constantly reviewing, researching, and analyzing the marketplace—going to conferences, talking to people in the industry, and trying to figure out the new companies coming along and the new ideas in education," Ms. McCaughan said.

Most of Tribune Ventures' education investments to date have been Internet- and technology-based businesses, which is where the 39-year-old's engineering background comes in handy. Ms. McCaughan researched and taught computer modeling of engineering systems for seven years at Case Western Reserve University in Cleveland, but had an itch to move out of academia and into the business world.

She had already joined the Tribune Co. when a venture capital position opened earlier this year. Part of her attraction to the post, she says, was the chance to work on education.

"It was a way for me to renew contact in the education space. I understand the environment of education," she said. "It tends to be slower-paced, and people aren't typically motivated by money. I understand what it takes to talk to people in that marketplace."

Ms. McCaughan is looking for business proposals she thinks will bring "long-term value" to Tribune and to education.

"I really place value not just on content, but pedagogy. We've really tried to avoid 'edutainment' kinds of companies," she said.

On a personal level, Ms. McCaughan says, she finds great satisfaction watching what she sees as the beginning of a technology-based revolution in education. And she believes that building strong companies ultimately will help improve education.

As a venture capitalist, return on investments has to be her top priority. But those other motivations "aren't far behind," she says. "They're awfully close together."

Vol. 19, Issue 14, Pages 1,14,16

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