Educational Entrepreneurship

Why It Matters, What Risks It Poses, and How to Make the Most of It

November 14, 2005

 

8:15 a.m.	Registration and Breakfast
8:45	Welcome:	Frederick M. Hess, AEI
9:00	Panel I: Understanding Entrepreneurship
	Presenters:	Kim Smith, NewSchools Venture Fund
		Paul Teske, University of Colorado at Denver
	Discussants:	Jon Schnur, New Leaders for New Schools
		Kent McGuire, Temple University College of Education
		Nina Rees, U.S. Department of Education
10:30	Break
10:45	Panel II: The Landscape of Entrepreneurship
	Presenters:
		Henry Levin, Columbia University Teachers College
		Patrick McGuinn, Drew University
	Discussants:	Barnett Helzberg, Jr., Shirley & Barnett Helzberg Foundation William Roberti, Alvarez & Marsal, LLC  Eric Adler, The SEED Foundation
12:15 p.m.	Luncheon
1:05	Panel III: Models of Entrepreneurship
	Presenters:	Robert Maranto, Villanova University
		Joe Williams, New York Daily News
		Steven Wilson, Harvard University
	Discussants:	Michelle Rhee, The New Teacher Project
		Larry Berger, Wireless Generation
2:40	Break
2:55	Panel IV: The For-Profit Question
	Presenters:	Alex Molnar, Arizona State University
		Adam Newman, Eduventures, Inc.
	Discussants:	Jeffrey Cohen, Catapult Learning
		Nancy Van Meter, American Federation of Teachers James Shelton, Bill & Melinda Gates Foundation
4:25	Break
4:40	Panel V: Unleashing Educational Entrepreneurship
	Presenters:	Larry Cuban, Stanford University
		John Chubb, Edison Schools
	Discussants:	Larry Rosenstock, High Tech High
		Joel Klein, New York City Department of Education
		Rod Paige, former U.S. Secretary of Education
6:15	Reception
7:15	Adjournment

(Unedited transcript made from audio recordings)

Proceedings:
MR. HESS:  Folks, go ahead take your seats.  We will get started.

I'm Rick Hess, Director of Education Policy Studies at the American Enterprise Institute.  I'd like to welcome all of you here today for this conversation about educational entrepreneurship.  If that's not what you thought you were here for, you are in the wrong room.

[Laughter.]

MR. HESS:  So deal with it.

First off, I'd like to begin by thanking the Ewing Marion Kauffman Foundation for funding today's gathering and the ensuing volume.  It's a neat topic that I don't think we spend as much serious and scholarly attention on as it probably merits.  And I think it's wonderful that the Kauffman Foundation is willing to invest in this kind of thinking and analysis.

In some ways, in a lot of ways, this is actually the companion project, companion book to the philanthropy volume.  Maybe of you were here for the spring philanthropy conference.  And Harvard Education Press published that book last month.

As with the best of intentions, in a lot of ways, this looks at kind of the flip side of those questions and says, if you're going to invest this kind of venture capital, if you're going to make these kinds of investments in education, how do we think about the process of generating new ideas?

That book is actually available in the lobby for those of you interested.  This one will be available next fall from Harvard Education Press.  Currently, it's tentatively titled "Educational Entrepreneurship."

We're going to try to run today pretty promptly.  For those of you who know me, know that because I'm ADD, I don't deal well with uncertain timelines.  So we will try to keep everything pretty much crisply running all day long.  If we're not doing that, I'm failing at my job as moderator, and I will try to get us back on track.

The basic purpose of today's conversation, like most of what we do at AEI, is basically get past the can't [inaudible] that we often use when we talk about education.  I'm not here--none of us are here today to talk about how wonderful and neat innovation is.  And none of us are here to celebrate the loveliness of reform.  And I certainly don't want us to have any vague, happy conversations about the, you know, the miracle of possibility of entrepreneurship.

Today's conversation is very much intended to be a serious challenging consideration of what are the up sides and what are the down sides of rethinking the ways that we approach school reform, school improvement and the operation of public schools.

So with that, here's how it's going to go.  I'm going to take about 15 minutes now, walk you through today's question, really today's setup from my perspective, why we framed it the way we did.  Then what we're going to do is roll into the first panel, which is going to start talking about what is educational entrepreneurship, what does it look like, what does it mean, who are these people?  And from there, we're going to proceed though the day.  And after that, we're going to talk about what the landscape looks like when we talk about this set of issues.  We're going to talk about what it means for folks to be educational entrepreneurs on the ground--what does it look like.  We're going to talk about the for-profit question.  And we're going to close today by talking about what it would mean to really open up the education sector to more entrepreneurship.  And what are the perils of doing so.

With that, let me take about 15.  I want to talk you through exactly why we're here today from my perspective.  First off, I think a lot of us in these conversations, and certainly a lot of us who have the time and privilege to come sit in rooms like this and kind of jawbone about education, operate under the premise that what we've got isn't getting the job done.  Now you've got a whole bunch of various theories about why this may or may not be.

For me it's pretty simple.  Our education system was never designed to answer the challenges we're now placing upon it.  We've got a school system which grew up over the last couple of centuries with the basic purpose of education children to a relatively low level, making sure only a relatively small percentage of children were actually well educated and which ultimately was like anything else, particularly in 20th century America, really a processing operation intended to make sure that we were running a pipeline of children into adulthood.

It wasn't designed or intended to provide excellent education of all children.  So it's kind of unfair to expect that it would.  The flip side of this, of course, and this is when we get into quoting Sam Freeman back and forth ad nauseam, is that globalization and the 21st century have posed new challenges both to our nation and for our children.  And what worked passably well 30 or 50 years ago is not going to work passably well 20 or 30 years from now.

So given these kind of twin realities that our current system isn't designed for what it needs to do, the stakes are getting higher, we come to a fork in the road.  And a fork is always--a fork always implies risk.  Anytime you're talking about change, anytime you're talking about reinvention, you have to be honest about the degree of risk you're talking about.

But what we often kind of brush under the rug is that not changing is that the status quo has massive risks of its own, that only 70 percent of our kids are graduating high school on time, and that in many of our major cities, it's under 50 percent, that in cities like Atlanta and D.C. and LA, barely are less than 50 percent of 4th graders are even at basic on math and literacy.

The Manhattan Institute analysis of Latino and African Americans suggest that only 16 to 20 percent of Latino and African American 18-year olds have the necessary literacy and course requirements even to pursue four year college at their state flagship institution.

So when this is the situation, one has to consider whether the risks of change are not in fact less than the risks of hugging the status quo.

So with that, what I want to suggest is that's where educational entrepreneurship comes in.  Innovation entrepreneurship by design involves failure.  Anybody that tells you you can do real experimentation, real innovation and not court failure is lying to you.  They're selling you a bill of good.  The question is, how do we make sure that we're comfortable with the amount of failure that we're going to encountenance, and how do we make sure this failure actually serves a productive purpose?

Because the fact is not only do existing arrangements currently lead to failure, but they have real negative after affects.  In particular, they create a real disincentive for so many of our best and brightest teachers.  They don't get rewarded for their efforts.  They find obstacles in their way when they try to do more and better stuff.  They are not promoted.  They are not compensated for doing excellent jobs.  And we're not making any systematic effort to call out and remove the weaker and less effective educators who are down the hallway.

And one of the results of this is we get a stagnation.  What we're created is an environment where so many of our best educators, particularly in troubled schools and troubled districts, you know, often just take it as part of the job that they have to deal with bureaucracy, that they have to carry other people on their shoulders.  And they just shrug at it.  They don't even think this is surprising.  To them, this is just the way the world always works and should work.  And I don't think it needs to be that way.

So the entrepreneurial presumption, the entrepreneurial presumption in this conference is that the risk of status quo are at a point where they outweigh those of considering reinvention seriously, or promoting reinvention.  And whether reinvention occurs inside or outside of public school systems, whether it involves for-profits or not-for-profits, these are open questions.  And those are some of the questions we want to talk about today.

Now what exactly is entrepreneurship?  What do I mean by this?  One of the things you're going to realize today is that folks can define this in different ways and mean different things by it.

J.S. Seay (ph) and kind of perhaps--the French economist, one of the earliest definitions of entrepreneurship said it was the process of reallocating resources from low productivity to high productivity areas.  And so entrepreneurs are people who do that.  That's kind of a nice textbook definition.

In America, entrepreneurship has often meant folks who open up and run small businesses and small enterprises.  That's kind of a functional definition.

For my purposes, with apologies to Peter Draw (ph) for the way I tend to think about today's exercise is that it's really a process of purposeful innovation, a lot like when [inaudible] always talks about.  It's a process of using innovation in a purposeful way to drive toward new improvements and productivity, in efficiency, and in quality of what we're putting out.  And so that's ultimately what we're talking about.

