An Interview with Tom Kalinske – On Experiences from Multiple Industries
Tom Kalinske is best known for being the CEO of Mattel (multinational toy manufacturing company, most famous for Barbie) for 15 years, growing Mattel’s market capitalization to over 10 times its original size. After leaving Mattel he was also the CEO of Sega, where he managed to wrestle over half of the video game market from Nintendo. This story had become an important business case study and turned into a book “Console War”.
His passion for education led him to leadership in many companies in the education industry: LeapFrog(CEO), Knowledge Universe (CEO, now KinderCare), BlackBoard, Cambium Learning, and Lightneer. In Knowledge Universe, he has invested or managed 36 education companies, most of them are very successful. He is currently Chairman of Global Education Learning and Gazillion Inc.
This interview is to learn from Tom his insights on education industry compared with other industries, what it takes to succeed in education space and his experience and perspective on China education market. (he has invested in a China education company and already exited successfully)
To help us learn from your strategic thinking, could you share some stories about the big challenges you have faced and how you and your team conquered them, or otherwise — learned from failure?
Long ago, in the early 70s, I was a part of Mattel. I was working on physical toys, talking toys, and wooden toys, and jack-in-the-boxes, and things like that, and one day, Ruth Handler, the founder of Mattel, came into my cubicle and she said, “Tom, Barbie sales declined last year. It’s the first time they’ve ever declined. My retail buyers say it’s over for Barbie, my sales force says it’s over for Barbie, the Wall Street analysts say it’s over for Barbie, you should go on and do something else. What do you think about that?”
And I said, “Ruth, that’s the dumbest thing I’ve ever heard. Barbie will be around long after you and I are gone.”
And she said, “Well, that’s what I wanted to hear. You are now the product director and marketing director of Barbie.”
And I asked her, I said: “Ruth, what is it in your mind that makes Barbie so special?”
And she said, “Well, with Barbie a girl can be anything she wants to be. She can imagine, play, and be anything that she wants to be. It’s the heart of Barbie.”
Well, I took that to heart. And I used that phrase on packaging, on advertising, and I did a lot of different—up till then, the company would do one new doll a year, and one new accessory a year, and one new line of costumes a year, and I said to heck with that, let’s go after every girl. So let’s have a Barbie doll that’s appropriate for two- and three-year-old girls that can be dressed very easily with velcro and snaps, and on the other end of the spectrum, let’s go after older girls who like fashion, and let’s have famous designers like Oscar de la Renta and Bob Mackie and BillyBoy* out of Paris design outfits for Barbie and sell them for a hundred dollars. And in between, let’s do all the occupations that one could think of; let’s have Barbie be an astronaut, a teacher, a doctor, and even President Barbie, in 1976. And there were a lot of other things we did—we made all of the packaging in one color, pink, and we were obviously very aggressive in our advertising and marketing, and soon Barbie grew from $42 million in sales to $550 million in sales, and it became a big success. Today Barbie’s about a billion-dollar business, and it has had several years of declining recently, but still, I think the reason it’s declining was they walked away from what Barbie should be, and now they’ve returned to that phrase and that promise to little girls.
At Mattel, I was working on He-Man and the Masters of the Universe. This was a product that came out of pure research, lots of lots of research that defined who He-Man was, who his enemy was, where he lived in this imaginary world, and we grew it to be about a $75 million business. But my chairman said, “Well, that’s nice, but Hasbro has Star Wars, and Hasbro has G. I. Joe, and you’ll never make He-Man Masters of the Universe that important, because you can’t get a television show.”
And I said, “You wanna bet?”
