So believes Wangui Nyaga, an education investor in Kenya who works on behalf of an anonymous funder.
To Nyaga, the complexity inherent in education can frighten away some potential investors. âYou need a good teacher, you need materials, you need infrastructure, you need parents, you need a support system, 1,001 things,â she continues. âThat complexity makes it hard to see the results [of an impact investment] within a short period of time. I think most investors want something that is simple, something where you can easily see results within a short timeframe. Where you can say, âI have vaccinated so many and eradicated a particular ailment in a given area.â You feel like you have gotten value for money.â
In contrast to the vaccination example, she argues, it is extraordinarily difficult to know whether a child has truly been educated, and whether a particular education intervention actually made a difference.
âHaving kids go to school is quite easy,â says Nyaga. âAll you have to do is round up kids, have a structure, and have someone sitting there with the kids. Everyone can see a school building, and you can count the number of classes youâve built. The most difficult piece is making sure kids are staying in school and they are learning.â
Due to the multifaceted nature of education, few rigorous analyses of educational interventions are able to demonstrate clear or replicable impact, making them less enticing for investors, who are in most cases looking to put their money in ventures that have the potential to scale.
In much of the world, education is viewed as a public good that should, at least in part, be provided by the government. (To a degree, this is true for most social issues, from health to agriculture, but I would argue that the role of government is perceived to be particularly critical in education.)
âIn healthcare, we accept that we need drugs from private companies and doctors trained by the private sector,â says Erikson. âThere is more political acceptance of contracting with private sector to deliver [a public good].â This is not necessarily the case with education; many people are unwilling to have for-profit companies take over the education system, citing concerns that a profit motive will ultimately hinder education access and quality.
This prevailing philosophy leaves comparatively fewer opportunities for private investment. In some cases, such as Liberia, the government is pursuing a controversial experiment, in which it is contracting with private companies and nonprofits to run some of the countryâs schools. But such arrangements are rare, and while some believe it represents âbold innovationâ in education, many believe they are fraught with challenges.
âYou cannot bring big change into a country with [investment] projects,â says Nyaga. âThey are piecemeal and made to be time-bound. The movers and shakers of a good education system are the government.â
In the same GIIN survey that found that only 4 percent of impact investing dollars flow into education, over 40 percent of respondents said they had investments in the sector in their portfolios. This suggests that though there is little overall money flowing into education, there are many small, tentative, early-stage bets.
This is in part because of how education is structured, particularly when it comes to schools. âNormally scale brings marginal cost reductions; in education, it brings scrutiny and regulatory compliance,â says Caitlin Baron, CEO of the Luminos Fund, which focuses on educating the worldâs poorest and most marginalized learners. âThere are some counterintuitive ways in which scale hasnât been the marginal cost reducer you would expect.â Starting a second school is nearly as difficult as starting a first one, and starting 100 schools is not much easier. This is why there are so few large networks of schools, particularly in the global south.
As a result, there arenât that many business models within education that have truly scaled, contrary to other sectors. Arguably, few education companies would even have the capability to absorb a large investment the way that, say, solar giant M-Kopa would.
âEveryone loves to invest in the occasional impact investing âhome runâ that promises strong financial and social returns,â say Matt Bannick and Paula Goldman in a 2012 essay in the Stanford Social Innovation Review. âAnd these home runs have an important demonstration effect for the viability of the industry as a whole. Unfortunately, relatively few appear willing to step up to the hard and uncertain work of sparking and nurturing the innovations that ultimately generate a robust flow of investable, high-return impact investments.â
While investors have stepped up in sectors like energy and financial services, which have seen investments of tens of millions of dollars, fewer seem willing to place similar bets in education.
Baron agrees that the sector needs investors with a slower appetite. âEducation is still a space where patient capital is required,â she says. âThere havenât been that many killer business models that have been cracked. Itâs important for an investor from the [financial technology] space to know that theyâre looking at a different timeframe, not just because outcomes for kids are long-term, but also because of the stage of the sector.
âAnd because for-profit education is politically fraught,â Baron adds, âitâs problematic for business models to push them too fast. Your job as an investor is to look at scale, but in the education space, itâs also to manage the risk of rapid growth.â
Perhaps impact investment funds arenât set up to be as patient as they need to be to ultimately help build the for-profit education sector.
Points 3 and 4 suggest a catch-22: itâs difficult to scale education companies to the point that they need large infusions of capital, and there isnât enough patient capital among impact investors to support education companies to get there.
This situation is amplified by a tendency within the impact investing sectorâââand among investors overallâââtowards âherd mentality,â or multiple investors making bets on companies that have proven popular within the industry already.
By 2014, 60 percent of all impact investing funds in India had gone to only 15 enterprises. âItâs practically an investment community that is dedicated to micro-lending,â wrote Shruti Chakraborty in Quartz of this trend.
Even within the two most popular impact investing sectors, finance and energy, there is evidence of herd mentality. Investors are excited to bet big on solar companies, but give comparatively little to clean cooking or refrigeration.
âI want to acknowledge that itâs harder to do business with schools than with parents, from a business point of view,â says Erikson. â[Impact investors] see schools as messy and unreliable clients.â
Some impact investors have realized that instead of investing in schools, there is opportunity to invest in companies that sell directly to parents or other consumers. In India, as an example, families at all income levels are willing to spend about 40 percent of their monthly income on their childrenâs education.
This has led in part to the explosive growth of the test preparation spaceâââthough many investments in this area are done for pure commercial gain, as opposed to social impact. âPart of impact investing is saying, âAre you solving the most important problems in the landscape?ââ says Ramya Venkataraman, CEO of the Center for Teacher Accreditation (CENTA), an India-based teacher certification company. ââAre you catering to an opportunity, or are you solving a really important problem?â Test prep often falls in the category of catering to an opportunity.â
Venkataraman suggests looking for educational companies that have differentiated themselves in some ways. For instance, she cites a company called Varthana, which offers financing and loans for schools in India. Other opportunities for impact investments may exist in teacher training, early childhood development, and tertiary education âin other words, areas that exist outside the regulation often found in K-12 schooling.
Baron has found that instead of giving education companies equity or debt financing, social impact bonds could be a useful financial vehicle. Impact bonds are defined as âa contract with the public sector or governing authority, whereby it pays for better social outcomes and passes on the part of the savings achieved to investors.â
Essentially, private investors give money (most often to governments) to achieve a set of social outcomes, like increasing the number of girls enrolled in school. If the government achieves the goals, the investor gets paid with interest, and if they fall short, the investor loses money.
Baronâs organization, Luminos, has been experimenting with impact bonds in education for eight years now, and she says they have seen some positive results. She says she has found the bonds to be most effective when talking about educational access, rather than quality, as the former is a âbinary and verifiable event.â
There are other financial vehicles to get money to education besides impact investing, like bilateral and multilateral aid. But these represent a different, and ultimately less sustainable, type of opportunity for the sector than impact-oriented investments.