Now one of the reasons we're not comfortable with entrepreneurship in education is because we've so wrapped education in the syrupy cloak of sentimentality that it's really difficult for anybody to actually talk honestly or forthrightly about balancing risks of one approach versus balancing risks of the status quo.

In particular, I would suggest we fall into three traps, three of these kind of sentimentality traps.  The first if the familiarity trap.  When people talk about things that are radically different from the way they've been done in education, they get attacked as anti-public education.

So when you talk about differentiated pay, when you talk about school vouchers, when you talk about outsourcing, you are by default anti-public education.  That's one.

Second is the certainly trap, that in order to be comfortable with an innovation, it has to be proven, it has to be scientifically verified.  It has to be based on evidence, which is compelling and convincing.

Now the problem with this is a whole bunch of stuff we take for granted like the idea that you should pay good employees more than bad employees has never been scientifically verified.  These are a whole bunch of working assumptions which we operate under, and most of the neat innovations by definition were never proven.  They were tried and they were tested and they were refined.

And then the third of these traps is what I call the jettison (ph) trap.  The idea here is that we've got to figure out what the future holds and get there first, that it's not allowed to experiment.  We're not comfortable with failure.  We want to figure out what the future should look like, and we want to build it today.

And all of these are fundamentally antithetical to the premises of entrepreneurship.

So what is entrepreneurship about then?  Entrepreneurship ultimately is messy.  The reasons that security traps don't hold is first off the solutions are going to change over time.  What worked in 1950 may or may not be working as effectively in 2000.  Second, by definition, new solutions are going to be untested.  And finally, in almost every case, solutions emerge from trial and error.  We don't actually know what's going to work before it works.

In fact, a lot of great ideas look really stupid on the front end.  Michael Dell selling computers out of his dorm room--it's ridiculous.  Hundreds of kids were trying it and nobody could make it work.  At the end of the day, it fundamentally changed our relationship with our personal technology.

You know, Kim and her paper, it's got one of the classic examples.  A founder of FedEx, Fred Smith, he wrote up FedEx as a graduate project and he got  C on it because they told him it was a ridiculous exercise, it would never fly.

So the fact this notion that somehow we can figure out the future ahead of time and get their first I think is just fundamental misrepresentation the way the world works.

In fact, it's not the way anything works in the world that we live in.

Well, one classic example is somebody asked the Wright brothers in 1902 how long it would be before somebody was able to actually to figure out a way to fly.  They said probably 20 years.  In 1903, they were the first to fly.

So if these guys don't have any good estimate of what was going to be involved, the idea that all of us feeling around who may be out on the front lines can kind of estimate what the future will look like or when it will look like that, I think is just hopelessly naive.

In fact, if you look at even relatively simple start-ups, relatively simple firms surrounding our economy, then tend to fail at huge rates.  BizMinor (ph), for instance, reports on survivors over any two year period of cookie and cracker start-ups.  In 2002, 25 percent--excuse me, not even start-ups--of all cookie and cracker makers in the U.S., 25 percent that were around in '02 had failed by '04.  Among florists, among 24 percent of the florists that were around in '02 had failed by '04.  Among men's clothing start-ups, 50 percent of the firms that had started in 2002, no longer existed in 2004.

So even in relatively simply businesses, where folks pretty much know what's involved, where you're not dealing with the incongruities, the kind of unpredictability of children, were still pretty lousy at knowing exactly what business model is going to work and making it work.

So the idea that we should be able to predict perfect success in education seems pretty unlikely.  And this  has been recognized for a while.

Peter Draw, education entrepreneurship pointed out that knowledge-based innovation is especially tricky compared to this other stuff.

So one might think given that, that we would be, that we would force ourselves to wrestle with what unpredictability means.  In fact, if you look at one of the other sectors, which is really knowledge driven, which is book publishing, what you find is a massive amount of uncertainty.  In fact, more than 8,000 publishers enter the sector every year.  There's about 120,000 to about 150,000 new books published in the U.S. every year and most of them lose money.

Five publishers control about percent of the publishing market.  Eighty percent is give guys.  But about three quarters of books are published by everybody else, all of the little guys.  And partly, this is because the big guys, with all of their resources and all of their science and all of their market research, still miss once in a while.  They passed on a book called "Harry Potter and the Sorcerers' Stone," a little cult book  you might have heard of.

This isn't unusual.  If you look at the TV industry, the movie industry, these guys invest immense resources trying to base on immense audience research to predict what it is that's going to work.  And they're wrong the vast majority of the time, because the world is not a simple or predictable place.

All right, so what does entrepreneurship actually involve?  What it involves is throwing a lot of darts.  What it involves is getting a whole lot of smart, motivated people working under pressure to solve problems in a lot of different ways.

Now in education the last 15 years  we've seen a lot of this kind stuff emerging whether it's folks who are going to be in this room today like Teach for America or Seed (ph) or Edison or National Heritage Academies, these are the fruits--these kinds of breaks--not necessarily to endorse them or not endorse them, but these are the kinds of endeavors that we can throw out and we can see how well they work.

Now one of the big problems, of course, when we talk about educational entrepreneurship is even the people who get heralded as fresh thinkers in education, even the visionaries, their notion of being experimental or being entrepreneurial is to say, ah, hah, KIPP works.  I want  KIPP in my district.  Or NHA works, I want NHA in my district.  That's not entrepreneurship.  That's saying, you know, I like to go to horse races and bet the pony that's going to win.

Entrepreneurship is a process.  Entrepreneurship is a process of generating new operations which are going to challenge those in the field today, force them to raise their game and hopefully do better.

You know, the notion that being entrepreneurial that you want to bring KIPP to your district is a whole like saying in 1981 that Presidential Airways is the way of the future and therefore, what we should do is we should insist that we have Presidential Airways gates at every airport in the country.  Or saying that TWA is a state-of-art in 1986, and therefore, what we need to do is require every district in the nation to have a two gate.

Entrepreneurship is the process of being open to the fact that trial and error is going to throw out things like Southwest and Jet Blue.

Now, in fact, this is what we do everyday in most of our lives.  If you look at 2000, which is a  high year say in venture funding in the U.S., more than 8,000 operations got venture.  More than 3,000 got early stage venture capital.  Even in a horrible year like '02, more than 3,000 firms in this country got venture capital.  These aren't just folks that were starting.  These are folks who actually got venture capital from VCs.  Many of which aren't going to work out, most of which are going to lose money, but all of which seem like reasonable bets and they might work.

Now in fact, this is absolutely not the way we operate in education.  In the U.S., according to Journal of Developmental Entrepreneurship in '04 reported that about 11 percent of U.S. jobs were involved in either starting or managing new businesses.

This is one of the reasons that the American economy tends to work so well.  That's twice the ration in France, which is about 5.5 percent.  It's four times the ratio than Slovenia.  What's the ratio in the education sector?  Well, if you want education help and social services together, the rate is approximately zero percent.  Okay.

Another way of looking at this is a better R&D commitment.  At least in health services, at least we're investing in new knowledge.  At the federal level, we're spending $25 to $30 billion the his year generating new knowledge through NIH funded R&D.

And in the case of education, the Institute of Ed. Sciences, the capital figure is [audio break] out 1/100ths of that, about $250 million.  So we're neither throwing darts at the board nor are we building the knowledge that could actually support folks who might be interested in trying new ideas.

Now one of the common kind of mistakes, one of the common  misapprehensions I guess that I got asked about a bunch of times in the last couple of weeks is, well, isn't entrepreneurship school choice?  Right, if you like vouchers and charters, you're a for entrepreneurship.  And if not, you're not.

No, think there's a fundamental misunderstanding here.  First off, markets aren't about making choices.  You've got Belgium has gone one of the most radical choice based arrangements in education in the world.  Few people think of Belgium schooling as a radical market in education.  In fact, if you lived in Moscow in 1975,  you had your choice of scores of grocery stores.  Not many people would have said that Moscow in 1975 was a market for consumer goods.

Markets are actually about this process of creative destruction.  Markets are about this idea that you create opportunities for new approaches to emerge and make it possible for failed approaches to get plowed under, disappear.

The fact is you can have a punitive market system and it can be dynamic and it can be dynamic or not be dynamic.  If you look at French firms, for instance, at the 25 biggest French firms, 0 percent were founded since 1965.  Everyone of the 25 biggest firms in France today was already around in 1965.

In the U.S., if you look at the 25 biggest firms today, three-quarters didn't exist in 1965.  And you know, again, it gets to a question of whether or not we're comfortable with these processes.

Now it's legitimate to say, I'm not comfortable with this.  But one needs to understand what one is giving up when one gives up the renewal and the replenishment and the vigor or entrepreneurship.

Now what are the barriers to turning a choice system or an open or opportunity entrepreneurship into entrepreneurship?  Well, first, the key is to understand entrepreneurship is about creating new solutions.  It's not about choice.  It's about new solutions.  So much of our creative energy today is focused on EMOs, education management organizations, which are one of a continuum, an almost infinite number of ways you might think about educational entrepreneurship playing out.  And yet this all we really think or talk about.

