Palo Alto, CA – Sep 7, 2017 – One of the most important principles of technological disruption is that the more overdue a disruption is, the more sudden it is when it finally occurs, and the more off-guard the incumbents are caught. We are about to see a disruption in one of the most anti-productivity, self-important, and corrupt industries of them all, and not a moment too soon. High-quality education is about to become more accessible to more people than ever before. For this reason, this is a superb time to be an Education Technology (EdTech) company seeking to be acquired, or for an AI company seeking to disrupt education.
The Natural Progression of Educational Efficiency: The great Emperor Charlemagne lived in a time when even most monarchs (let alone peasants) were illiterate. Charlemagne had a great interest in attaining literacy for himself and fostering literacy on others. But the methods of education in the early 9th century were primitive and books were handwritten, and hence scarce. Despite all of his efforts, Charlemagne only managed to learn to read after the age of 50, and never quite learned how to write. This indicates how hard it was to attain modern standards of basic literacy at the time.
Over time, as the invention of the printing press enabled the mass production of books, literacy became less exclusive over the subsequent centuries, and methods of teaching that could teach the vast majority of six-year-old children how to read became commonplace, delivered en masse via institutions that came to be known as ‘schools’. Since most of us grew up within a mass-delivered classroom model with minimal customization, we consider this method of delivery to be normal, and almost every parent can safely assume that if their child has an IQ above 80 or so, that they will be able to read competently at the right age.
But consider what the Internet age has made available for those who care to take it. I can say with great certainty that the most valuable things I have learned have all been derived from the Internet, free of cost. Whether it was the knowledge that led to new incomes streams, new social capital, or any other useful skills, it was available over the Internet, and that too in just the last decade. Almost every challenge in life has an answer than can be found online. This brings up the question of whether formal schooling, and the immense pricetag associated with it, is still the primary source from which a person can attain the most marketable skills.
Why Education Became an Industry Prone to Attracting Inefficiency: To begin, we first have to address some of the adverse conditioning that most people receive, about what education is, what it should cost, and where it can be obtained. Through centuries of marketing that preys on human insecurity at being left behind, and the tendency to conflate correlation with causation, an immense bubble has inflated over a multi-decade period, and is at its very peak.
Education, which in the bottom 99.9% of classroom settings is really just the transmission of highly commoditized information, has usually correlated to greater economic prospects, especially since, until recently, very few people were likely to overtake the threshold beyond which further education would no longer have a tight correlation to greater earnings. This is why many parents are willing to spare no expense on the education of their children, even to the extent of having fewer children than they might otherwise have had, when estimating the cost of educating them. Exploiting the emotions of parents, the education industry manages to charge ever more money for a product that is often declining in quality, with surprisingly little questioning from their customers. We are so accustomed to this unrelenting rise in costs at all levels of education that few people realize how highly perverse it is.
Glenn Reynolds of Instapundit, with his books ‘The Higher Education Bubble’ and ‘The K-12 Implosion’, has been the earliest and most vocal observer of a bubble in the education industry. The vast corruption and sexual misconduct by faculty in K-12 public schools is described in the latter of those two books, but over here, we will focus mostly on higher education.
Among the dynamics he has described are how government subsidization of universities directly as well as of student loans enables universities to increase fees at a rate that greatly outstrips inflation, which in turn allows universities to hire legions of non-academic staff, many of whom exist only to politicize the university experience and further the goals of politicians and government bureaucrats.
As a result, university degrees have gotten more expensive, while the salaries commanded by graduates have remained flat or even fallen. The financial return of many university degrees no longer justifies their cost, and this is true not just of Bachelor’s Degrees, but even of many MBA and JD degrees from any school ranked outside the Top 10 or even Top 5.
Graduates often have as much as $200,000 in debt, yet have difficulty finding jobs that pay even enough to service the debt. Student loan debt has tripled in a decade, even while many universities now see no problem in departing from their primary mission of education, and have drifted into a priority of ideological brainwashing. Combine all these factors, and you have a generation of young people who may have student debt larger than the mortgage on a median American house (meaning they will not be the first-time home purchasers that the housing market depends on to survive), while having their head filled with indoctrination that carries zero or even negative value in the private sector workforce.
