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Great post but, If this equation was all it took for VCs to switch their attention away from software, biotech, and energy maybe they would also be investing a

Great post but, If this equation was all it took for VCs to switch their attention away from software, biotech, and energy maybe they would also be investing a lot in social services, retirement homes, and other growing sectors of the economy. I think you miss the point that VCs are not just after market size, they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector. Dan

rafaelc 16y ago
Ah, there's definitely not an equation nor do I claim there to be an equation to VC investments. I'm just pointing out the very big discrepancy in the numbers. Some more facts: - Over the past three years there have been 165 private equity backed transactions within the education sector. - Aggregate deal value of these investments based on data compiled by Berkery Noyes is in excess of $35 billion. - Education was the source of 4 IPO's in the last 18 months Also, regarding your point about strong cash flows and large profit margins not existing in education: that is a myth. Two points from that same presentation: - Across various education sectors EBIT margin ranges from 15%-40%. - Negative working capital: many K-12 models for content and technology receive cash first and are transitioning to SaaS and subscription based, recurring revenue content models
patio11 16y ago
they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector The following comment doesn't apply to any VCs y'all may be friends with: the key skill for maximizing a VC firm's income is to maximize their assets under management, and that makes investments a marketing decision which have second order consequences on capital returns. Cleantech is sexy and will attract dollars. Education is not sexy. Given the choice between a sexy field with N% expected returns and an unsexy field with N+3% returns, a rational VC would back sexy almost every time. This should not come as a surprise to anyone who has studied the mutual fund industry, which is also perpetually chasing the new hotness (which juices inflow) at the expense of returns for the owners.
- byrneseyeview 16y ago
  The market is more efficient than that: the accurate way to describe the situation is that unsexy fields have a higher return on investment to compensate for their unsexiness, and thus that their undervaluation is way to quantify how much people dislike them. Take BP as a good example of this. It's a major oil company trading at a P/E under 6. If they made a catastrophically huge one-time payment of $30 billion to settle the Deepwater Horizons case, they'd still be worth ~50% more than their current price. But who wants to say that they profited from environmental destruction? Better to invest in Google--you get a stake in the business, but you also get a stake in the smugness.

rafaelc 16y ago

Ah, there's definitely not an equation nor do I claim there to be an equation to VC investments. I'm just pointing out the very big discrepancy in the numbers. Some more facts: - Over the past three years there have been 165 private equity backed transactions within the education sector. - Aggregate deal value of these investments based on data compiled by Berkery Noyes is in excess of $35 billion. - Education was the source of 4 IPO's in the last 18 months Also, regarding your point about strong cash flows and large profit margins not existing in education: that is a myth. Two points from that same presentation: - Across various education sectors EBIT margin ranges from 15%-40%. - Negative working capital: many K-12 models for content and technology receive cash first and are transitioning to SaaS and subscription based, recurring revenue content models

patio11 16y ago

they are primarily interested in value creation through strong cash flows and large profit margins which are not strong in the educational sector The following comment doesn't apply to any VCs y'all may be friends with: the key skill for maximizing a VC firm's income is to maximize their assets under management, and that makes investments a marketing decision which have second order consequences on capital returns. Cleantech is sexy and will attract dollars. Education is not sexy. Given the choice between a sexy field with N% expected returns and an unsexy field with N+3% returns, a rational VC would back sexy almost every time. This should not come as a surprise to anyone who has studied the mutual fund industry, which is also perpetually chasing the new hotness (which juices inflow) at the expense of returns for the owners.

byrneseyeview 16y ago
The market is more efficient than that: the accurate way to describe the situation is that unsexy fields have a higher return on investment to compensate for their unsexiness, and thus that their undervaluation is way to quantify how much people dislike them. Take BP as a good example of this. It's a major oil company trading at a P/E under 6. If they made a catastrophically huge one-time payment of $30 billion to settle the Deepwater Horizons case, they'd still be worth ~50% more than their current price. But who wants to say that they profited from environmental destruction? Better to invest in Google--you get a stake in the business, but you also get a stake in the smugness.