There's two key things that limit our imagination.  One of that we tend to only talk about packing money into blocks per child.  This is considered radical thinking in American education, the notion that money should follow the child.

Certainly an improvement to what we've done, which is compiling money at the district or school level.  But if we only unpack money by the child, then all of the entrepreneurship that is going to occur is going to be in terms of serving the entire child as a block, as an entity.  That doesn't have to be the way we think about school reform.

Supplemental services in No Child Left Behind offers one example of how you might think about unpacking some stream of money for the purpose of educating children in particular ways.

The flip side of this is that services can be configured differently than they traditionally have been.  You might think about in rather than only having whole school operations run everything from literacy to tutoring to experiential learning, to specific subjects to applied skills to support functions, you can imagine dozens of ways in which it might make sense to unpack these.

So the idea that we are here to talk about EMOs or we're here to talk about school choice is a fundamental misperception.

We're here to talk about all of the ways in which we might create opportunities for folks to figure out  how to run schools and schooling better.

Now key barriers to these kinds of reinvention are particularly fourfold.  One is a lack of capital.  The second is the barriers to entering that face folks who get into this.  The third is the talent pipeline to support these kind of endeavors. And the fourth is the infrastructure that's in place to nurture entrepreneurship.

Now to understand these, there's a whole bunch of questions that we need to ask and talk about.  And that's really what today is about.

In particular, there are two sets of key questions I would point us towards.  One, is what the role about educational entrepreneurship look like today?  How does it look inside or outside of school districts in the profit or not-for-profit sector?  What motivates entrepreneurs?  What tools do entrepreneurs need to be successful?  And the flip side of questions are, what policies or practices impede entrepreneurship today?

If one is comfortable with the notion that we should be thinking more seriously about expanding its scope, what stands in the way?  What are the costs of today's obstacles and impediments?  What are the virtues of current arrangements?  What are the risks we take if we move away from them?  And if we think about the kinds of remedies or changes we might embrace, what are the down sides of them?  What are the perils that they pose?

So finally, let me just say, that what I want us to do is think about entrepreneurship in particular as a lens for thinking about reform more generally.  And we can do that by talking about--when we talk about vouchers and charters, we can say what do they look like in terms of entrepreneurship in particular.

We can say when talk about who's allowed to teach, about how we compensate employees.  We can say when we talk about the provisions of No Child Left Behind or high stakes accountability.

Okay, so here's how today is going to work.  We're going to work in five sessions.  The first session is going to talk about this question about what is educational entrepreneurship?  And who are educational entrepreneurs?

The second is we're going to talk about the landscape on which it unfolds.  What's the backdrop against which these folks are operating in terms of the cost structures and in terms of the policy and statutory structures?

Third, what is entrepreneurship look like in practice inside or outside of districts or in terms of other ways of thinking about organizing our activity?

Fourth, what do we know about the for-profit component of all of this?  How much is there?  What role does it play?

And finally, how might be boost entrepreneurship?  And what are the risks of doing so?

At the end of the day, my hope is that we're going to walk out of here not necessarily being more or less comfortable with any particular notion of doing this, but understanding that talking serious about entrepreneurship is not talking about merit pay.  It's not talking about school choice.  It's not talking about being for or against accountability.  It is basically the question of if you open the door to the 21st century school improvement, what's going to walk through?  What are we going to equip, to provide the schools and the operations and the entities and the support services and everything else that's actually going to be providing education?  And I think that's a conversation we  really have had.  With that, what I want to do is introduce the first panel.  And we're going to get today underway.

For the first panel we have two presenters with us.  Kim Smith will be going first.  Kim is the Co-founder and Executive Chair of the NewSchools Venture Fund.  You're going to go second?  Let me flip that.  Going first will be Amy Williamson who co-authored her piece with Paul Teske of the University of Colorado at Boulder.  Amy is a Ph.D. graduate in the Graduate School of Public Affairs at the University of Colorado.  She is co-author of Public Opinion About School Choice in the 2005 Encyclopedia of Polling in America, and she has taught at the University of Colorado.

Going second will be Kim Smith, Co-founder and Executive Chair of the NewSchools Venture Fund which she established in 1998.  She's a founding team member of Teach for America, and she's founding Director of BAYAC AmeriCorps, a consortia of nonprofits in the San Francisco Bay area.

Our discussant is Nina Rees, Deputy Under Secretary for Innovation and Improvement at the U.S. Department of Education.  There Nina coordinates the implementation of public school choice and the supplemental service provisions of the No Child Left Behind Act.  Nina was previously Deputy Assistant for Domestic Policy to Vice President Dick Cheney, and previously the Chief Education Analyst at the Heritage Foundation.

The way this is going to work is each of the speakers is going to take about 15 minutes, present kind of the gist of their papers which are available out in the lobby.  Nina is going to speak for about 10 minutes.  We're going to then open it up for Q and A.  As always, my request is going to be that we violate the D.C. precedent and not give speeches from the floor.  I'm going to ask that we ask questions which are demarked by more than a question mark at the end but that actually are questions addressed towards the panelists, and hopefully we will give you guys a chance that way to get a significant time to be involved in the conversation.

Amy, why don't you start us off?

MS. WILLIAMSON:  Thank you all for coming, and thank you to Rick Hess and AEI for having me here today.  I'm here to talk to you about the meaning of educational entrepreneurship, how the concept applies to education including common elements, and some examples of exemplary organizations.

I'll begin with some definitions.  Even within the business sector there's a lack of consensus regarding the boundaries of the term entrepreneurship.  A very narrow definition would describe an entrepreneur as a business person who successfully developed a new idea that results in a whole new business or new business model.  Bill Gates, for example.  On the other hand, a broader definition of entrepreneurship but still within the business sector could extend to almost anyone trying to start a new business regardless of whether such a business has already been established.

In recent years, the term entrepreneurship has been increasingly examined within the public and nonprofit sectors.  Public entrepreneurship describes activities fostering radical change within the public sector.  Public entrepreneurs could be elected officials, appointed officials or other public servants, for example.

Social entrepreneurship refers to activities working toward radical social change.  These entrepreneurs are most often associated with the nonprofit sector, but the concept has been applied to the public and private sectors as well.  A key distinction between business entrepreneurship and social entrepreneurship is that the profit motive if present is secondary to the social change motive.

In applying the concept of entrepreneurship to education, the key element for us is transformative, so educational entrepreneurs are individuals seeking to instigate change in the public education system that will disrupt, transform or radically alter the way education is provided, for example, business people envisioning a new way to provide education services.  Educational entrepreneurs can also be public leaders who seek to change the existing system from the inside.  Educational entrepreneurs can also be nonprofit leaders creating organizations on the fringes of the public education system.  Two of the people on this panel, Kim Smith and Jon Schnur, have created impressive organizations within the nonprofit sector as a means to transform public education.

Paul Teske and I suggested that there are common elements of educational entrepreneurship that span all three sectors.  In developing models for transforming education, entrepreneurs are alert to opportunities or may at times create their own opportunities.  Educational entrepreneurs are prepared to take significant risks to fill these gaps.  Such risks often have a financial component, but in the public and nonprofit sectors, the financial risk is more likely to be that of taxpayer dollars or philanthropic funding rather than the personal financial risk of the entrepreneur.  However, the entrepreneur is clearly taking on personal risks in these sectors as well, particularly in terms of their careers.  A successful venture could push a career to new heights, resulting in new opportunities for the individual.  On the other hand, a significant failure could certainly dampen the career.

Having a great idea and the willingness to take a risk, however, is not sufficient.  The ability to build organizations and network with others are essential skills.  There is significant difficulty in implementing a new idea in the education system.  Networking may be important for generating financial resources, for passing relevant legislation and for bringing together individuals to implement the program.  Furthermore, some ideas may require partnering with state or local districts who may already be entrenched in their way of doing things.  At any rate, all of these elements are essential for successful educational entrepreneurship.

Educational entrepreneurs are also likely to share similar characteristics.  I'll just touch upon these lightly.  I think Kim will cover it quite a bit more in her presentation.

Although entrepreneurs usually recognize risks, they are more likely to frame the risks as potential gains, making the risks more appealing both for themselves as well as potential funders.  They have a sense of urgency and action orientation.  Personality traits often tend to include a strong need for achievement and also a high internal locus of control.

The institutional environment makes a difference for the emergence of entrepreneurs.  Entrepreneurs may emerge anywhere, but are more likely to do so in an environment where success and rewards, with rewards broadly construed, are at least possible.  The public education system does reveal some constraints that aren't as common within the private for-profit sector.  Our public education system functions within the democracy system of government resulting in the need for greater consensus and at times perhaps legislative or even public vote.  The public education system is established as a bureaucracy.  This arrangement makes it more difficult for an entrepreneur to emerge, as discretion is significantly limited.  Furthermore, teacher's unions are a powerful force in public education that typically strive to maintain the status quo.  Collective-bargaining agreements often bind schools and districts in important areas such as the ability to hire teachers that meet a school's needs, to fire ineffective teachers, and/or to set or adjust salaries.  The last point follows rather closely from the effects of bureaucracy and democracy, that being that there are multiple veto points in public education for any innovative idea.

