Investing in the Workforce of the Future: Reflections from SOCAP

SOCAP is the world’s preeminent conference dedicated to increasing the flow of capital towards social good, and while in the 12th year of its history, 2019 was the first time the conference tapped the Future of Work as one its 10 focus areas.

Through the panels, coffee chats, breakfasts, happy hours, and more I had the chance to attend (90% of which I found myself running late to), there were a few central reflections that I left with when considering the flow of capital towards the workforce of the future:

1. Shifting Financial Risk Off Students

Despite investment in higher education soaring, with student loan debt at an astonishing $1.6T, the return of a higher education degree has never been more in question, with 40% of college graduates taking positions that do not require a college degree. Meanwhile, as progression in technology radically transforms the workforce, the average half life of a skill has shrunk to only 5 years, meaning that individuals will need to upskill or reskill much more frequently. And as such, society cannot afford for individuals to continue to take on the financial risk of whether or not investments in education will pay off.

To invest in the workforce of the future, we need to invest in models that shift the financial risk off students, and encouragingly, innovative models are emerging to accomplish this:

• Income Share Agreements (ISA’s) — by far the most talked about, of course, are ISA’s, whether being offered by education programs directly (Lambda School, Kenzie Academy), by companies partnering with institutions (Vemo), or by startups offering the financing structure directly to students (Stride, Blair, and MentorWorks)
• Job Guarantees — although they don’t have the sexy, controversial appeal of ISA’s, job guarantees effectively offer students much of the same downside protection, allowing students to only pay for an educational program if they land a job in their field of study (Springboard is a great example of a company employing this structure – they boast 1,730 students have gone through their data science program with zero requested refunds… imagine if a university had this same offer…)
• Student Loan Insurance — Ardeo Education Solutions partners with institutions to enable them to offer students loan repayment assistance programs, which assist them in paying off their student loans if they do not attain a job above a certain salary threshold
• Employer Paid Programs — when labor market demand is particularly high and education programs have close enough partnerships with employers to place students directly, some programs like SV Academy are employing models where students aren’t on the hook for any payment, as it is directly financed by the employer who hires them
• Employer Benefits — in contrast to the other models listed where training takes place prior to employment, employer benefits models like those provided by Guild support existing employees who need to continue to upskill to remain relevant as the skills needed for their careers evolve
• Innovative Staffing Models — staffing companies like Revature have pioneered an innovative model of hiring individuals who need additional skills, training them internally, before ultimately deploying them out to clients (or having those clients hire them full-time)

Though each model above has its own set of payoff curves and risk distributions, what can be said across all of them is that they largely increase access to education programs, align stakeholder incentives towards student success, and decrease the downside risk for the students.

My thesis around this area is that education programs that do not adopt at least some form of these models that shift financial risk off students will not survive in the long-run. That said, not all of these models are appropriate in all scenarios — my view is that many parts of the VC world have begun worshiping ISA’s much too early without thinking diligently enough about in which contexts they are most appropriate and in which another model would be best suited.

This is an area I am currently doing a deeper dive analysis on — I will likely share some of my insights on this blog, but please reach out if this is something you are interested in sharing and comparing views on.

2. In Alternative Pathways, the ‘Non-Traditional’ Student *is* the Traditional Student

Though in my view, shifting financial risk is the most critical way education programs need to evolve, close behind that is acknowledging the reality of support and flexibility needed by the students in these education to employment pathways. For too long, discussing ‘wrap-around support’ services within education pathways has been exclusively reserved for conversations focusing on the social mission of engaging a small population of ‘non-traditional’ students that are being left behind. While this is a worthy conversation to have, what I believe has failed to be seen is that, increasingly, a very *large* portion of learners will need some form of these support services in order to succeed in rapidly changing workforce, particularly as the need for lifelong learning implies the existence of a massive portion of adult learners with busy, complex lives.