And we did something very unusual—we developed a television show. We invested $3.5 million, and Group W. Westinghouse invested $3.5 million, and with Filmation Animation Studio we developed 65 half-hour shows. And we gave them away free; we gave them to the local television stations in each market. Whether it was in New York City, or Tulsa, Arizona, we gave them the show for free. Well, they loved that. And in return, they gave us three-second commercials, and we would use those commercials either for our own products or we would sell them to McDonald’s or to Kellogg’s or to other people. Well it turned out, the show was so popular, we sold the spots for more money than we’d invested in making the television show, and the television show became profitable for us, and we never actually intended that. And the revenues grew from $75 million to $750 million. So that was another example of overcoming challenges and people’s “can’t do it” to make a success.
And I guess the next one I would talk about would be Sega. When I went into Sega, my Wall Street analyst friends all said, “What are you doing? Sega can’t compete with Nintendo. Nintendo has 95% of the market! Sega has almost nothing!” And at that time, Sega was trying to do the same things that Nintendo was doing, going after the same-aged boy, the 9- to 13-year old, doing the same kind of games and the same kind of advertising.
And I said, “This is crazy. We’re going to lower the price of the hardware, we’re gonna put our best title in the hardware—that would be Sonic the Hedgehog—and we’re gonna make fun of Nintendo in advertising. We’re gonna position Nintendo as the little kids’ product, whereas Sega is for teenage and college-age people. And we’re gonna do more sports games, NFL Football and Major League Baseball and NBA Basketball and FIFA Soccer, and we’re gonna leave them the little kids. And we’ll tell everybody that ‘Yeah, Nintendo’s fine, they’re for your little kids, but Sega’s for serious gamers and college-age students.’” And of course within three years we’ve passed Nintendo in share of market by adopting that strategy.
And then finally, I guess I’d say, when I went to Knowledge Universe—same kind of thing, a lot of the Wall Street analysts said: “Why are you going to do educational companies and products? Everybody knows you can’t make money in education.” And I didn’t believe that. I didn’t think that was the case. I thought for-profit education companies could make a nice living. And so, when we started LeapFrog, again, everybody said: “Well, moms claim they want education, but they don’t want to pay the extra price that really doing good educational products cost.” And I didn’t believe that, and we worked with Stanford University, and frankly Stanford University professors designed most of our early products. The head of the Graduate School of Education there, Dr. Robert Calfee, was very instrumental in designing the curriculum that we put into our products, particularly the phonics, learning how to read curriculum and math curriculum. We took his curriculum, and we made it fun and interesting, and of course we ended up building LeapFrog to at one point bringing about $680 million in revenue, so it proved that education, in fact, can sell.
So those are just a few examples of where there were big challenges, and how we overcame that. Along the way we certainly did have some failures. I learned, at Sega, when we did an educational game, it was actually quite successful, it wasn’t a failure, but my board of directors said, “Why are you doing education inside of an entertainment company? Just do another Sonic the Hedgehog title and you’ll bring a lot more revenue.”
And so a lightbulb kind of went on in my head. I said, “Well, I don’t think that an entertainment company really understands how to do education, so if you’re gonna do education, you have to really devote yourself to doing education properly.”
What was the educational product in Sega?
It was a product called Pico. It was a product where a ROM cartridge was embedded in the bottom of a book, and when you turn the page of the book, the same visuals that were on the page of the book showed up on the television screen, the difference being that now, when it was on the television screen, it could be animated, the characters could talk to you and ask you questions and move around. So it was quite a unique product, and we could play games within the pages of the book through the use of a stylus. And we sold about a $100 million worth of that product, and I thought it was a very very good educational product for young children, particularly to get them interested in learning to read and learning early math skills and early reasoning skills actually.
You are on the board of Lightneer, which was launched by people from the Angry Birds team. Why do you think these people wanted to create Lightneer?