Are educational entrepreneurs born or made?  It seems likely that educational entrepreneurs are born in the sense that there are key personality traits and certain skills inherently that are important, but the institutional environment does make a difference and educational entrepreneurs are made in the sense that this institution can foster or hinder entrepreneurial spirit.

Differentiating between entrepreneurship and reform is important to further our understanding of educational entrepreneurship, but it is not a simple task.  The main differences between entrepreneurship and reform are in scale and scope.  Reform is often incremental and does not necessarily make a significant change in the public education system.  Educational entrepreneurship, however, refers to grander, more transformational changes.  Theoretically, it is difficult to draw a specific boundary between the two.  If we only consider radical transformation such as school choice or virtual schools, then we're excluding those working within the public education system that are working as much entrepreneurial activity as they can.  But including such less radical change in our description, we do risk moving back towards the category of incremental reform rather than entrepreneurship.  In a few moments I'll give you some more concrete examples of what we mean by educational entrepreneurship.

Is the public education system today more conducive to educational entrepreneurship?  Over the last two decades a sense of crisis has emerged regarding the public education system.  Incremental reforms have not added up to significant change, and there is a large and growing achievement gap between low-income and minority students and the rest of the student population.  Perhaps such issues have the ability to open a window allowing more radical transformations within the education system.

Today there is a national market for top education leaders.  In other words, there is a potential reward for successfully making significant changes in the system.  State and local politicians appear to be more willing to take political risks specifically within education.  The No Child Left Behind legislation has created a number of new opportunities for entrepreneurship in education, specifically, such as expanding the private tutoring market or the domain of school choice.

Educational entrepreneurship seems to be alive and well in higher education, and K through 12 education can learn from this.  For example, faculty pay in higher education varies based on market factors and performance, and online courses have become relatively common place.  Finally, more philanthropic funding and venture capital resources are now available for K through 12 education.  Moreover, many new philanthropic organizations are promoting educational entrepreneurship than in the recent past.  All of these features reflect the notion that perhaps the educational system today is more conducive to entrepreneurship than it has been in the past.

The following are examples of areas that have been identified by Paul Hill where entrepreneurs can act in K through 12 education.  Although private firms already play a role in many support services to schools, much of which would not be characterized as entrepreneurial, there are other areas where entrepreneurship could flourish, for example, more could be done in terms of developing new ways of financing facilities with support from private investment.  Second, there is a wealth of business sector models from which K through 12 education can draw, for example, tapping into leadership models such as Jon Schnur's New Leaders for New Schools has done.  Other examples could include head hunting for high quality teachers or portable benefits for employees.  Private and nonprofit organizations are now operating whole schools funded by the public education system.  Online course options and virtual schools are examples of ways that they are harnessing new technology to make radical changes in education.

We've identified a handful of entrepreneurial organizations within the education sector.  Although the significance of their entrepreneurial activity was clearly the primary factor in our determining these organizations, we did try to find organizations that covered the landscape across the sectors.  I would like to note that the NewSchools Venture Fund founded by Kim Smith was part of our initial draft of case studies but we felt that including it here in our presentation and in our paper would be a bit redundant and we couldn't give the depth of information that she could herself.

So I'll start with Brad Jupp and Denver's new Professional Compensation for Teachers Program, or ProComp.  It was just approved by voters in the November election.  Teacher's unions have historically opposed pay for performance programs, instead aiming for payment schedules based primarily upon seniority.  In Denver, however, Brad Jupp, a teacher's union negotiator, worked against strong obstacles and helped start and push through this program that provides higher pay for such goals as raising student test scores.  Although pay for performance is hardly a new idea, it is fairly radical in public education and has the potential to transform the current pay structure of the Denver Public School System, and if replicated it may have even a greater impact.

Wendy Kopp founded Teach for America after developing the idea of training smart graduates of the top universities to teach in inner-city and low-income school districts.  Her idea was that a formal education school degree was not absolutely necessary for quality teaching.  Today over 17,000 individuals have participated in her teaching core which has demonstrated success.  An important point for our discussion, however, is that a lot of the alumni from the Teach for America program have gone on to do further entrepreneurial things within education.  For example, Dave Levin and Mike Feinberg founded the Knowledge Is Power Program, KIPP, which has demonstrated success with low-income children, and Kim Smith was one of the founding team members of Teach for America before founding NewSchools.

New Leaders for New Schools is a nonprofit organization founded by Jon Schnur that provides training in educational leadership.  NewSchools utilizes arbitrage as a central concept, applying business concepts to education.  Jon has been alert to the increasing need and the problem that large percentages of current principals are eligible or close to eligibility for retirement.  New principals will be needed.  New Leaders wants these principals to be able to work more autonomously within school systems and apply sound business practices.  Jon had the vision and determination to create a new organization to provide an innovative service, teaching principals to become effective school leaders.

K12 is a for-profit company that provides an online curriculum and operates virtual schools.  The company focuses on home schoolers.  Parents can enroll students in the K12 program either for a feet or at times enroll them in virtual charter schools.  By combining home schooling and technology, K12 has created a new business model.

Kaplan is a for-profit education company with various divisions offering programs such as higher education institutions, preparation for standardized testing and tutoring programs.  The company has expanded significantly over the past decade in part due to recognizing opportunities for private companies within the education sector.

What these organizations share are funders, founders or leaders with a strong entrepreneurial spirit who believe they can succeed.  Each entrepreneur recognizing an opportunity was willing to engage in the risk and able to work with others to achieve their goals.

We have come, Paul and I, to several conclusions.  First of all, constraints on educational entrepreneurship are weaker than in the past.  Public policies such as state choice laws and the federal No Child Left Behind Act have paved the way for a greater role for private and nonprofit organizations in public education.  Reflecting this openness to new ideas in education, educational entrepreneurship is taking pace today at an apparently greater rate than in the past as exemplified by some of the organizations I described.

There do remain, however, concerns about scaling up and maintaining entrepreneurial organizations.  Most of the activities of educational entrepreneurs are relatively small compared to the large size of the public school system.  The entrepreneurs we describe are making changes, but will these changes permeate through the entire system over time?  A similar concern is whether entrepreneurial organizations can maintain such an entrepreneurial spirit once their leader departs.  Organizations such as Teach for America, NewSchools and New Leaders, however, are trying to create institutions and networks that can generate entrepreneurship beyond their original founders.

What is the future of educational entrepreneurship?  This question will permeate all of the discussions here today.  As noted, it seems as though the climate for entrepreneurship in education is more ripe than it has been in the past.  There are now a number of successful entrepreneurial organizations that can serve as example for future entrepreneurs.  Perhaps the successes of this wave of educational entrepreneurs will encourage larger subsequent waves in the future.  The future of educational entrepreneurship will depend not only on the supply of potential entrepreneurs and the successes of existing entrepreneurs, but also in the policies enacted and the institutional environment of our educational system.  If the system is conducive to entrepreneurship, it will have a greater chance of flourishing.  Thank you.

MR. HESS:  Thank you, Amy.  Our second discussant for the panel has made it in, Jon Schnur, who was mentioned more than once in Amy's remarks.  For those of you who don't know Jon, he's CEO of New Leaders for New Schools, a national nonprofit that he co-founded in 2000.  He previously served as a Special Assistant to Education Secretary Richard Riley during the Clinton administration, and previously served as a Senior Adviser on Education to Vice President Al Gore during the Clinton administration.  Jon will be a discussant along with Nina after Kim's remarks.  Kim?

MS. SMITH:  I think a lot of what Amy and Paul write about and what Julie and I wrote about will come up again throughout the day, so I'm going go through some of the definitional stuff rather quickly, and if people want me to come back to it, I'm happy to do that.

First I want to say from a semantics position for clarity, I think what we have is a situation where there are entrepreneurial leaders and thinkers, they are true entrepreneurs who in our definition are actually creating organizations, and then there are entrepreneurs.  So there is this semantic confusion around who counts and who doesn't.  One thing I would say is that one difference I think in our paper and Amy and Paul's is that as an organization whose purpose is to support entrepreneurs, we take a pretty narrow definition of who they are.  To us they are entrepreneurs who are creating new organizations who need support for those organizations, and that's the basic perspective taken throughout our paper.

So consistent with what you've heard already, there are personality traits, they have a vision for how to do things differently.  I think most importantly when you think about that vision, it has to do with not being constrained by the current rules which is unusual, and not being constrained by the resources they currently have under their control which is not typical.  So I think that's the main way entrepreneurs are different from other leaders.