When you combine this erosion of value with the fact that it now takes just minutes to research a topic, from home and at any hour, that previously would have involved half a day at the public library, why should the same sort of efficiency gain not be true for more formal types of education that are actually becoming scarcer within universities?
Primed For Creative Destruction: Employers want skills, rather than credentials. There may have been a time when a credential had a tight correlation with a skillset that an employer sought in a new hire, but that has weakened over time, given the dynamic nature of most jobs, and the dilution of rigor in attaining the credential that most degrees have become. Furthermore, technology makes many skillsets obsolete, while creating openings for new ones. With the exception of those with highly specialized advanced degrees, very few people over the age of 30 today, can say that the demands of their current job have much relevance to what they learned in college, or even what computing, productivity, and research tools they may have used in college. Furthermore, anyone who has worked at a corporation for a decade or more is almost certainly doing a very different job than the one they were doing when they were first hired.
Hence, the superstar of the modern age is not the person with the best degree, but rather the person who acquires the most new skills with the greatest alacrity, and the person with the most adaptable skillset. A traditional degree has an ever-shortening half-life of relevance as a person’s career progresses, and even fields like Medicine and Law, where one cannot practice without the requisite degree, will not be exempt from this loosening correlation between pedigree and long-term career performance. Agility and adaptability will supercede all other skillsets in the workforce.
Google, always leading the way, no longer mandates college degrees as a requirement, and has recently disclosed that about 14% of its employees do not have them. If a few other technology companies follow suit, then the workforce will soon have a pool of people working at very desirable employers, who managed to attain their position without the time and expense of college. If employers in less dynamic sectors still have resistance to this concept, they will find it harder to ignore the growing number of resumes from people who happen to be alumni of Google, despite not having the required degree. As change happens on the margins, it will only take a small percentage of the workforce to be hired by prestigious employers.
The Disruption Begins at the Top: Since this disruption is technological and almost entirely about software, perhaps the disruption has to originate where the people most directly responsible for the disruption exist. The program that has the potential to slash the costs of entry into a major career category is an online Master of Science in Computer Science (MSCS) degree through a collaboration between the Georgia Institute of Technology, Udacity, and AT&T. For an estimated cost of just $6700, this program can enroll 10,000 geographically dispersed students at once (as opposed to the mere 300 MSCS degrees per year that Georgia Tech was awarding previously). This is a tremendous revolution in terms of both cost and capacity. A degree that can make a graduate eligible for high-paying jobs in a fast-growing field, is now accessible to anyone with the ability to succeed in the program. The implications of this are immense.
For one thing, this profession, which happens to be one with possibly the fastest-growing demand, has itself found a way to greatly increase the influx of new contributors to the field. By removing both cost and geographical location, the program competes not just with brick and mortar MSCS programs, but with other degrees as well. Students who may have otherwise not considered Computer Science as a career at all, may now choose it simply due to the vastly lower cost of preparation relative to similarly high-paying careers like other forms of engineering, law, or medicine. Career changers can jump the chasm at lower risk than before, for the same reasons.
As fields similarly suitable to remote learning (say, systems engineering, mathematics, or certain types of electrical engineering) see MOOC degree programs created for them, more avenues open up. Fields where education can be more easily transmitted to this model will see an inherent advantage over fields that cannot be learned this way, in terms of attracting talent. These fields in turn grow in size, becoming a larger portion of the economy, and creating even more demand for new entrants above a certain competence threshold.
But these fields are still not the ‘top’ echelon of professional excellence. The profession that is the most widespread, most dynamic, most durable, and has created the greatest wealth, is one that universities almost never do a good job of teaching or even discussing: that of entrepreneurship. I have stated before that the ever-increasing variety of technological disruption means that the foremost career of the modern era is that of the serial entrepreneur. If universities are not the place where the foremost career can be learned, then how important are formal degrees from these universities? Since each entrepreneurial venture is different, the individual will have to synthesize a custom solution from available components.
Multi-Faceted Disruption: As the Economist has noted, MOOCs have not yet unleashed a ‘gale of Schumpeterian creative destruction’ onto universities. But this is still a conflation of the degree and the knowledge, particularly when the demands of the economy may shift many times during a person’s career. Udacity, Coursera, MITx, Khan Academy, and Udemy are just a few of the entities enabling low-cost education at all levels. Some are for-profit, some are non-profit. Some address higher education, and some address K-12 education. Some count as credit towards degrees, and some are not intended for degree-granting, but rather for remedial learning. But among all these websites, an innovative pupil can learn a variety of seemingly unrelated subjects and craft an interlocking, holistic education that is specific to his or her goals.