So the Angry Birds team—Peter Vesterbacka and Lauri Järvilehto—Peter was the founder of Rovio, and he has a PhD in physics, and so his goal is to make particle physics interesting through gameplay. Now, he would be very open with you, and he would say: “I don’t expect you to become an expert physicist by playing this game, but I expect you to get engaged in physics, so that it’s not frightening to you, so that you enjoy it, and so that you’ll want to learn more about physics after you play Big Bang Legends.” I think that’s a realistic goal; frankly, myself, I was afraid of physics when I was in high school, I thought it was too hard, and I know a lot of younger children feel the same way about physics and chemistry. And I think Lightneer’s philosophy is—we’re gonna prove to you that physics and chemistry are not scary, that you can enjoy it in gameplay, and that you can learn quite a bit. You can learn all of the 140 elements, for example; certainly if a child could learn 160 Pokemon characters, they could learn 140 elements through gameplay, by making each element a character in the game, so that you kind of enjoy playing with them.
That’s what Lightneer is all about; they’ve had a beta launch in Singapore, and it’s going very well. People seem to really enjoy it. It’ll end up being a profitable game, but more importantly it’ll end up solving some big problems, which are how do we get kids interested in complex subjects that they might be afraid of?
Could you tell us about Knowledge Universe?
Knowledge Universe was always more than one company; it was founded in 1996 by Milken and Lowell and they each invested $250 million, and I was the CEO of it. And so the idea was, we were going to do cradle to grave education. In other words, we’re going to do young children’s education, and we’re going to do IT training, and we’re going to do post-retiree reeducation, and we’re going to offer online degrees—we’re going to do everything that we can think of in the world of education. We didn’t quite manage that, but we did do 36 different companies, we started 18 and we bought 18 when they were quite small.
For example, we started Knowledged Beginnings by buying a hundred childcare centers here in the California Bay Area, and then adding to it. We would add, in each market across the United States, until we had about a thousand. The business model was—we wanted to be reasonably priced preschool education, so part of our strategy was to be in suburbs, and part of our strategy was to build preschool learning centers in corporate offices, so that when Mom went to work, she could take her child to work to a preschool, and feel pretty good about the child isn’t too far away, during lunch she could go down and see how the child is doing. So we did that, about half was corporate centers and half was freestanding centers in the suburbs. And then after we grew enough we bought KinderCare, and because that’s such a good brand name, we started using the KinderCare brand name more than other brand names.
Now some of the other successes inside of Knowledge Universe were a company called K12, which we started from ground zero. When we started it, the original idea—the founder was a guy named Ron Packard—was there are 3.5 million homeschoolers in the United States, and they have a hard time figuring out what curriculum they should use. So Ron thought it was a good opportunity, to put together the best curriculum he could find for homeschoolers, box it up, and ship it to homeschoolers. So that was how the business started. But then this thing called the charter school movement came along, and a lot of charter schools had the same issue: how do we know we’re getting the best curriculum in our charter schools? So Ron offered again—the best curriculum. It wasn’t necessarily a curriculum that we developed—some of it was from Pearson, some of it was from McGraw-Hill, some of it was from Mifflin, some of it was from Wiley, and we put this educational material together, and use it in the charter schools. Well, K12 became a—I think the revenue was about $750 or $800 million, and the market cap was about the same, about $800 million. So that’s one we started from zero, which was quite successful—it’s gone up and down, but it’s still quite successful.
One that wasn’t successful—that I always thought was such an interesting idea—this was before the internet was very strong, and we decided to offer an online MBA degree where every one of your professors had a Nobel Prize in his respective discipline. So we were working with Stanford, University of Chicago, Harvard, Carnegie Mellon, London School of Economics, and we would go in with a film crew and film their lectures and their coursework, and the idea was we would make it available. You could earn an MBA degree by listening and watching these lectures and going to online discussion groups and, obviously, take tests to prove that you comprehend these subjects. It turned out nobody wanted to do that, for a couple of reasons. One, professors who have a Nobel Prize can’t necessarily teach. They’re very good researchers, but they don’t necessarily teach very well, so they’re quite boring. And then the other problem was that, at that time, the internet wasn’t very strong, so you had a lot of glitches, and it took time to get it done, and also, people frankly in those days preferred traditional university and being with their colleagues, sitting and discussing in the student union and what have you, rather than just doing all this discussion online.