I think, too, for NewSchools we have another way we narrow the definition which is we're really focusing on that portion of the entrepreneurial community who are creating organizations that have the possibility of really redefining our sense of what is possible, and from that having pretty dramatic impact on changing the system.  So we acknowledge this as a subset of the entrepreneurial world, but that's the angle we take when we think about educational entrepreneurs.

In general terms, why do we think they matter?  Rick has already talked about the current context we're in and why we're asking or how we're asking the system to operate much differently.  Typically, you don't see large entrenched institutions radically transforming themselves.  This philosophy is based in part on Clay Christensen's work around disruptive technologies.  I think we've seen that disruptive technologies have an impact in a lot of other industries, and that's what educational entrepreneurs are beginning to do in education.

When we were thinking about what their role is, I think there are three different ways of thinking about it.  One has to do with what we call coopetition.  It's similar to the technology industry, it's different from how some people think about it.  I think it's an important point because some people will oversimplify and say that the only purpose of an entrepreneur is to provide competition for the system.  I don't think that's true, I think that's one of their major roles, so certainly one of their roles is to provide competitive pressure and push change.

But another role which I think you'll see in a lot of entrepreneurial organizations in education is this tricky coopetition role where they are both cooperating and competing and that's a really interesting dynamic to create.  Even if you're an EMO, you may be running some contract schools which are in a sense cooperation and creating better schools that are still officially within the district, at the same time you may be running charter schools which are much more competitive and are drawing students away from that district.  I think that's true no matter what your business model is, that right now there's a lot of creative tension happening in this coopetition role.

Another thing that I think is important right now at this time of great transition is they are a different working environment for a part of the labor pool who are not attracted to going into the traditional public school district.  You will see a lot of people who are very achievement oriented who are interested in a more meritocratic work environment who will come into the education sector if they can enter in an organization that they feel will be responsive to those needs, and I think many of our entrepreneurial organizations have more of that meritocratic culture and they are drawing people into the sector who would not be coming in otherwise.  Teach for America is an example, New Leaders is an example, the various EMOs and CMOs I think are examples of that.

Then lastly, we think of entrepreneurs as an important learning laboratory, so they come into the space understanding from their own existence that this is not intended to be a static, permanent system that will always operate the same way.  Used as this sort of learning laboratory, they are in an opportunity to try things out which, frankly, we may not be ready to do at a large scale, that may merit having some experimental opportunity to see what the impact is so we can then think differently about how we might want to implement it at a larger.

Our paper focuses at this intersection.  There is a community of education entrepreneurs broadly defined which could include at one point in their existence the publishers, people doing bussing, all sorts of different entrepreneurial activity, and this is a separate circle on this diagram for social entrepreneurs.  We're at NewSchools focused on this intersection of the two because those are the entrepreneurs.  To me what makes a social entrepreneur is the intent to have dramatic social impact.  I would disagree with Amy.  I don't think it has to be the case that the social impact always comes before sustainability of the organization.  I think there's a creative tension there and if your organization doesn't exist, you will have no social impact.  If you want to have a social impact and you focus on your business model in order to do that, that's just the reality whether you're a nonprofit or a for-profit.

[End Tape 1 Side A, begin Side B.]

MS. SMITH:  [In progress] --pretty agnostic on corporate structure.  There are implications of the choice you make about what corporate structure you take, for-profit or nonprofit, but I don't think they preclude you from being a social entrepreneur.

This is just a summary of the role.  Policy makers in our view make the rules, most people, 99.9 percent of folks in the system, do the very best they can within the rules, and so the role of the entrepreneur in our view is to strategically break the rules, to figure out where those rules are dysfunctional and they're not serving the ultimate outcome for kids, and figure out a different way to do things.

If as in those learning laboratories they figure out something worthwhile, and they don't always, but often they do, then the job of the rest of us in the entrepreneurial community connecting back to policy makers is to figure out what that means about changing the rules, and if we do that well they'll make new rules and we'll change the culture so that the bulk of people in the system are then operating in a different way.  This is the role we see for entrepreneurs in the larger scale system.  It is not necessarily the case, and I don't even think it's wise of us, to expect entrepreneurs to reach the scale where they will replace the existing infrastructure.

We're dealing with a massive $500 billion industry.  I think it's unlikely that Jon Schnur is going to end up preparing all of the principals for that system.  That doesn't mean that his organization doesn't have an incredibly important role, I know that's shocking.

We've spent a little bit of time and I apologize that a lot of this is pretty basic, but Rick asked us to set the table for later discussion, so we thought a little bit about what in our experience creates the opportunity for entrepreneurs.  Fundamentally the answer is change.  When there is a change, there is a slack in the system that creates opportunities which entrepreneurs can spot.

Within education we've had a number of types of changes.  First and foremost there's been a dramatic change in our expectations.  When you expect more students to learn more information, you have to come up with a more productive approach to doing that.  You can't just do business as usual because that's an enormous challenge.  Secondly, and this is particularly true in publicly regulated industries, there's a change in the market structure, and that happens in education typically through public policy changes.  When you have policy changes like No Child Left Behind or state accountability laws that require people to think differently, that often creates unclaimed turf that entrepreneurs can then lay claim to and get people to think differently.

Third, there's the change in the availability of resources, and there are all types of resources from public dollars that flow from policy changes, private investment has been brought up both in the venture capital world as well as the philanthropy community changing their practices, so that creates another set of opportunities.

Lastly, new knowledge creates opportunities for entrepreneurs.  In education, that can happen within the system, so if a particular set of approaches are effective but they're not being spread more widely, that's an opportunity for an entrepreneur to take on that challenge.  But there are also ideas from outside education and you'll hear in particular about technology offering new knowledge that we now have an opportunity to apply in the education sector.

If you think about entrepreneurs finding those opportunities, then the second part of the question is what resources do they need to be successful, particularly, as I said, entrepreneurs tend to have a vision and see an organization they want to create and not have the resources under their control.  The way we think about it, which is pretty consistent with anyone taking the venture capital model, is there are three types of capital that entrepreneurs need.  Financial capital tends to get the most attention, human capital, and intellectual capital.  I'll spend a few minutes talking about financial capital on the next slide, so I'll talk about the other two here.

From the human capital perspective, as we said, they have a different culture, they have a much different approach to change, so they need people who think differently.  You'll see in the paper we talk both about what we call hybrid teams, people bringing skill sets across the sectors, as well as the board level.  I think the board level is often ignored, but it's a really critical piece of the equation.

Intellectual capital, we need stronger set of consulting firms, evaluation, we really need to invest in R&D which I know will come up later, and then, of course, the entrepreneurs themselves are bringing intellectual capital to the table.

From a financial capital perspective, I just wanted to show this chart quickly.  I think the most productive way to think about it is start-up growth and sustaining capital.  We can talk more about this later, but I think that the tricky part for nonprofits is the sustaining because typically they're not able to develop a revenue generating business the way businesses do because often they're pushing a change that doesn't yet relate to an existing stream of funding.  So the hardest part for nonprofits is sustaining.

Conversely, I think right now at this moment in time the hardest part for for-profits is early stage start-up capital and early growth capital.  Most of the venture capitalists are waiting until later stage until business models are proven, and so there's really a dearth of venture capital at the early stage.  I think the challenges in the capital market are later for the nonprofits and earlier for the for-profits, but in both cases we have a really underfunded and relatively irrational capital market which is holding back a lot of potential entrepreneurs.  We can talk about that later.

Lastly, as we were working through this we had an event with a number of entrepreneurs and we started thinking about a core framework for entrepreneurs.  I think there are two possibilities that are not mutually exclusive.  One is the clear Clay Christensen disruptive technology approach, the system is changing dramatically, asking for massive improvements in productivity, current players are going to operate the way they've been trained by and large, so you need new entrants to come in and think differently.  We do believe in that.

But I think perhaps more interestingly and alongside of that, I think there are characteristics that Rick talked about that have to deal with what we call dynamic equilibrium, thinking of this system the way other industries are, that it isn't static, that the world changes quickly and that the system needs to be responsive.  As we thought that and talking with this group of entrepreneurs, we brainstormed what we thought were a set of principles for a more entrepreneurial educational system, and those are these.  That the system would be responsive to its customer and not static, customer oriented is obviously implicit in that; that there would be no monopolies or oligopolies because those clearly hold back innovation and prevent new and innovative solutions from entering the market; that it would be performance drive, that has a number of implications that we go into in the paper; that part of that is this constant learning cycle, parallel processing all the way through both within an entrepreneurial organization, but also across the sector; and that within these organizations and across the sector, again, there would be this culture of meritocracy, that that would draw to the industry the type of labor pool that we're looking for.

The implications of either of those, but particularly the second framework, fundamental redesign of human capital systems because you need people to be organized and prepared in different ways, tools, which is one of my bit pet issues right now, and for tools we think of both the way we finance public schooling, the equations and how we think about distributing funding, but also technology tools, and they're quite interrelated because if you want a more complicated approach to finance, you've got to give folks better tools for managing their resources because you simply cannot manage a more complex system than we have right now without better use of technology.

