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Entrepreneurs Encouraged by Public School Market

Public education is in the grips of a dysfunctional government monopoly that must be broken by private entrepreneurs offering new models of schooling, according to the billionaire businessman Theodore J. Forstmann.

The Wall Street financier was the co-sponsor of a conference here last week for investors, policy analysts, and others interested in the growing business of education.

Theodore J. Forstmann

"A monopoly produces a bad product at a high price, and the education monopoly in America is no exception to that rule," said Mr. Forstmann, who is also the co- founder of the Children's Scholarship Fund, which provides partial tuition aid to help some 40,000 children attend private schools.

Mr. Forstmann launched the scholarship fund nationally in 1998 with a $50 million contribution. John T. Walton, an heir to the Wal-Mart stores fortune and the co-founder of the scholarship fund, also contributed $50 million. The fund has distributed some $160 million in scholarship aid.

Noting that the fund received more than 1.25 million applications for this school year, Mr. Forstmann said his reaction was: "Let's do it again. Let's raise enough money to fund another 40,000, or 80,000, or as many as we could."

But, he said last week, he realized that capacity in existing private schools is limited. While the demand is there to flee troubled public schools, he believes, an adequate supply of alternative seats does not exist.

So Mr. Forstmann wants to foster a range of alternatives to traditional public schools.

"Just because we pay for education through government taxation, it is not inevitable that government be the only supplier of the product," he said in a letter to "friends" of the scholarship fund.

Mr. Forstmann, who is a senior partner in the New York City investment firm Forstmann Little & Co., did not say last week whether he was prepared to go beyond philanthropy and offer his own money as capital for education entrepreneurs. But his conference, co-sponsored by Merrill Lynch Inc., highlighted a number of private efforts that have begun to offer capital for education businesses.

"The fundamentals are all aligned for a great number of people to make a whole lot of money in this sector, and do well by doing good," said former Gov. William F. Weld of Massachusetts, who is part of a group that has raised $150 million to invest in education-related businesses. The Leeds Equity Partners III fund hopes to reach $250 million in capital by this year.

The fund was conceived by Wall Street investment banker Jeffrey T. Leeds, who has separately invested in Edison Schools Inc., the New York City-based school management company that was often mentioned at the conference as a leading model for education entrepreneurship. ("All Eyes on Edison Schools As Company Goes Public," Nov. 24, 1999.)

While many advocates of for-profit corporate participation in public education come from the political right, several participants at the conference here said the trend defies traditional categorization as Democratic vs. Republican or liberal vs. conservative.

That was the view of John Doerr, a leading Silicon Valley venture capitalist who has established an unusual nonprofit source of capital for education enterprises called the New Schools Venture Fund.

"We can't wait for a voucher system, and we can't wait just for charter schools" as the only models for transforming public education, said Mr. Doerr, who is an adviser to Vice President Al Gore and a partner in the Menlo Park, Calif.-based venture capital firm of Kleiner Perkins Caufield & Byers.

The New Schools Venture Fund acts like a typical for-profit venture fund, except that it provides seed capital to both nonprofit and for-profit ventures and plows any profits from its investments back into the fund. The fund has invested in for-profit companies such as Advantage Schools Inc., the Boston-based charter-school- management firm, and nonprofit enterprises such as the reading program Success for All.

"We want to encourage risk-taking among educational entrepreneurs," Mr. Doerr said.

—Mark Walsh

Vol. 19, Issue 19, Page 13

Published in Print: January 19, 2000, as Reporter's Notebook
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