Staking out a share of public-school gold

For-profit company aims to run urban schools, earn a slice of the $311-billion education budget

By Mike Hofman

To bang the drum for the public school he runs in Phoenix, Pepe Quintero tells of a 10-year-old boy with a learning disability. The boy's mother, a single parent, speaks only Spanish. A year ago, at a different school, the boy's fourth-grade teacher concluded that he would never learn to read English. Last fall the boy switched to Quintero's Phoenix Advantage Charter School. When the mother visited Quintero in November, she burst into tears--tears of joy. "She was shocked that the boy, after only a few months, had begun to show an interest in reading," Quintero says.

Quintero's parable strikes a particular chord in Phoenix. Inner-city teachers in the Phoenix public schools must struggle to teach English to many students of low-income families for whom Spanish is the first language. Those inner-city students typically rank in the bottom third on standardized nationwide reading tests.

Quintero operates a public school, but his employer is not an Arizona school district. He works for Advantage Schools Inc., based in Boston and founded two years ago by Steven F. Wilson, 38, a former software entrepreneur. Advantage Schools joins a dozen other companies in an emerging for-profit industry. The companies are angling for a piece of the estimated $311 billion that the nation spends annually on its public schools for kindergarten through twelfth grade. Whether these companies can strike gold in staking out a share of public education and whether they can outshine their governmentally administered rivals in raising academic performance remain sharply debated issues.

In the Advantage Schools approach, Wilson says he has a formula that will succeed on both counts (although no definitive measures of performance are available from the Phoenix school or the elementary school in Rocky Mount, N.C., that Wilson's company opened in 1997). By 1999, Wilson expects to have 17 schools under management in eight states and the District of Columbia.

The Advantage Schools curriculum is based on so-called direct instruction, a method by which elementary-level students learn reading and math through recitation and coaching by the teacher. Wilson insists on a degree of policymaking latitude by confining his business to nonunion charter schools, which operate outside the control of local school boards in such matters as hiring teachers and setting curricula. That limits his market to the 30 states that allow charter schools.

In seeking contracts, Wilson zeroes in on well-paying urban schools. The per-pupil allocation in a public school district's budget determines Advantage School's receipts, ranging as high as $10,000 in Washington, D.C. Wherever he solicits a school contract, Wilson cultivates an influential local person as an ally. In Jersey City, N.J., to cite one example, he has enlisted the support of Mayor Bret Schundler. "It's an approach that can be replicated reliably from site to site without undue difficulty," explains Wilson.

The strategy's sparkle has captivated top-drawer venture capitalists. Fidelity Ventures, an arm of mutual-fund giant Fidelity Investments, and Bessemer Venture Partners, of Wellesley, Mass., have kicked in a combined $5 million in first-round financing.

Not everyone is dazzled. "These people are carrying more chains than Jacob Marley's ghost," says Alex Molnar, an education professor at the University of Wisconsin-Milwaukee, referring to for-profit companies that run public schools. "There's a track record here with regard to for-profit schools, and it's not very good." It's underfunding that plagues public schools, Molnar argues, and for-profit companies are "basically feeding off" them and eventually will falter.

Indeed, the September 1997 opening of the Phoenix Advantage Charter School highlighted one way the company can blunder. A 10-week delay in converting a government office building into a schoolhouse forced the 23 teachers and 500 students into temporary quarters. Enrollment plummeted by half, jeopardizing the budget. But now the school is full again. Wilson confidently predicts it will generate revenues of $4.3 million in the first year of operation, "just as our business plan called for."

How bad is bad?

For-profit companies are gaining a foothold in public education because of a perception that American schools are performing badly. How bad is bad? Below are sample math questions asked of roughly 10,000 high school seniors in 1996 on a standardized test--the National Assessment of Educational Progress--and the percentage of students who answered correctly. --Mike Hofman

1. A certain machine produces 300 nails per minute. At this rate, how long will it take the machine to produce enough nails to fill 5 boxes of nails if each box will contain 250 nails?

A. 4 min.
B. 4 min., 6 sec.
C. 4 min., 10 sec.
D. 4 min., 50 sec.
E. 5 min.

49% correctly chose answer C

2. Luis mixed 6 ounces of cherry syrup with 53 ounces of water to make a cherry-flavored drink. Martin mixed 5 ounces of the same cherry syrup with 42 ounces of water. Who made the drink with the stronger cherry flavor? Give mathematical evidence to justify your answer.