Those both relate in our minds to a much better investment in R&D, and particularly the development part of it, and there are a number of areas that are covered there in the paper, and with that notification I will stop.

MR. HESS:  Thank you so much, Kim.  Nina?

MS. REES:  Thanks, Rick.  What I'm going to do first is tell you a little bit about some of the investments that we've made at the federal level to encourage entrepreneurship, and these investments fall into two categories.  Some of them are direct investments that have been made I would say since the early to mid 1990s in programs like Charter Schools, Alternative Roots to Teacher Certification and School Leadership which have in turn offered funding to entities like Leaders for New Schools, Teach for America, the New Teacher Project, and the growth of charter schools all across the country.  And I'm also going to talk a little bit about some of the indirect investments that we have made at the federal level which has already been touched on through the enactment of the No Child Left Behind Act.

Since the enactment of the No Child Left Behind Act, I should also mention that we have taken some pretty bold steps forward in terms of supporting entrepreneurship.  I would say one of the greatest investments we're making right now at the federal level is the creation of a test, the American Board for the Certification of Teacher Excellence, which is when all is said and done will be a $40 million investment at the federal level which if states adopt the tests will ultimately circumvent hopefully all the state rules and regulations to enter the teacher labor force without having to go through a teacher education school or things of that nature.

In recent months we've also tried to look at the existing grants at our disposal a little bit differently to try to see if we can attract different types of entrepreneurs to get engaged in administering the programs.  The best example I have is the Ready to Learn program which was a pot of money that traditionally had gone to organizations like the Corporation for Public Broadcasting and the public TV stations, PBS.  This year because of a tweak that we made to the program and because of the publicity that we generated around the need for focusing the program a little bit more on reading instruction and making sure that students who are benefiting are watching the shows on these television stations are actually using the tools in order to become better readers, we were able to attract a station in Chicago, WGBH, which presented to us a very bold grant application.  They have never produced this type of TV show before, but for the first time they are now going to be able to get federal funding in order to create a TV program which will hopefully also be studied using a rigorous research design and give us a lot of information about whether you can use television as a medium to make students better readers.

But I would say that the greatest contribution of the federal government in entrepreneurship really is in the kind of climate that the No Child Left Behind has created at the local, and this is something that most creative superintendents tell us all the time.  The pressure that No Child Left Behind has created has given them the opportunity to invite the types of people to the table who up until now were not invited to sit at the table.  You talk to folks like Arnie Duncan, Allen Bursen up until recently, you talk to Joel Klein who is going to speak alter today, Paul Vallis to some extent, is it No Child Left Behind alone?  Probably not.  Paul Vallis had other dynamics at play which give him the tools that he needs to invite entrepreneurs to the table.  But I think by and large, both entrepreneurs and local leaders contend that the pressure that No Child Left Behind has created, the sense of urgency it's created to close the achievement gap by a certain date, has been a creative medium to attract entrepreneurs to the table, and I would say that that's the kind of thing that I think the federal government should be more engaged in rather than direct funding creating the medium it takes in order for these types of activities to flourish at the local level.

A couple of observations about the papers since I guess that's what Rick wanted me to do.  I thought they were both extremely helpful.  I was just telling Kim earlier that even though we're engaged, or my Office of Innovation and Improvement is supposed to be the arm that's encouraging entrepreneurship and this kind of activity, I had never actually sat down to think about the topic as I did over this weekend in reading through these two papers.  I thought they were both extremely informative, and I was very encouraged to see the number of new players on the education scene that certainly Kim's paper touched upon, people that I had never even heard of before.  So from that aspect I think that the growth is very positive and very encouraging.

But at the same time I was a little bit discouraged because the way that Kim certainly described what entrepreneurship is about, for these individuals to feel fully fulfilled with the tasks that they've taken on, two things need to happen.  They either need to make money if they're in the for-profit sector, or they need to really have a greater impact on the public school system in terms of bringing about systemic change.  So someone like Wendy Kopp should not have to rely on someone like Don Fisher every year to bring in the private sources of funding in order to sustain her organization.  And ultimately, even at the federal level, a lot of these organizations rely on federal funding, but ultimately these are things that the states and school districts ought to take on if the entrepreneur wants to feel like they have actually contributed to the case of education reform and transformed it in a significant way.  The same with charter schools.  We have a lot of charter schools around the country and a lot of them are doing wonderful things, but the vision of charter schools was never to create a parallel universe of schools that parents are picking and choosing from, but to have the public school system behave more like charter schools and create a system of autonomous schools that are accountable to the public and also accountable to a public entity that's ensuring that they're abiding by certain rules and regulations.  So I have three ideas and, Rick, this is probably something that you'd want to cover in your last session, but since I'm not going to be here, I'm just going to offer these ideas in terms of how you can encourage and grown entrepreneurship around the country.

The first recommendation that I have is that I feel that entrepreneurs need to be far more engaged in public policy discussions at the federal and at the state level, all the discussions from school choice to creating new funding sources for entrepreneurship to grow, discussions around licensing laws for teachers to enter the work force, and then farther down the road, discussions around the regulations that affect entrepreneurship.  These individuals, even though you have a lot of them and they're growing around the country, entrepreneurs tend not to be present at the table when we're having these public policy discussions.  I will tell you, when No Child Left Behind was being drafted we had a lot of individuals who were conduits of information and represented entrepreneurs, but I didn't feel that despite the growth of the number of entrepreneurs we had, an organization that was truly representing their best interests, and I think that is not a good thing and that's something entrepreneurs really need to think a little bit more about because there are a lot of little things you can do in terms of drafting federal laws and also at the regularly stage that would make it a lot easier for entrepreneurship to flourish, and those discussions I don't think have happened in a significant way up until now.

The second recommendation I have is along the lines of creating better lines of communication between entrepreneurs and those individuals within the public school system because I feel that inherently entrepreneurs speak a completely different language sometimes than the language that folks in the education establish speaks.  Often times, the only time these two entities end up speaking to each other is when the entrepreneur is coming in to ask for money from someone in an education bureaucracy, and that's not the best medium to try to market your idea and your thoughts.  So I think that's something that entrepreneurs should think about a little bit.  Whether it's a question of learning the education lingo or just understanding what goes on in the heads of these education bureaucrats, I think it's important for you all to communicate a little bit better.  Let me just give you one example in the context of supplemental services which is one of the functions of my office.

We often get a lot of questions from state education agencies and local education agencies about something specific that a provider wants to do.  Often times, on paper the idea sounds a little crazy, so if we were to just judge what the provider wanted to do on its face value, we would probably say, no, this is a bad idea.  You are free to say no to them, but when you bring the supplemental service provider to the table and talk to them about why they want to do things a certain way, especially if they're online providers, then all of a sudden the discussion changes course and people come to the understanding that perhaps this is just a new way of doing business and one that we ought to be considering more seriously.  Again, this may be happening among entities like KIPP and some of the entities that they have to deal with in the state and local bureaucracies, but they need to happen in a more systemic and more consistently, and I think there are a lot of lessons that different entrepreneurs can teach one another about how do this well.

Lastly, if the true goal of most of the education entrepreneurs out there is to close the achievement gap, I think it's very important for these individuals to forge better alliances around with those individuals who are interested in inner-city renewal because I think at the end of the day, if you're trying to promote these big, bold education reform ideas which a lot of times the education establishment is going to say no to, it's important to give the politicians who you want to attract the kind of political cover that they need to come on board.  We did this to some extent again in the mid 1990s when Floyd Flake was a member of Congress into kind of couching at the time school vouchers in the context of urban renewal, and those discussions really haven't taken root in different settings as much as they should.  I think it's very powerful to bring the different stakeholders who are interested in reform of education together with those who are interested in inner-city reform because ultimately the whole question of closing the gap is a more complicated that a lot of different people would be interested in solving and helping you with if they were approached at the right time to frame the discussion.

In the context of the District of Columbia, one of the things we did, for example, and this is not actually be the best example, but what we did was we crafted this thing called the Three Sector Strategy which offered funding to charter schools and public schools at the same time, offered funding for private vouchers, and that made selling the concept more palatable.  So for the first time we have a program in D.C. that offers 1,700 low-income kids an opportunity to attend a private school of choice.  Thanks.

MR. HESS:  Thanks, Nina.  Jon?

MR. SCHNUR:  Thank you.  It is a pleasure to be here.  I wasn't sure I was going to get here this morning.  I came in from New York and the simple version was that my flight was delayed and the taxi driver dropped me off at the wrong location, but to translate that into kind of terms today of entrepreneurship and hybrid, people working across sectors, there was a little risk management involved for me this morning which is that I made the decision that a 7:00 a.m. shuttle could get me in at 8:00 a.m., and most of the time an 8:00 a.m. would be more than enough to get me here by 9:00, and as it turned out, it didn't, but in part because when the taxi driver dropped me off at the wrong location, shows you this is real hybrid work across sectors, I didn't realize that he hadn't dropped me off at the American Enterprise Institute which shows the different political roots that some of us come from when we come to these places, and I think that's real in lots of ways.