So that one didn’t work for us. That was a failure for us; however, we didn’t lose money on it, because we ended up selling it. We sold it to Thompson Education, up in Canada, and they’re using it for corporate training. What else did we do—well, speaking of Nobel, we did the Nobel learning centers in the east. These are very good schools, again, on the premise of we wanted to provide quality education at reasonable prices, and so this was a chain of private schools. It was quite successful. We did a teacher-training company for teaching IT to teachers. We did a company in Europe that was the largest IT training company in Europe—it’s changed the name several times but it became known as Spring, and this was training IT professionals the next level up in the profession, as you will. So if they wanted to get a higher-paying job, they’d learn one more skill that was different from what they already knew, and they could go out and get a job at a higher rate of pay. Now that was quite successful, that was about a $700 million business as well. So those are just some of the examples of what Knowledge Universe was all about.
In fact, we had two IT training companies—we had one in the United States called Productivity Point International and one in Europe called Spring. Both of those companies have been sold, by the way—in 2005, Larry Ellison and Milken decided to capitalize on everything that they’ve made, so we basically sold almost all of those companies. At that time, Mike held onto Knowledge Beginnings, which included KinderCare, until last year, and he sold it last year.
Is Knowledge Universe more like a venture capitalist firm?
Well, it is and it isn’t, because oftentimes we were actually managing the companies, the staff inside of Knowledge Universe. So I was obviously Chairman and CEO of LeapFrog, I also was on the board of Spring, the IT training company in the UK, and at one point or another on the board of the teacher training company and Nobel schools. So, we really went in and lended a hand in managing these companies, and in fact, the one I’d mentioned—K12, for curriculum for charter schools—it literally was run by Knowledge Universe people in its early days; now, it’s expanded out to other people, but in its early days it was all Knowledge Universe people. So we were a holding company that’s actively involved in managing companies.
We divided almost all of Knowledge Universe’s assets back in 2005 and 2006. As I said, Milken hung on to Knowledge Beginnings, including KinderCare, till last year. And he bought the name Knowledge Universe—part of the agreement with Larry Ellison was that he got the name and he added the word “education” at the end of it. So there is now—I think you could find the website—Knowledge Universe Education, and that’s where Mike is now doing some more things in education, but it’s really quite a different model.
Selling to end users and selling to schools (districts) can be very different; what challenges had you faced? What is needed to be successful in each of them?
School district sales are really terrific when you get them, but it’s a very very lengthy process. As I mentioned, I’m on the board of Cambium Learning Group, and part of our business is big district-wide sales, and honestly sometimes the salesman would say “Oh, I’ve been calling them for three years now. Oh, I just got an order!” Three years later! So you have to have a lot of patience to get it done. One of the other things that we do at Cambium Learning Group is, a couple of our subsidiaries sell directly to teachers at a low price. For example, our fastest growing unit is called Learning A-Z (LAZ) and Reading A-Z (RAZ), and we sell that to teachers and here’s the promise from that: kids want to read material that they’re interested in. So what LAZ does is each month, it churns out a new book for kindergarten, 1st grade, 2nd grade, 3rd grade, 4th grade, 5th grade, 6th grade—all leveled content (in other words, right words for that particular grade whether it’s kindergarten or 1st grade)—and even within 1st grade, they’ll do three different books, three different ones in 2nd, three different ones on the same subject.
So let’s say—bad example, but—let’s say the Pope was coming to the United States to visit, it would churn out all of those books with leveled reading, leveled content, next month for the schools. And the schools would buy it—it’s all online, so the teachers could have it read online, and obviously, when you’re online, you can highlight different words, you can get definitions of different words. But many teacher still also print them out—they print the books out and hand them to the kids.