Luis: 6/53 = 0.113

Martin: 5/42 = 0.119

23% correctly chose Martin

Seeds of an industry

September 1991: Education Alternatives Inc. opens the South Pointe Elementary School in Dade County, Fla., the first public school run by a for-profit company in the United States

1993: Lehman Brothers becomes the first Wall Street investment company to employ an analyst specializing in the for-profit education industry

February 4, 1997: In his State of the Union address, President Clinton calls for 3,000 charter schools (a potential market for for-profit companies) by the year 2000

Governor's-eye view

Among the most important customers of for-profit companies in the business of public education are the governors of the states where the businesses operate. One such governor is Republican John Engler of Michigan, a high-profile leader on educational policy. In 1993 his state passed a charter-school law, opening the way for for-profit companies to run public schools. Engler recently spoke to Inc. senior editor Joseph Rosenbloom:

Q: Why the willingness to experiment with school privatization now?

A: There's a growing understanding that monopolies, whether they're in the telephone, utility, or some other sector, aren't always the most willing to change, and frankly, we're not willing to risk having kids in a system that doesn't do the best for them. We're paying top dollar for public education in America. There are a number of positive things taking place, yet increasingly there's concern that we've got to move faster.

Q: Can you boil down the argument for the for-profit model?

A: It's choice and competition.

Q: Please explain.

A: Giving parents options that allow them to pick the best possible education for their children, by comparison shopping, if necessary--looking at the performance of their school and comparing it with another school.

Q: Who's against the idea?

A: The teachers' unions have opposed it. A lot of teachers are more open-minded.

Q: Is there a risk of teachers' being mistreated?

A: I don't think so. No more so than any other company would mistreat its employees. We know today about high-performing companies in America. Those that treat their employees well, those that have the right kind of corporate culture, are going to do well.

Q: Will you have accountability? Will a company lose its contract if it doesn't measure up?

A: The odds are good that there'll be at least as much accountability as we have in the traditional public schools today.

Q: Can the companies make a profit?

A: The jury is still very much out on that. I'll let the shareholders worry about that.

Q: Are the for-profit companies improving student performance?

A: Well, the best evidence is the actions being taken by school districts to form blue-ribbon committees and decide to change their curricula, to end social promotions, to end a whole host of things that aren't necessary.

Trailblazers' tale of early woes

It's a tough assignment: improve America's schools and earn a buck doing it. Two trailblazers in the for-profit school business, the TesseracT Group and the Edison Project, charged down the path years ago. Both stumbled badly.

TesseracT was the true pioneer (see " Educating the Market," July 1991). Known as Education Alternatives Inc. until last year, the Minneapolis-based company set out in 1986 to build a network of private schools. When that looked too costly, it began managing public schools for urban districts. But politics got in the way. Education Alternatives' first contract, awarded in 1990, to manage an elementary school in an impoverished area of Miami, was not renewed in 1995 because of pressure from skeptics. Its second contract, in 1992, to manage nine schools in Baltimore, fell apart in 1995 when unions balked at staff changes, an independent review did not show significant academic improvement, and Mayor Kurt Schmoke slashed the company's budget.

In 1994, Education Alternatives' third contract, to run a school district in Hartford, looked great on paper. But the company found it had little management control. So in 1996 the company, now called TesseracT, agreed to exit for a $6-million settlement. TesseracT Chairman and CEO John Golle maintains that the company did a "good job" but failed to change the "system" for lack of authority.

TesseracT is now specializing in charter schools, public schools that are managed outside of local control. The strategy has given it a new lease on life. For the fiscal year ending June 1997, it had revenues of $4.8 million and earnings of $600,000. The company runs 16 charter schools in Arizona and has won contracts to open 15 more schools in that state, as well as 2 in Texas and one in New Jersey.

The Edison Project, based in New York City, blundered at first, too. Founded in 1991 by media entrepreneur Chris Whittle, the company embarked on an ambitious strategy to create a national chain of 200 private schools by 1996. As his number two, he hired Benno C. Schmidt Jr., then the Yale University president. But while Whittle was devoting 90% of his time to Edison, his media business sagged. Scrambling to pay off a $100-million bridge loan, he sold the media business in 1994, and he revamped and at least temporarily scaled back his plans for Edison. "Had I been smart, I would have sold my media business the day I started Edison," he says. "Instead, I tried to do both."

Edison never opened a private school. The company retooled its strategy in the early 1990s, shifting its focus to public schools. It now operates 25 of them in eight states, including 12 charter schools, and is looking for more. "My long-term vision has not changed," Whittle insists. "I think we can have an enterprise that runs thousands of schools in the United States." --Claire Poole

Published on: Jun 1, 1998