When Nina and I first met and I think became friends when we were actually debating back in 2000 on the Bush/Gore campaign, I had worked for Clinton, Gore and Riley, and she had worked at Heritage and was going to soon be a leader in the Bush administration, and I think one of the things that this forum and these papers show in a very, very serious way is that you now have people I think across the political spectrum, across spectrums of all kinds, who are coming together around a set of ideas to really transform public education, and I think that that's part of the context for today.

It's exciting to be part of it.  I think the papers are very important papers that I think do point out some major issues and challenges and opportunities to building this sector as we move forward.

I'm going to make three points and I, like Nina, will have a few specific, concrete ideas about what could be done to build on the important insights in these papers.  My first point is a pretty simple one, but I'm not sure it's been said a lot.  The authors of these papers have made this point, many people in this room may believe it, but I'm sure it's widely understood, and I would amplify it.  In an area where we as a society have unified around the goal of making dramatic change in performance for kids, especially for kids from low-income families and families and kids of color, one of the most important solutions to our problems I deeply believe, maybe not even emphasized enough by these papers, is the importance of effective entrepreneurship to change education in scale.

It may be in other sectors of our society that social entrepreneurship can also make a change, but I don't think it's a coincidence that most of the social entrepreneurship that you see today that is rising to a significant level is in education.  That's, one, because our society is very focused on the fact that we need to make dramatic change.  But two is we have, and this is from the perspective from somebody who is a strong advocate for public education, but not the status quo of how public education is delivered, a calcified, stultified, anachronistic system for public education today.  At the heart of it, and I'm seen it more closely in the last 5 years through New Leaders for New Schools than I'd even seen it before, you have, with a lot of incredible people working day in and day out, teachers, principals, superintendents, from some today a culture that ultimately right now is a culture based on compliance, process, mediocrity and differential expectations for different kids.  It is not a culture that is characterized by some of the qualities that Kim's paper, for example, describes, around a sense of being merit based and the notion that a work ethic ultimately translates into success.

I think that in the face of that culture, this kind of disruptive technology of entrepreneurship is important because it's a disruptive technology, but I also believe it's important because the very culture of entrepreneurship, the focus on merit, the focus on the belief that hard work can translate into success, is exactly what's needed as an antidote to the culture of public education today.  I really do believe that scaling up in an effective way the entrepreneurial sector in education is not the only key to success in education, but it's an important one.

The second point I would make is Kim's paper outlines three factors that are important to the success of entrepreneurial enterprises and has borrowed it from the entrepreneurial sector outside of the nonprofit and the educational sectors, intellectual capital, human capital and intellectual capital.  It also alluded to, and Nina actually alluded to this, too, there's a fourth around a policy environment that is I think also important to the success and the growth of entrepreneurial enterprises.  From the perspective of somebody who's been leading a social enterprise for the last 5 years, I would say that both papers are absolutely right in underscoring those as crucial ingredients for success in scaling entrepreneurial endeavors at scale, and I would tell you very directly that we as a society and as a sector are nowhere near where we'd like to be or need to be in each of those in order to actually promote effectiveness.  Let me just give you quick point and idea on each of the four categories, I would say human capital, financial capital, intellectual capital and the policy environment.

On financial capital, it does get some attention, but I would underscore here as both papers say, it is not simply that more money is needed.  Sometimes in education or in the nonprofit sector you hear the argument financial capital means we just need more funding.  In these papers it's an obvious point but I'd underscore it because it's a very substantial one, the point is not just that more funded is needed, it may be that in some cases it is, and maybe in some cases we can reallocate existing funding much more efficiently, but there are two things I'd highlight under financial capital.  One is there is a dangerous absence of what these papers call sustaining and growth capital for organizations to scale.  Most of the sector that funds at least the nonprofit side of the social sector which is the one that I'm the most familiar with, ultimately most funders like to fund programs.  In fact, there's a real disincentive: once programs demonstrate effectiveness, the traditional funding world stops funding those because they think that their funding should go to someone in more need so that you actually get less funding available in some cases as you begin to get success.  Even now there are a few terrific funders are investing in this kind of capital: the Broad Foundation, Kevin Hall is here, Kim Smith, the NewSchools Venture Fund, the Gates Foundation, the Dell Foundation, the Walton Foundation, are some examples.  New Leaders as an example, I think we're sort of at the edge of the field on this and we've received support from all of them, and we still don't have enough in order to scale the way we'd like to over the next few years because there really is an absence of this kind of not program funding, but growth and sustaining capital is crucial.

The second financial capital point I'd make is as enterprises scale, it's one thing in the early stages, and a lot of the interpretation of these papers might revolve around what it takes to create social enterprises, but in fact as creating as alluded to in these papers, is actually the dramatic scaling of these in order to make a major impact.  On the financial capital side there's a crucial issue that I'm not sure has gotten enough attention, which is these enterprises scale, and New Leaders, for example, is scaling in a large way.  We're going to provide 25 percent of the new urban principals needed across the country by the year 2012.  In a few years we're going to have 1,000 new leaders, we're going to have several hundred staff, $30 million budgets.  This is a significant enterprise.

The management expertise that is needed to actually manage that at scale is something which does not exist in the nonprofit or the K through 12 educational sectors.  That may seem a little harsh, but the fact is that the sectors haven't had experience with growing this kind of institution before, whereas, more often it has happened in the for-profit sector where people do exist and can earn about 10 times as much as they can in a management role in the social sector.  So one specific idea on this front which actually is something other than just direct funding, I was talking the other day to somebody who would be a fantastic senior management partner for me at New Leaders.  He's a top executive in the private sector.  He said, Jon, I'd love to come and work with New Leaders, there's nothing I'd rather do, but he said I'm going to have to go somewhere else and I need financial equity and there's no equity here.

So my specific idea that I'd throw out for consideration is that companies such as Google, for example, could say that for enterprises with highly effective managers, with very clear performance objectives, could give stock equity in their companies such as Google to those executives who actually demonstrate that they are achieving their performance objectives in that social enterprise over time.  Even though there are some differences, and they're not working at Google, but those incentives for that kind of equity I think could be a dramatic incentive to attract people to the field.

I'm just about out of time, so the last thing I would say is on knowledge capital, on intellectual capital.  McKenzie is an example of an institution that's created a phenomenal knowledge management system.  At New Leaders and at other institutions in the social sector we are trying to create actually a knowledge base which can be shared in very effective ways across the sector.  There has been so far very little financial investment and also very little pro bono investment from places like McKenzie.  Although McKenzie has done a lot of other things, there hasn't been a lot of work done on how do we really help create absolutely top-notch, world-class knowledge management systems which in the end can scale the ideas as fast as our social enterprises can scale the outcomes.  Thanks, and I look forward to the discussion.

MR. HESS:  Thank you, Jon.  The way the discussion will work is, are Hillary and Rosemary here?  Catch Hillary or Rosemary's eyes, please.  Also just during the day in general, if you have any questions or needs, please just contact these guys or Morgan who you probably saw when you came.  If you have any questions, we'll see if we can help you out.

Like I said, please make sure your questions are actually questions, and please do us all a favor of identifying yourself just by name and affiliation so folks know who's speaking.

MR. HEMMERER:  I'm Frank Hemmerer [ph] from the University of San Diego.  We're in the process of developing a unique, from scratch interdisciplinary master's degree for leaders of schools of choice.  One of the challenges in developing the program relates to exactly what you've been talking about, securing not only start-up funding, but also sustaining funding.

It seems to me since really three of the speakers have talked about this funding issue of finding the capital to begin and then sustaining capital on down the line, the question is, would it be of any assistance to develop some kind of clearing house whereby those who have funding that they would like to contribute to educational entrepreneurs and those who have desires for the funding could come together in some way?  The merits of the proposals could be identified and there could be some kind of linkage, some kind of nonprofit clearing house so that it isn't so much a who do you know or let's fill another grant application out, et cetera, that there is some kind of tutored way of finding capital to support entrepreneurial ventures whether they're in higher education, starting a charter school or some kind of virtual school, whatever it may be.

MR. HESS:  Thanks, Frank.  Kim?

MS. SMITH:  I think it's a good idea.  It's something we've thought a lot about over the last 7 or 15 years or so.  The challenge is from a nonprofit standpoint, nonprofit funders are pretty idiosyncratic and they're not actually just looking for a rational listing of what's out there and who's doing what.  They have their own set of criteria for what they're funding that means they are unlikely to use that sort of resource.  I think you're right about identifying the problem, that it is relationship based, it is not rational, it is too hard to raise funding, so you're totally right on that.