So, that’s an example where I think the price is—dollars per student, per year. And the teachers pay that. It’s not a district sale, the teachers pay it out of their own pocket. Maybe they go to their principal and get reimbursed, but that’s what they’re using for helping kids learn to read. And that’s a very effective way of doing it, selling directly to the teachers as well, as long as your price point is low enough, because the teachers don’t have big budgets, you know, and they’re sometimes taking it out of their own pocket, or sometimes they’re taking it out of maybe library funds or something. And that has been really successful for us, because the teachers love it, they love that it’s current content that the kids like. They have good research that shows that this is an efficacious way of children learning. They like the pictures, they like the words. So the whole thing has worked very, very well.
But on the other hand, back to what you started with—if you’re selling to districts, have a lot of patience. You have to have enough capital to survive a long sales cycle. If you introduce a new reading program or a new math program and you’re counting on district sales, it’s probably gonna be three years before you get any sales at all, it’s probably gonna be five years before you have enough sales to where it starts making sense to you. And you have to have great research, you have to have great research if you’re doing district sales, you have to be able to prove that what you’re selling actually will improve student performance. And that the teachers will like it.
You have to fit within their budgeting constraints. When you’re talking about a reading program, let’s face it, most schools already are buying reading programs from somebody, whether in the old days it was Scholastic, READ 180 (which is now part of Houghton Mifflin), or if it was a Pearson reading program, or a McGraw-Hill reading program—they are already buying, and some of these programs with lots of materials are quite expensive, they’re probably $30,000 a classroom. So, to get a district to pay $30,000 a classroom, you’ve got to have a lot of great research to prove it could work. And the price is all over the place—I shouldn’t say 30,000—because a lot of it is $10,000 a classroom, $15,000 a classroom, a lot of it is much less than what I just said, but nevertheless, the point is, you have to be able to prove that it works and that it’s gonna improve the students’ performance. And put in some time and effort.
Could you talk about Teachers’ PD (Professional Development)?
We do quite a bit of that at Cambium Learning Group. That’s usually part of the sale—when we are doing a district sale, the PD part is included in the price of the program. So, usually what happens is we say: “Okay, here’s a program, and this is gonna be $7,000 a classroom for a new reading program, and we’re gonna include four days of professional development where we’ll come out and train your teachers on how to use this curriculum better.” So it’s all part of the price. Now sometimes, it may also be separate where a school says, “Hey, I’ve got a bunch of new teachers now, you gotta come out and train them again,” and we’ll say, “Okay, we’ll do that, but now we’re gonna charge you.”
It’s both online and face-to-face. There’s quite a bit that’s now online. I would say more and more of it is going online, but a lot of it’s still face-to-face. The teachers work like that better. All of the companies have large online and also telephone service—so customer service through telephone calls, walking them through how to use materials better, or online—that’s becoming more and more important. But when you first launch a program, oftentimes a district will want in-person training.
You have been CEO or Chairman of companies in the toy industry (Mattel, Matchbox), the video game industry (Sega, Gazillion Games), early education schools (KinderCare), and early education products (LeapFrog), and are still sitting on the board of companies providing K12 e-learning content (Cambium Learning), Higher Education LMS (BlackBoard), and educational games (Lightneer). What are the differences and similarities between these verticals? in terms of:
- Business metrics
- Winning market and partnership strategy
- Customer acquisition
- Customer service
- Profit making timeline plan
Well, a lot of the metrics are the same. You’re certainly interested in revenue, you’re certainly interested in gross margin, in cash flow, in share of market, whether you’re talking about Mattel and whether you’re talking about Cambium Learning Group. You’re interested in your share of market, you’re managing R&D costs.
