Congress last week passed a bill that makes it easier for startup companies to raise capital and go public, two oft-cited barriers for new ventures looking to enter the education market.
After passing in the Senate March 22, the Jump-Start Our Business Start-Ups, or JOBS Act received final approval from the House of Representatives on March 28 and, as of press time, was expected to be signed into law by President Obama.
The legislation, a rare example of conflict-free, bipartisan congressional support, is a composite of several smaller bills but puts forward two main initiatives aimed at helping startup companies grow faster:
--The measure would establish a new form of company financing called "crowd funding." Companies would be able to raise up to $1 million by selling small numbers of shares to a large number of buyers through several mediums, including the Internet. It's been compared with the social-financing website Kickstarter, where projects are introduced with development and financing goals and users can donate money to help the projects become realized. (Kickstarter, however, does not offer actual stake in the projects and companies being funded.)
--The JOBS Act also would allow companies that earn less than $1 billion in revenue to bypass certain financial-reporting requirements in the five years after filing for an initial public offering, or IPO. Those companies would not have to conduct an external audit of their internal controls and only would have to disclose two years of previous financial information rather than three.
One of the main reasons the education industry has been slow to embrace entrepreneurs as quickly as other sectors is the difficulty in raising capital in a highly regulated field skeptical of for-profit involvement. There are also few publicly traded companies in education, in part because of the difficulty of addressing both investors' and students' needs. The new legislation could put a dent in both of those barriers, though field experts expect the crowd-funding to have a larger impact.
"In K-12, it's a hard place to raise capital, and a lot of the entrepreneurs are raising less than $1 million anyways," said Adam J. Newman, a founding and managing partner of Education Growth Advisors, an education business advisory firm in Stamford, Conn. "It certainly creates a way for more dollars to come in."
A 'New Resource'
Formal and informal mechanisms are already in place for early-stage companies to raise money. In education, the NewSchools Venture Fund, based in San Francisco, for instance, invests in companies that may be too risky for venture capitalists. It is financed by a wide range of private donors. The organization recently announced the creation of an educational technology seed fund that aims to help ed-tech startups find early-stage funding.
For example, three years ago, NewSchools invested in BetterLesson, a Boston-based company that allows educators to use the Web to share and catalog lesson plans, after NewSchools recognized the need for such a tool in the education community. BetterLesson is quickly gaining traction among educators and, although NewSchools continues to contribute funding to the company, in its latest round of funding last August, most investments came from elsewhere, including traditional venture-capital firms.
The nebulous "friends and family" donation is another staple for early-stage startup companies. Those investments could be emboldened or even replaced by the crowd-funding initiative, said Steve Pines, the executive director of the Education Industry Association.
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