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Ed tech companies are benefitting from the rise of impact funds. Credit: Terrell Clark for The Hechinger Report

In September 2019, a young Canadian ed tech company called Classcraft announced that it had raised $7.5 million from investors. One of the investors — the MaRS Catalyst Fund — was unusual. It’s backed by the philanthropic foundation of Virgin Group founder Richard Branson and it aims to solve societal problems as it makes profits.

The Branson-backed “impact investor” is monitoring not only Classcraft’s revenues but also squishier, less quantifiable performance indicators such as student engagement and school climate in the schools that have bought the product. (The Classcraft product is a piece of software that turns classroom behavior into a game. Teachers choose which behaviors they want to foster and students rack up points for actions like being kind or handing in their homework on time.)

Classcraft is an example of impact investing, investments that seek social or environmental benefits along with financial returns. Since the term was coined in 2007, the concept has quickly grown into an enormous $500 billion pot of money, according to one estimate by the Global Impact Investing Network. Education is attracting only a small slice of it (renewable energy and healthcare firms are getting the lion’s share). But even a small slice of a half trillion dollars is a lot and it’s starting to affect the field of education and what wares educators get pitched.  One of the main things Classcraft plans to do with its new money is build its sales force to sell its gamification software for social-emotional learning to schools.

The topic of impact investing dominated a September 2019 lunch panel at BMO’s Annual Back to School Conference, which brings more than a thousand investors and education entrepreneurs together in a Manhattan hotel every year. Phil Alphonse, a senior partner at the Chicago-based private equity firm Vistria and a veteran education investor, noted that the competition from the new impact investors is forcing him and others to pay more to own a piece of a start-up.

“Valuations are going up,” Alphonse said in a interview. “It’s a good time to be an education entrepreneur.”

Wealthy millennials are driving the impact investing. Three-quarters of millennial-run foundations, Alphonse said, have an interest in impact investing, compared with only a third of family foundations overall. Instead of just writing bigger checks for good causes, many younger heirs are attracted to the idea of investing in companies with a social mission.

What this means for education is that there are more dollars to fund education technology, such as computer-generated lessons tailored for each student, and online learning. “Impact investing could mean the more rapid adoption of those technologies,” said Alphonse, whose firm recently created a new fund with an impact approach.

Related: Research shows lower test scores for fourth graders who use tablets in schools

For education companies, impact investing means reporting about different kinds of metrics. For example, online universities have traditionally been focused on building a marketing operation to recruit customers. Alphonse says that impact investors want to know about graduation rates, whether students are graduating on time and whether students are earning a credential that leads to a good job.

“Those other questions are questions that impact investors are raising and tracking,” said Alphonse.

Non-financial metrics are still in their infancy. Often companies create their own and they’re not audited by outsiders. For Classcraft, school climate is measured by how many points students rack up when playing their games. Student engagement is measured by how frequently students do the activities that the game encourages.

“I wouldn’t ding a company for publishing its own data,” said Vistria’s Alphonse. “Over time, people will get smarter and figure out objective, audited data so that we can all be honest and make sure we’re doing this the right way.”

To be fair, Classcraft also shares student attendance, a more objective measure of student engagement, with its impact investor.

For entrepreneurs like Classcraft’s Devin Young, impact investors are benevolent shareholders. “I was very enthusiastic to take on an impact investor,” Young said.

He told me about a meeting with prospective investors who wanted to exploit his gamification tool and put it in Starbucks. “You’re not the investor for us,” he recalled. “This is about serving kids and impact investors have the same set of values and beliefs that we do.”

So is it good for education to have more dollars financing ed tech innovations? One can engage in endless debates about which education tasks the private sector might be able to accomplish more effectively. But ultimately tax dollars are what are paying for these companies’ products, either in the form of pubic school spending on supplies or in the form of federal student loans for college tuition. Every dollar spent on a piece of software is one dollar less for a good teacher’s salary.

Related: 3 lessons from data on how students are actually using educational apps and software at school

Classcraft’s Young makes a strong argument for the other side of this debate. “We’re attacking really important systemic issues in education that I don’t think the school system or the government can,” said Young. “We have technical expertise. We bring a bunch of things to the table that other actors in the education landscape aren’t tooled to do.”

The problem is that there isn’t strong research evidence for the effectiveness of a lot of ed tech. Sometimes it’s harmful. I worry that impact funds will help well-intentioned companies build effective marketing teams to sell ineffective products to schools. Schools will buy them and students may not be the winners.

This story about impact investing in education was written by Jill Barshay and produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.

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