ISA Investment 101: Due Diligence
In our time as angel investors, we have conducted due diligence through a relatively extensive process, with multiple checklists, reference checks, expert conversations, and document checks. Christopher Mirabile, Managing Director at Launchpad Venture Group describes due-diligence as an investment process: “Diligence is the fancy word for the process you use as an investor. A good process can help improve your returns.”
Due diligence is very contextual, however. Thankfully, the process of diligence for ISA investments is more straightforward than in an angel investment context. Typical schools considering ISA programs have data on recent outcomes, which makes assessing risk and return on an investment much easier. Moreover, usually schools have some process for tracking their screening, marketing, and placement outcomes, which provides useful data points to assess the different risks for ISA investing and create a viable ISA program design and valuation.
Q: Why is it important to do proper due diligence for education investors considering an ISA investment?
While data from schools is available for ISA investment, and gives a good picture of what the future might look like, it may be far from complete. Creating an ISA program requires a clear view of the future might unfold, a proper financial model, and clearly laying out the assumptions behind the models.
With past data, you know what has happened. Then you need to account for the growth trajectory and projected outcomes for the school as they scale. Further, the presence of an ISA program itself can affect program outcomes. Enrollment can increase with the presence of an ISA program, and actually, that is the hope for many schools when they are considering an ISA program.
Such growth, however, needs to be supported by proper screening of students, marketing, and career support as the school scales. Understanding whether the school’s infrastructure can support such growth or what plans the school has for managing that growth is as important.
Finally, an important part of diligence should be verification of the information provided by schools. This can be in the form of document checks, reference calls for the school as well as conversations with students. In our experience, students have a pretty good read in realizing the value they are getting. Talking to students about their experiences in the program, as well as understanding how they get supported can be very illuminating.
Q: What are the important criteria around which due-diligence is important in ISA investing?
- Outcomes data on completion rate, placement rate and timing of job placements, and salary distribution on graduation.
We have already discussed the role of outcomes and placement on ISA pricing and risk assessment. Our model creates an algorithm to price ISAs using this data, based on investor IRR and impact requirements. We use both discounted cash flow (DCF) and Monte Carlo simulation based approaches, depending on the richness of the data that is available.
As we have mentioned earlier in this series, both the mean level and variance of graduation level income of students are important in assessing ISAs. In addition, time taken to placement can affect returns.
Running clear sensitivity analyses around scenarios of worse than expected income levels and default rates is important.
Regarding the authenticity of the data provided by the school, there are limited options to check this. Certainly, a third party audit can be done, but that may not be perfect either. The Council on Integrity in Results Reporting (CIRR) is a non-profit organization that certain boot camps have joined to increase transparency. Schools provide standardized and audited outcomes reports to this group which then makes them publicly available.
- Assessment of marketing channels and efficacy, screening criteria, and career support services.
The school should be able to effectively acquire students to make investment worthwhile. A school with a high cost of acquisition and a low conversion rate may be having problems attracting good students. This may reflect some issues with the program itself or the marketing strategy of the school. Given that ISAs will only fund a subset of students at a school, this creates a significant deployment risk.
- Growth projections for the program, particularly with an ISA program in place.
How does the school plan to grow, and scale is an important question, though not one we are concerned with beyond a certain point. To be sure, we care about programs that can effectively deploy allocated capital, but beyond that, we want understand the growth strategy of the program to assess potential scalability of the ISA program, but also any adverse impact growth can have on existing programs and students.
Certainly, it would be interesting to fund larger programs which can deploy a lot of capital. This reduces the impact of the fixed cost of setting up an ISA program. However, higher education is inherently limited in its scaling ability. A well designed school with solid deployment capability represents a strong investment. Beyond a certain point of scale, we worry about the school diluting its operational capabilities and teaching quality and/or lower enrollment standards.
- Current financials of the school, particularly if it is a coding boot camp or certification program.
Schools that have shown consistent growth and traction are naturally preferable from a financial perspective. However, certain investors may want to consider what population and geographic region (rural vs. urban) the program is serving for an impact perspective.
Schools earlier in their lifecycle and with limited data seeking ISA investments are more successful when they show some level of competitive advantage (i.e., corporate partnerships, team strength) and may need to take worse ISA investment terms to get one going.
- If an ISA program exists, program design and key statistics including proportion of students using ISAs, ISA volume per year, and any payment data.
Schools having existing ISA programs, particularly on their balance sheets, have more data to show and a track record of outcomes that they can lean on. Some investors that we talk to also prefer to set up ISA programs for existing schools.
It will be important to understand the existing ISA program structure, and if it fits with an investor’s investment interest on both the financial and impact side.
- Verification of licensing or educational program certification requirements in the state(s) of operation.
- Reference checks on the management team
Leadership checks are a common element of diligence. Certainly it is a good practice to in the case of an ISA investment as a double check on the relevance and quality of the outcomes data provided by the school.
We also strongly recommend talking directly to 10-15 students in the program, ideally randomly selected from a list to understand students’ perspectives on the program.
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