While I have written about some of these support elements in the past (see: Reflections from ASU-GSV), I am repeating myself because I want to double down on (a) the size of the population that has these needs as discussed above, and (b) some of the ways in which I see it successfully materializing:

• Stipends — even in upskilling programs that are free or have deferred payment structures, organizations like Resilient Coders recognize that many students need stipends in order to take time away from working and invest time in education
• Emergency Loans — continuing on the financial track, some may be surprised to know that 40% of Americans would have difficulty covering a $400 emergency expense; companies like Edquity are supporting education institutions in ensuring their students have access to emergency funds such that such an expense is not the reason they don’t persist in an education program
• Professional Skills — while much of innovative programs like Kenzie Academy focus on technical skills like software engineering, the company also realizes the importance of extensive training on basic professional skills like communication that we incorrectly assume most students may already have exposure to
• 1:1 Mentoring — when students at Springboard enroll in data science, analytics, or design, they are also offered weekly 1:1 mentoring with an industry professional, which not only acts as a support mechanism, but also helps them start building the social capital often required to land a job
• Mental Health Support — Lambda School made a big announcement earlier this month with their partnership with Modern Health, providing all students access to resources that help support mental health and well-being; driven by their understanding that 1 in 3 people experience a mental health challenge at some point in their life
• Clothing — YearUp is one of the most successful workforce development non-profits out there, and one of their many wrap-around services offered is ‘career closets’ which make sure that access to professional clothing is not the obstacle that prevents students from getting a job

Important clarification — this list is far from exhaustive of the types of support services being provided and far from identifying all the companies that provide each of these, but my hope is that sharing just a short list of examples will start to illustrate the point of what is needed to ensure success for a large portion of students in these pathways.

My thesis on this area revolves around the idea that when we discuss investments in the workforce of the future, we must acknowledge that what has historically been known as the ‘non-traditional’ student is now the traditional student, and education programs will fail if they do not meet these students where they are with the necessary support and flexibility. Navigating which types of support are necessary for a particular student population and pathway, as well as which of those types are best served by which stakeholder group, will be critical to success going forward.

3. When is Venture Capital Not the Right Capital to Best Support Students?

Taking a step back from the financial arrangements and support services being offered by innovative companies to try to equip students for the workforce of the future, it’s worth reflecting on the underlying assumptions we may sometimes be making at events like SOCAP, which largely focus on how venture capital equity investments (whether aiming for market-rate or concessionary returns) can impact these large scale social issues.

It’s worth noting that some solutions in equipping individuals for the workforce of the future will need to be hyper-localized and with a high degree of wrap-around support services (as discussed above).

In thinking about the capital required to support these solutions, it’s important to acknowledge that not all types of capital are the same. Venture capital is a model that is best suited for fast-growing, scalable models that are poised for an eventual liquidity event. Some solutions required may be hyper-localized, have a high degree of wrap-around support services (as discussed above), need significant experimentation before scaling, or be based in emerging markets where a liquidity event is less likely.

So as we think about how to best invest in the workforce of the future, it’s worth considering the range of different capital flows in the market other than traditional venture capital equity investing:

• Grant Funding — perhaps as the largest step in the other direction, there are some challenges that may be better addressed by non-profit organizations and best sustained through grants
• Blended Financing — midway towards this first alternative is blended financing, which is a structure that allows public or philanthropic funders to catalyze private investment by impacting risk/return profiles
• Debt Financing — though debt has its own set of challenges, some models with sufficient cash flow may be better suited being largely financed through debt rather than equity
• Revenue-Based Financing — one of the more innovative models to emerge as an alternative to traditional equity financing (and being pioneered by investors like Village Capital) is revenue-based financing, which among other benefits, allows companies to pursue more sustainable growth targets
• Outcomes-Based Financing — thought not a direct alternative for organizational funding, a final unique capital flow model that I think is important to understand in the context of this conversation is outcomes-based financing, which provides governments an innovative way to fund service providers to achieve certain social outcomes; a relevant recent example is the Massachusetts Pathways to Economic Advancement project, enabling JVS to scale its workforce development model, brokered by Social Finance, and invested in by Maycomb Capital and others

Venture capital is a hugely powerful model for creating financial and social value. But traditional equity investing is a blunt instrument, and having a mismatch between capital and model can lead to imminent failure for both companies and investors.

My thesis around this area is that a diversity of different capital flows and financial arrangements are needed in order to best equip the workforce of the future, and venture capital firms will need to have more thoughtfulness around where their is capital is best suited, and where another financing structure is more appropriate.