When the sizes and shapes of education available online has so much variety, many assumptions about who has what skills will be challenged. There will be too many counterexamples against the belief that a certain degree qualifies a person for a certain job. Furthermore, the standardization of resumes and qualifications that the paradigm of degrees creates has gone largely unchallenged. People who are qualified in two or more fields will be able to cast a wider net in their careers, and entrepreneurs seeking to enter a new market can get up to speed swiftly.
But this is just the beginning. Once Deep Learning enters into the equation, we arrive at ‘EdTech 2.0’. Deep Learning will not just adapt each course into a pathway customized for each student’s learning style, it will recommend further courses or even a different field of study best suited for the personality that the algorithm has learned about.
Scale to the Topmost Educators: There was a time when music and video could not be recorded. Hundreds of orchestras across a nation might be playing the same song, or the same play might be performed by hundreds of thespians at the same time. Recording technologies enabled the most marketable musicians and actors to reach millions of customers at once, benefiting them and the consumer, while eliminating the bottom 99% of workers in these professions. Consumers and the best producers benefitted, while the lesser producers could no longer justify their presence in the marketplace and had to adapt.
The same will happen to teachers. It is not efficient for the same 6th-grade math or 8th grade biology to be taught by hundreds of thousands of teachers across the English-speaking world each year. Instead, technology will enable scale and efficiency. The best few lectures will be seen by all students, and it is quite possible that the best teacher, as determined by market demand, earns far more than one currently thinks a teacher can earn. The rise of the ‘celebrity teacher’ is entirely possible, when one considers the disintermediation and concentration that has already happened with music and theatrical production. This sort of competition will increase quality that students receive, and ensure renumeration is more closely tied to teacher caliber.
Conclusion: It is not often that we see something experience a dramatic worsening in cost/benefit ratio while competitive alternatives simultaneously become available at far lower costs than just a few years prior. When a status quo has existed for the entire adult lifetime of almost every American alive today, people fail to contemplate the peculiarity of spending as much as the cost of a house on a product of highly variable quality, very uncertain payoff, and very little independent auditing. The degree of outdatedness in the assumption that paying a huge price for a certain credential will lead to a certain career with a certain level of earnings means the edifice will topple far more quickly than many people are prepared for.
We are about to see the key components of this transformation fall into place. Some people will be enter the same career while spending vastly less on the requisite education than they may have expected. Many colleges will shrink their enrollments or close their doors altogether. The light of accountability will be shone on the vast corruption and ideological extremism present in some of the most expensive institutions (Moody’s has already downgraded the outlook of the entire US higher education industry). But most importantly, the most valuable knowledge will become increasingly self-taught from content available to all, and the entire economy will begin the process of adjusting to this new reality.
Within this, the volume of M&A activity will be high. EdTech companies have to acquire AI teams, and EdTech itself has to consolidate into a few large entities that can form brand recognition to supplant existing universities. Any companies in EdTech or AI for EdTech should reach out.
Kartik Gada has 20 years of experience across investment banking, hedge funds, and technology business unit management. At Woodside Capital, his focus is on Artificial Intelligence, FinTech, and other advanced, high-impact technologies.
Woodside Capital Partners, LLC
About Woodside Capital Partners
Woodside Capital Partners is a global, independent investment bank that delivers world-class strategic and financial advice to emerging growth companies in the technology and life sciences sectors, as well as institutional technology research services marketed as techView. With a strong track record in M&A, strategic partnerships and private placements, Woodside Capital Partners has been providing worldwide investment banking services since 2001 with leading domain experience in software, Internet services, electronic communications and materials, and healthcare. Woodside Capital Partners is headquartered in Silicon Valley, with an office in London. Securities offered through Woodside Capital Securities LLC, member FINRA/SIPC. For more information, please visit www.woodsidecap.com
NOTICE: No information herein is a recommendation that any particular individual should purchase or sell any particular security in any amount or at all, and is not a solicitation of any offer to purchase or sell from or to any particular individual.