Some of the differences are, again, at the toy companies and certainly at Sega, we were also interested in the number of units we sold of hardware and the number of units we sold of software. It was important for us to understand our share of market versus Nintendo. Now, in education companies, they still are very concerned obviously with revenue and margin and profitability and cash flow, but, as I said earlier, they’re very interested in the number of schools that they’re in, how many more can they get—and, very important to them: is it effective? If it isn’t effective they’re not gonna be there long. So they have to have the research that proves effectiveness. And that’s hard. A lot of times it takes three years to prove that a new program is effective and changing students’ lives and helping them learn, whether it’s reading or math, better. So a lot of that stuff is difficult to do, but very necessary.
In terms of differentiating strategies, in the video game business, the positioning of the product is very, very important. It’s critical, you know, how do you position Barbie, how do you position He-Man, how to you position sonic the hedgehog. And you advertise and do PR and a lot of aggressive marketing behind those products. Whereas in the education business, advertising and marketing isn’t that important. I mean, I’m not gonna say it’s not important at all, it is, but it’s not nearly as important as it is in the video game or toy business. It goes back to research—research proving that you’re changing a student’s life, making them understand something better, faster, getting them better grades. That’s what’s important, getting those scores, those grades, proving that they really are learning, and helping the teachers. In terms of customer acquisition and service—you know, we all need service, whether it’s a toy company or an education company, but within the education business, your main purpose is to help the teachers learn to use the product, you’re training the teachers. Whereas in the video game or toy business, you’re answering a question that’s frankly not all that important most of the time: “Gee, I’m stuck at level 5, how do I get past the big boss so I can finish the game?” So it’s quite different.
And we talked already about the profit-making timeline. I mean, within the toy business, we expect to make a profit that year, the first year the product comes out we expect that product to be profitable. If it isn’t, we’ll drop it. And we expect the second year of it to be even more profitable, probably to be its largest profit-making year. And in the third year, we probably hope it stays the same but it might start declining and certainly would decline in the fourth or fifth year. Well, that’s the opposite of the education business. The education business is: you’re not gonna get profit until your fourth or fifth year, maybe.
Do you have any strategy advice for new companies entering the education industry?
You know, what bothers me is when I see a company doing the same thing that another company is doing, and it’s just a tiny little bit better. I think we really need to be looking for big differences, big breakthroughs, how much better it is, prove to me that it’s gonna be much greater than that competing product. And this is hard, you know, because it gets down to—how do you do that? It’s the research, and the teachers buy into it, and their word-of-mouth and saying “Yeah, it is better! I’ve seen the proof in my students” A lot of the research, by the way—here’s a good anecdotal, because it is things like the teachers saying “Yeah, I just started this new product and it is definitely better than Houghton Mifflin’s READ 180, so I’m gonna switch over to it.” Now, is that quantified? It’s the intuitive feelings about how a product is better than another. But, you know, again, the kinds of things I’m looking at—that I’m really interested in—I really believe the big breakthrough is gonna be through greater use of AI and AR and VR, and I really think that we’re gonna be able to reach a point where we could personalize curriculum to a student’s level of interest. So—a lot of boys hate math (well, a lot of girls hate math), but this boy loves cars. Why can’t we deliver algebra to him using a car analogy, a car curriculum? We should be able to—with our tools today—grab examples of problems that will be interesting to that student, that are algebraic problems but are in a car paradigm. We should be able to do that and I think we’re getting very close.
One of my favorite sayings is: if your strategy is basically a strategy that—if someone else can do the same thing, with very little effort and maybe make a small improvement on it, you don’t have a strategy. You have to be able to differentiate yourself.
How do you evaluate if an innovation (including new technology such as AR, AI, and new pedagogy such as project-based learning) in education is worth investing? and when?
