This is the longest stretch I’ve gone without writing since I started the blog two years ago. The reason for the lack of production is this: I’ve been on (and am still on) a 10-day trip with my family to look at colleges. My daughter is at the age where next year she will finish high school. So off we went to eyeball all the places she might consider as the ideal location at which to arrive after breaking my heart by leaving home.
It has been an interesting if grueling journey: somewhere between a rock star concert itinerary and the Bataan Death March. 6 states and 13 schools in 10 days. We should have gotten t-shirts with the names of each location printed on the back for a truly authentic vibe. Given the pace and the hours and the driving, no writing time for me. All my extra time has been spent wishing my kid were little again.
The higher education system is interesting in that it is the only other significant U.S. economic sector where the end-user of the service is not typically the payer of the service (parents pay and kids use). In that way it is very similar to our healthcare system (employers/goverments pay and individuals use) and, as a result, is literally the only sector of the economy where costs have risen even faster than healthcare. If that isn’t proof that misalignment of financial incentives is the basis for economic catastrophe, I don’t know what is. Since 1985 U.S. per capita healthcare costs have risen around 400%; in that same period, the overall consumer price index has risen 115% while the college education inflation rate has risen nearly 500%. Yes folks, we have a winner. I predict we will be seeing a lot more about this over the next 10 years, as the next likely economic meltdown will undoubtedly be caused by to the inability of people to ever pay off their college loans.
Just as with healthcare, a key factor in the recent escalation of college costs has been the baby boom, although in this case it is the one that took place between 1988 and 1995, not the post-war one that is driving up healthcare costs. Healthcare and a university education share another cost-driver: the challenges of measuring quality and outcome and the payments that are made despite this. In the university system the cost of tenure is a key driver of costs; in the healthcare system there is no such nomenclature, but there is effectively the same thing: the system pays physicians for life (or close to it) regardless of the quality of their personal contribution to the system or what they can demonstrate as outcomes of using their services.
Many healthcare services are well worth their high cost, particularly when they save your life; unfortunately you pay the same whether your life is saved as when it isn’t for the same service. When you go to a four-year college you dramatically increase your likelihood of a higher lifelong personal income and dramatically reduce your likelihood of ending up imprisoned (even if you run a “too big to fail” bank), but this again is about the law of averages, not a commentary on the success of every single graduate. One of the statistics often cited during our college visits this week was the percentage of people who get into medical school after having completed their pre-law degree; the highest outcome we heard was 80%, but the other 20% no doubt paid the same $56,000/year as the 80% and who knows what they are doing now (“do you want fries with that?”). Just as with healthcare, this bad outcome probably had something to do with BOTH the university experience AND lack of personal accountability, but the bill is what we all talk about.
I knew a lot of these similarities between healthcare and college existed before I set out on the journey this week, but what I hadn’t thought of beforehand was the other similarity I would encounter: that of the similarity between vetting a college and vetting an investment, as you would do in the VC or PE world. It was a weird kind of déjà vu experience in several ways. For the uninitiated among you, let me start with how these college tours go: first you sit in an hour-long “pitch meeting” where a university representative (or two—usually an admissions person and a super-perky and accomplished student) tell you all the reasons why their particular institute of higher learning is the bees knees. It is like an entrepreneur’s new business pitch in so many ways.
First you get the history (what led to the founding). This is always followed by background on the qualifications of the leadership/professors (aka, the management team). Next up is the market size for the opportunity, although in this case it is couched in terms of scarcity, as in “we get 10 million applications and only 8 people are accepted.” This is always followed by the operational considerations including cost of goods (what the university has invested and will invest in various programs, etc) and operating functions, both in terms of how to get in and what happens when you get there (dorm living, meal plans, etc.). I was particularly amused how much of each of these hour-long sessions was dedicated to describing the wonders of the food and the opportunities for fun. Clearly these admissions people know their market is the kids, not the parents with the checkbooks. Again, the healthcare bells were ringing loud in my ears, as most healthcare provider organizations are selling hard to consumers while the bills are paid by employers and other payers; but I digress.
After that it is the “special sauce” part of the speech, by which I mean the following, “yes we are sure every university you are visiting is great, but here’s why ours is particularly awesome compared to everyone else and how no one else can touch us.” This differentiation from the competition and touting of intellectual property is a key part of every investment pitch and so it was on the college front. Just as with new company pitches, you have to listen very hard to glean real differences. “Unique” is a word too often used in both contexts, particularly since it is rarely true. It is particularly disconcerting to hear the words “most unique” at places that charge over $50K a year and are known for their English departments.
Last up: how much money is needed and what you get for it. In investment pitches it goes like this: “we need $15 million to build a company that will produce $100 million in revenue within 5 years.” In America’s universities it goes like this: “Pay us about $50,000-$100,000/year all in and your kid will be set for life if they wear our sweatshirt in public. As long as they work hard. But trust us, the food is great and the beer flows freely, wink wink, nudge nudge!”
After the “pitch” you get the demo. An extremely accomplished, well-trained and super chipper coed leads you around the highlights of the school (“here’s the great food!”) while walking backwards and not running into things. It is an impressive display, not just for the walking skills, but for the marketing skills they evidence. Just as with company pitches, one’s perception of the school (company) is easily tied to one’s perception of the presenter (CEO). A great tour guide results in higher interest in the school; a lousy tour guide has a tough time selling even the best and most touted institution. It’s just human nature, as charisma sells, and not everyone has charisma even when they are definitely the smartest person in the room. Just as with investment pitches it is important to remember that and to be able to look past the presentation skills to the idea and its attributes, at least to a certain extent. On the other hand, what $50K/year institution would let loose a poorly trained tour guide (which happened more than once)? It makes you question the execution skills and worry that junior will get the most for your money, causing parents every where to think, “hey kid, how about you get a nice community college education, we split the savings and I buy myself a year or two in Fiji?”
And just like the investment analysis process, the very best opportunities, whether they are hot deals or hot colleges, get the last word as to whether you are their partner of choice. While colleges and entrepreneurs sell, sell, sell to get interest from those with the checkbooks, the best have the last word on who they end up living with for the next four or five years. Multiple potential investors pursue great entrepreneurs, who in the end must decide who will be the entity or entities selected to make money with them. Tens of thousands of kids pursue certain great universities, which, in the end, pick only a handful to be the best and brightest as determined by an absurdly short analysis in which they probably never even meet the kid. Several of the universities we saw select a paltry 6-10% of applicants. But then again, as an investment fund we invest in far fewer than 1% of the deals we see based on a pretty cursory view of most of them, so the similarities persist.
And thus, while I was theoretically on vacation this week touring colleges, and while my own alma mater was demonstrating their own chick coed prowess in the NCAA basketball tournament (Go Bears!), it felt oddly familiar. I guess this means I’m going to need a vacation from my vacation. Hey kid, how is that Fiji plan sounding?