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Broadening education investments to full-stack solutions

Gabby Abir      -

Broadening education investments to full-stack solutions

As an education investor, one of my favorite sayings is that education is the next industry to be disrupted by technology, and has been for the past twenty years.

When I started my career at Warburg Pincus, I inherited a portfolio of technology companies that senior partners naively believed would solve major problems in our education system.

It would have worked out fine, of course, except for all the people. Teachers weren’t always interested in changing the way they taught. IT staff weren’t always capable of implementing new technologies. And schools weren’t always 100% rational in their purchasing decisions. And so while, given the size of the market, projections inexorably led to $100M companies, sales cycles stretched asymptotically and deals never seemed to close, particularly in K-12 education.

My current firm, University Ventures, began life in 2011 with the goal of funding the next wave of innovation in higher education. Much of our early work did revolve around technology, such as backing companies that helped universities develop and deploy online degree programs. But it turned out that in making traditional degree programs more accessible, we weren’t addressing the fundamental problem.

At the time, America was in the process of recovering from the Great Recession, and it was clear that students were facing twin crises of college affordability and post-college employability. The fundamental problem we needed to solve was to help individuals traverse from point A to point B, where point B is a good first job – or a better job – in a growing sector of the economy.

Once we embarked on this journey, we figured out that the education-to-employment missing link was in the “last mile” and conceptualized “last-mile training” as the logical bridge over the skills gap. Last-mile training has two distinct elements.

The first is training on the digital skills that traditional postsecondary institutions aren’t addressing, and that are increasingly listed in job descriptions across all sectors of the economy (and particularly for entry-level jobs). This digital training can be as extensive as coding, or as minimal as becoming proficient on a SaaS platform utilized for a horizontal function (e.g., Salesforce CRM) or for a particular role in an industry vertical. The second is reducing friction on both sides of the human capital equation: friction that might impede candidates from getting the requisite last-mile training (education friction), and friction on the employer side that reduces the likelihood of hire (hiring friction). Successful last-mile models absorb education and hiring friction away from candidates and employers, eliminating tuition and guaranteeing employment outcomes for candidates, while typically providing employers with the opportunity to evaluate candidates’ work before making hiring decisions. Today we have eight portfolio companies that take on risk themselves in order to reduce friction for candidates and employers.

The first clearly viable last-mile training model is the combination with staffing. Staffing companies are a promising investment target for our broadened focus because they have their finger on the pulse of the talent needs of their clients. Moreover, staffing in the U.S. is a $150B industry consisting of profitable companies looking to move up the value chain with higher margin, differentiated products.

Because fill rates on job reqs can be as low as 20% in some skill gap areas of technology and health care, there is no question that differentiation is required; many companies view staffing vendors as commodities because they continue to fish in the same small pool of talent, often serving up the exact same talent as competitors in response to reqs.

Adding last-mile training to staffing not only frees the supply of talent by providing purpose-trained, job-ready, inexpensive talent at scale, but also increases margins and accelerates growth. It is this potential that has prompted staffing market leader Adecco (market cap ~$12B) to acquire coding bootcamp leader General Assembly for $412.5M. The acquisition launches Adecco down a promising new growth vector combining last-mile training and staffing.

We believe that staffing is only the most obvious last-mile training model. Witness the rise of pathways to employment like Education at Work. Owned by the not-for-profit Strada Education Network, Education at Work operates call centers on the campuses of universities like University of Utah and Arizona State for the express purpose of providing last-mile training to students in sales and customer support roles. Clients can then hire proven talent once students graduate. Education at Work has hired over 2,000 students into its call centers since its inception in 2012.

Education at Work is the earliest example of what we call outsourced apprenticeships. For years policy makers have taken expensive junkets to Germany and Switzerland to view their vaunted apprenticeship models – ones we’ll never be able to replicate here for about a hundred different reasons. This week, Ivanka Trump’s Task Force on Apprenticeship Expansion submitted a report to the President with a “roadmap… for a new and more flexible apprenticeship model,” but no clear or compelling vision for scaling apprenticeships in America.

Outsourced apprenticeships are a uniquely American model for apprenticeships, where service providers like call centers, marketing firms, software development shops and others decide to differentiate not only based on services, but also based on provision of purpose-trained entry-level talent. Unlike traditional apprenticeship models, employers don’t need to worry about bringing apprentices on-site and managing them; in these models, apprentices sit at the service provider doing client work, proving their ability to do the job, reducing hiring friction with every passing day until they’re hired by clients.

America leads the world in many areas and outsourcing is one of them. Outsourced apprenticeships are an opportunity for America to leapfrog into leadership in alternative pathways to good jobs. All it will take is service providers to recognize that clients will welcome and pay for the additional value of talent provision. We foresee such models emerging across a range of industries and intend to invest in companies ideally positioned to launch them.

All of these next generation last-mile training businesses will deliver education and training – predominantly technical/digital training as well as soft-skills where employers also see a major gap. They’ll also be highly driven by technology; technology will be utilized to source, assess and screen talent – increasingly via methods that resemble science fiction more than traditional HR practices – as well as to match talent to employers and positions. But they’re not EdTech businesses as much as they are full-stack solutions for both candidates and employers: candidates receive guaranteed pathways to employment that are not only free – they’re paid to do it; and employers are able to ascertain talent and fit before hiring.

While last-mile solutions can help alleviate the student loan debt and underemployment plaguing Millennials (and which put Gen Z in similar peril), they also have the potential to serve two other important social purposes. The first is diversity.

Just as last-mile providers have their finger on the pulse of the skill needs of their clients, they can do the same for other needs, like diversity. Last-mile providers are sourcing and launching cohorts that directly address skill needs, as well as diversity needs.

The second is retraining and reskilling of older, displaced workers. For generations, college classrooms were the sole option provided to such workers. But we’re unlikely to engage those workers in greatest need of reskilling if college classrooms – environments where they were previously unsuccessful – are the sole, or even initial modality. As last-mile training models are in simulated or actual workplaces, they are much more accessible to displaced workers.

Finally, the emergence of last-mile full-stack solutions like outsourced apprenticeships raises the question of whether enterprises might not only seek to outsource entry-level hiring, but all hiring. Why even hire an experienced worker from outside the company if there’s an intermediary willing to source, assess and screen, upskill, match, and provide workers on a no-risk trial basis? As sourcing, screening, skill-building, and matching technologies become more advanced, why not offload the risk of a bad hire to an outsourced talent partner? Most employers would willingly pay a premium to reduce the risk of bad hires, or even mediocre hires. If the market does evolve in this direction, education investors with a full-stack focus have the potential to create value in every sector of the economy, making traditional investment categories of “edtech” seem not only naïve, but also quaint.