In terms of the appropriate solution, I have found nonprofit funders in general refuse to let go of the relationship-based selling process, frankly, so I don't think there's any reason not to create a clearing house.  Certainly it will put information out there.  I would be incredibly surprised if it led to a more efficient flow of funds, frankly, and it really hasn't in other parts of the nonprofit sector.  So in other fields where they have created Web-based interfaces to list different social entrepreneurs, they really haven't generated very much funding.  So it's a good idea in principle, it just don't seem to play out pragmatically, unfortunately.

MR. McTIDE:  Joe McTide [ph] from CAPE [?].  This is a question for Kim.  How should one measure the success of a particular educational entrepreneurial undertaking and over what period of time?  Two, how does one measure the success of the educational entrepreneurship movement in general?

MS. SMITH:  We take a two-tiered approach to thinking about outcomes.  The first is we do a roll-up of what we call direct impact.  Each enterprise has its own business model and each enterprise has to measure the impact on typically it's student achievement, though there may be a couple of intermediate steps.  When Jon measures impact, he has a number of indicators that are about his own business model, how many people he recruited, whether he hit his own metric.  That's one level.

Then a level down which he's engaged in measuring is, so what?  So when you get those principals placed, what's the actual impact for kids?  That's what we call the direct impact.  As a funder we work with each venture as they define those metrics to make sure that they make sense, and then they each measure them with an independent evaluator and so on, so there's a direct impact on student outcomes.

The second layer we call the catalytic change which is what you're talking about the field, and the catalytic change I think is much more difficult because it's honestly not worth the money it would take to invest in an external evaluator to do the type of sophisticated analysis you'd need at this point to really prove causality.  So instead what we do is collect a number of indicators that show progress.  Jon could speak about the work that he did in Memphis where in addition to placing principals, the work they did, the discussion they had with the superintendent, led the superintendent to radically restructure how other principals in the district were allowed to operate.

Does that indicate massive success?  No, but it's a really good indicator that New Leaders is not just preparing new principals who operate on isolated islands, but that in their work with districts they're leading to a bigger systematic change.  Right now the catalytic change I think is being measured in much more an ad hoc, idiosyncratic way.

Honestly, 7 years ago when we started New Schools, people said educational entrepreneur was an oxymoron.  So from my standpoint, I look at it as an evolutionary process, and we're at a place now, and I think this volume helps to indicate that, that it's a piece of the sector that's being taken seriously, so that level of evaluation is now going to step up and be taken more seriously and we'll have a better opportunity for that because so far I think it's been pretty much anecdotal.

MR. GREENBAUM:  I'm Stuart Greenbaum [ph] from Washington University in St. Louis.  I was curious about a comment you made about the capital markets being irrational because it seems to be almost a spike in the heart of the whole notion of entrepreneurship.  I wish you'd explain that notion of the irrationality of the venture capital financial sector.

MS. SMITH:  What a lot of people don't understand is that venture capital even in other sectors is really an intuitive business.  When they evaluation of an early stage business they're not really looking at projected cash flow because it's all guesswork.  What they're looking at is what's happening in the sector and whether they believe in the entrepreneur.  So to some degree venture capital itself is a little bit irrational because it's involving quite a bit of intuition about the future which is not something you can really prove.

What I was talking about was the irrationality of the nonprofit capital market.  Typically what you find in the nonprofit capital market is a lack of transparency of information, a lack of common tools and metrics across the field so that even if you wanted to be what you would think of as a rational investor who looked at exactly what was having what kind of impact, exactly what it cost, what would your social return on investment be, that would be a pretty rational approach to it, you don't actually have the information you need right now to do that.  Part of it is an information transparency problem and an access to information problem.

The other part of it is that, frankly, a lot of people who come to the table as investors on the nonprofit side are emotionally motivated.  That's why they're there.  They're there because they have some values or some beliefs or some emotional desires to change the world, that's what guides their decision making, and it is not always rational.  They may choose to invest in a program that feels good to them, frankly, or is a program that is a friend of theirs.  You often see in the philanthropic world, particularly among private foundations, that people will fund things because of the relationships they have, not necessarily because that's the program that proved to be the most effective.

That's the sort of irrationality I think that makes it a little bit harder for entrepreneurs because when you go in to fund raise, you're not going in and making the same case to all of your funders the way you probably would in the business world.  You would probably talk about your business model, your margin, your profits, your projected return consistently across all of your investors.  In the nonprofit what you have to do is segment your investors, and we do this.  We have head and heart people.  When you into the had people, you give them that sort of rational argument.  But, frankly, if you go in to the heart people and you make that argument, they think you're insane.  They're not going to give you any money.  It's not going to happen.

So you have to think about who it is you're raising funds from, and with the heart people you make a different argument.  You can potentially receive funding for the same venture from both of those folks, but they're just motivated by an entirely different framework for how they think about the way they're using their funds.

MR. HESS:  Jon, do you have a couple of thoughts on this?

MR. SCHNUR:  I would say from an anecdote from one institution looking at funding as New Leaders for New Schools has looked for funding and has benefited greatly from the creation of this new type of philanthropy, outside of maybe a half-dozen funders in the country, several who are in this room, a couple who aren't, I don't think I've ever gone to a philanthropist in the country and had them ask what have your results been for students, what are your projected results for kids over time, what's your theory for how you're going to accomplish that and what's your organizational strategy to make sure your organization can support that.  I've had a lot of other questions that are often very, very good questions, but generally not those.

So from my perspective at least, and you can't make it mechanistic.  You can't get a formula on this and I'm not sure you should, it is going to be judgment in the end, but in the end I think it would be a more rational financial market for nonprofits if there were more funders asking those questions, asking what's the data you're collecting on those, what are you doing about the fact that it's not going well, and that the answers to those questions would determine and trigger funding allocations more than fit for a programmatic focus with philanthropic priority would be good.  I think there's an evolution toward that which is very good, but I think it's still an exception and not the rule in the philanthropic sector from my perspective.

MR. TANG:  My name is Aaron Tang.  I'm the co-director of a new nonprofit called Our Education which is working to improve schools by empowering the voices of students themselves in the fight for better education.

My question is this, we've talked a lot and the panel has talked a lot about how entrepreneurship is done well in different ways of service provision and recruiting leaders, teachers and principals, but Nina made the point that entrepreneurship hasn't really done much by way of creating a feedback loop to policy discussions, entrepreneurship hasn't done much in changing or mobilizing public demand or political will or public engagement for real drastic improvement in our schools.  My question is, what's the degree to which philanthropists and other folks need to be focusing on entrepreneurship in creative ways of advocacy and public engagement and not just in the actual service provision?

MR. HESS:  Nina?

MS. REES:  You've made my point already.  Maybe the others want to weigh in.  As I said, I personally think that to some extent you need to take more risk, and I don't know that some of the individuals who are in this market, and if Kim's coopetition rule governs in a lot of places, you're not going to have these individuals engaged at the level they need to be engaged in to make the kind of bold reform suggestions they need to make around how teachers get certified, how they enter the classroom.  I agree with you, Rick, that choice in and of itself is not a solution, but in most successful entrepreneurial endeavors you do have consumer choice in the mix, so discussions around tying funding on the back of students, these are pretty difficult discussions to have certainly at the federal level and things that we have not made that much progress on short of supplemental services, but these are things that I think you need to have a lot of leadership in different organizations to take the ball and the movement to the next level.  But it could also be that the funders don't want to take these kinds of risks which may hinder entrepreneurs' abilities to advocate.

MS. SMITH:  I don't get the sense that that's the case.  I think it's just tricky because for nonprofit funders they have a number of IRS regulations about the types of advocacy they can do, and so what I think it comes down to is on the one hand the door is open because, frankly, I think entrepreneurs tried to participate in previous rounds of policy making and they just simply weren't listened to.  I banged on a lot of doors and people thought we were crazy.  Who are educational entrepreneurs?  Why should we listen to you?  What have you ever done that makes it worth listening?  That environment I think has changed dramatically.  So part of it is just entrepreneurs waking up to that and being clear that they need to be in the conversation, and policy makers inviting them.  So that's a piece.

But on the direct advocacy front, I think you're right.  I do think there's Bayo and other organizations like that that are focused on mobilizing community action for change, so that's a good set of entrepreneurs to think about.

Lastly, I think it's important for the entrepreneurial minded among the philanthropy community to create organizations that are about advocacy like a group of our funders did in California when they created EdVoice.  They have a 501(c)(4), they understand, and it was interesting to watch this process of learning.  They invested on the supply side in a lot of entrepreneurs and then realized they were all facing a lot of the same policy constraints and simply couldn't get to the place they needed to for impact.  So they did sit down finally and create a 501(c)(4), and they do serious political advocacy at the state level in California, but it requires putting money on the table that's not philanthropy and it required them to get to a place of a certain amount of frustration to be willing to do that, and that I think is just an evolutionary process that's going to take a little more time.

But what I see mostly is most of the new philanthropists who come from the business community think that political change is going to be much easier, it doesn't work, and then they get to that place of frustration and are willing to invest in (c)(4)s to do real advocacy.  So I think you're going to