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Profits Ahead of Education: Venture Capital-Backed Companies

In recent years, the landscape of education has seen a surge in the influence of venture capital-backed companies

These firms, often driven by a prioritization for returns on investment, have penetrated various aspects of the education system, from curriculum development to countless EdTech solutions.

While innovation in education is essential, the issue arises when these companies prioritize investor returns over the long-term educational benefits of students. Sometimes, even the long-term health of the company does not find its way to the top of the priority list!  

In this article, we will delve into the reasons why school districts should exercise caution when dealing with venture capital-backed companies and explore the potential long-term harms of relying on such entities.

The Venture Capital Influence

The education venture capital (VC) segment continues to grow even through many downturns.  VC firms have long been a driving force behind technological advancements and innovation. However, VC's interest in investor returns, can lead to unintended consequences. One of the primary motivations for VC-backed companies is to generate profits for their investors, often within a relatively short timeframe. This focus on short-term financial gains can conflict with the overarching goal of education: to provide the best possible learning environment for students.

Short-term Example: Sole Source Letters

A concerning example of venture capital-backed companies prioritizing their own interests over the well-being of students is the use of sole source letters. A sole source letter is a document submitted by a vendor to a school district, essentially stating that their product or service is so unique or specialized that there is no viable alternative. Companies like Apptegy and FinalSite have been known to use this tactic. And both have achieved skyrocketing valuations including 10s of millions in investment as well as the departure of the founder teams. By bypassing the competitive bid process, they gain short-term growth for long-term industry standing. When you’re most interested in valuations and future sale, it’s a worthy tradeoff. While there may be legitimate cases where a sole source arrangement is warranted, it has become a contentious issue when misused.

The Problems with Sole Source Letters

By avoiding competitive bidding, school districts miss out on the opportunity to compare different solutions and select the one that best meets their students' needs. This lack of competition can lead to suboptimal choices that do not prioritize educational outcomes.  Some venture capital-backed companies may exaggerate the uniqueness of their products or services in sole source letters, leading school districts to believe they have no alternatives. This can result in schools adopting solutions that are not necessarily the most effective or cost-efficient.  While using sole source letters may benefit a company in the short term, it can have long-term repercussions. If a vendor's claims are later found to be false or their product fails to deliver promised results, it can harm the reputation of both the company and the school district.

Here's an example of Douglas United #27 in Arizona accepting a questionable sole source letter from Apptegy, a company heavily backed by VCs.

"Discussion/action on approval of Apptegy, Inc. as a Sole-Source Provider.

Mrs. Samaniego advised that she is proposing to accept this company as a sole-source provider. Apptegy, Inc. is a communication company that builds custom mobile applications, websites, and a publishing platform, named Thrillshare, which allows among other things, all of a school’s or school district’s online communications to be updated at one time. So currently we have our website, and this would replace our website. It will allow us with a quick mobile app to provide information to all of our social media accounts, all of the school and district websites, with one click of a button. All the information has been provided and the Business Office has provided the sole-source documentation. Mr. Borane commented that it is hard to believe that this is the only company found that can build a website. Mrs. Samaniego replied no, this company does the website, does the parent notification system, and has the App for all of our social media accounts. That is what makes it a sole-source. There are other companies out there that provide the services but separately. We were already looking at redesigning our website to make it more user friendly and accessible.

Mr. Lindemann motioned to approve Apptegy, Inc. as a Sole-Source Provider as presented. Mr.
Sabal seconded the motion. Motion carried 5/0."

Source: Minutes – Regular Board Meeting – December 3, 2019 Page 8 of 9

Here's a bunch of examples of sole source letters from just one district.  Each are highly questionable.  For example, is Zoom really the only provider of web conferencing?

Prioritizing Student Achievement

To ensure that education remains focused on students' achievement rather than short-term profits, school districts should consider the following:

  • Leadership: Are the company leaders the founders?  Did they come in when the venture capitalists get involved?
  • Transparency: School districts should demand transparency from vendors, especially when they receive sole source letters. Vendors should be required to provide evidence supporting their claims of uniqueness or specialization.
  • Long-Term Impact Assessment: School districts should conduct thorough assessments of the long-term impact of any products or services they adopt. This includes evaluating whether the chosen solutions genuinely benefit students' achievement over time.
  • Diverse Procurement: Encourage the diversification of vendors and solutions. Relying on a single venture capital-backed company for all educational needs can be risky. By exploring various options, school districts can better cater to their students' unique requirements.
  • Community Engagement: Involve parents, teachers, and community stakeholders in the decision-making process. Their input can help ensure that educational decisions align with the best interests of the students.
While venture capital can be a catalyst for innovation, its entry into the education sector should be approached with caution. The use of tactics like sole source letters, which enable companies to circumvent competitive bidding, can undermine the long-term educational goals of school districts. It is crucial for school districts to prioritize students' achievement and be vigilant when dealing with venture capital-backed companies. By doing so, education can remain focused on its core mission: providing the best possible learning experience for students, rather than serving the interests of short-term investors.

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