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Though Investors See Opportunity In Education, K-12 Ranks Low

Venture capitalists are still on the lookout for opportunities to invest in education.

The good news for entrepreneurs trying to crack the education market emerged from a survey of more than 40 venture capital firms nationwide.

"There are more targeted investment funds" for education, said Jeffrey A. Fromm, the president of KnowledgeQuest Ventures LLC, a New York City consulting firm that conducted the survey. Precollegiate education ranks low, however, among investors' specific areas of interest.

The findings from the second annual survey were released here at the fourth annual Education Industry Finance and Investment Institute. The Sept. 16-17 meeting, organized by Fulcrum Information Services Inc., brought together entrepreneurs, investment analysts, venture capitalists, and others interested in education-related businesses.

Venture capital firms provide crucial early funding to business start-ups, then take a profit when a company is sold or begins selling stock to the public. Among the education management organizations that have had significant venture capital investments are Edison Schools Inc. (formerly the Edison Project), a New York City company that manages charter schools and traditional public schools, and Advantage Schools Inc., a Boston company that manages charter schools.

According to the KnowledgeQuest survey of more than 40 venture capital firms nationwide, the top area of interest for investing in education is companies that specialize in corporate training, followed by Internet-based education businesses.

Venture capitalists had the lowest level of interest in child care, K-12 education services, and services for at-risk youths. Although many venture capital firms have invested in Edison and other K-12 management firms, others have shied away from that sector.

"That's an area we don't understand well," said Elliot R. Royce, a senior vice president at GE Capital, the venture capital arm of General Electric Inc. "It has lots of government and union involvement--things GE is trying to stay away from."

Several participants noted that with the general health of the economy, venture firms are flush with capital to invest. "There is a lot of money out there," said A. Richard Caputo Jr., a partner in the Jordan Co., a New York City investment firm.

Mr. Royce said the education industry "has been a bit underdiscovered. This is a great industry."

Many analysts here were awaiting with great anticipation the initial public offering of stock from Edison Schools, which is expected to go to market sometime this fall. Edison has filed for a public offering of as much as $172 million in stock. ("Edison Project, Now Edison Schools Inc., Plans To Go Public," Sept. 8, 1999.)

Christopher Whittle, the company's president and chief executive officer, appeared at the conference but gave only a general speech because of federal securities regulations that require a "silent period" for company executives surrounding an initial public offering.

S. Joshua Lewis, a managing director with the New York City investment firm E.M. Warburg Pincus & Co., summed up the sentiment of several participants: "With Edison, a great IPO and a sustained value afterward will be great news for all of us."

Just as Coca-Cola is sold around the globe, might U.S. education companies see the world as their market? And what is to keep foreign education businesses from entering the American market?

"The new education economy is unquestionably global in scope and, as a result, entrepreneurs and investors are exploring new markets and new partnering opportunities around the world," said Peter Stokes, the executive vice president of EduVentures LLC, a Boston consulting firm.

Participants at a session here devoted to such issues pointed out that Edison Schools has explored expanding to Britain. Sylvan Learning Systems Inc., the Baltimore-based provider of supplemental educational services, has launched an international universities initiative.

Meanwhile, the Open University, based in Britain, has established a distance-learning business in the United States.

James Tooley, a professor of education policy at the University of Newcastle in England, sees abundant investment opportunities in for-profit education companies worldwide.

"Entrepreneurs in developing countries have created educational opportunities which are profitable, which are financed almost entirely from student-fee income, and which are open to mass markets, not just to the elite," he said.

--Mark Walsh

Vol. 19, Issue 5, Page 12

Published in Print: September 29, 1999, as Reporter's Notebook
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