Right now, of course, the big AR success is Niantic’s Pokemon Go. However, before they did Pokemon Go, they did an educational game called Field Trip, which, through the use of AR, they recorded the history and the architect and interesting facts about monuments in Washington D.C.—you know, the Washington Monument, the Lincoln Memorial, the White House, the Smithsonian, the federal court, the Supreme Court—and then they did the same thing for monuments in New York City and Chicago and San Francisco. That was pretty interesting, you know, to be able to point your smartphone at the Golden Gate Bridge and hear when it was built and who the architect was and how long it took and all that stuff. But it never really caught on. I do think, though, that kind of an idea, done better today, doing a Field Trip again maybe in the area of chemistry—or any of the sciences for that matter, geology—you know, you point your smartphone at a fault on a cliff and it tells you all about it. This stuff is possible today, and it makes the curriculum more interesting. So I think that’s coming along and I think that’s gonna be important relatively quickly.
VR is a little more difficult, because it’s still so expensive to both develop and then to experience. However, I’ve seen some great VR educational examples that you say: “Oh my God, this is gonna save hours and hours of time.” And one example that I saw most recently was for emergency vehicle EMPs, where they come upon a stroke victim, and they put on their VR helmet—it’s supposed to train them how to deal with a stroke victim—they have a VR helmet on and in front of them is a human body, there’s a table next to that human body with some syringes and other medical devices on it, there’s an MRI screen that they can see, and the voice in their head is saying: “You have five minutes to save this stroke victim’s life. Insert the syringe in the femoral artery in his leg. Now grab the pink tube on the table and press it up through his artery and push it up toward his heart. Now attach the green tube, press the green tube through his heart. You have thirty seconds to save his life,” the voice says. “So you’d see on the MRI screen the clot in his brain, push the red tube up to the clot in his brain. And now attach the suction device and suck that clot back out. You have ten seconds to save his life.” So you do all this stuff, and I can tell you, having experienced it, it really makes you sweat. But what a great way to learn, you know, as opposed to—you can’t do that on a cadaver, and a cadaver’s awfully expensive, too. So that type of medical training, nurse training, doctor training, through the use of VR, I think is really gonna come on fast, because it’s better learning, it’s faster learning, and it’s cheaper! Because, just think about it, most of the time VR training isn’t cheaper because it costs so much for a headset, but on the other hand, if you’re teaching medical students, the other way of training them is through bodies, you know? Either cadavers or live human beings, and that’s a lot more expensive than seeing a virtual reality human body on a screen.
I was just back at the University of Wisconsin and I saw a lot being done in nurse training, and also I saw quite a bit being done in astronomy, interestingly enough. Now, this is another area where, as a student, I never was interested in astronomy, I just didn’t care. But there was a VR experience where, first of all, it’s beautiful, you’re looking at the whole universe, the Milky Way, it’s absolutely gorgeous. And then there was gameplay involved with the VR helmet. And it really got me interested in astronomy. So I think it’s coming along—and this is going on in campuses all over the place. For normal education like astronomy, the downside is: it still costs a lot to have the proper VR helmet and a powerful enough computer to really run the experience well. But certain high-touch, already expensive training, like I mentioned—in medical or nursing or dentistry—there I think it’ll take root much, much faster. I think it’s the right time to invest in those right now.
With your experience and insight in the education industry, how do you evaluate if a company or a business venture is worth investing?
Well, I’m also a VC, I’m a partner at Alsop Louie Venture Capital, and what we’re looking for is a minimum of seven-time return, if we can get it. So we’re gonna do high-risk investing, knowing that a lot of them aren’t gonna succeed, but some are, and we’re gonna get a big return from those that do. Now on the other hand, a company like Cambium Learning Group, that’s more—you know, that company’s been around a long time, so there, it’s different. You’re trying to figure out the cost structure, or how can you keep cost out, can you raise prices at all, how do you improve margin, does moving it all to digital make sense—that is, over time, yes. Initially that’s a very high cost, to digitize everything that used to be print, but we’re past that, we’ve pretty much done that, now, pretty much translated all of our print into digital, or at least there’s a digital complement to the print curriculum. So there, it’s more of a—you’ve got to be careful, you don’t want to make any big mistakes, you have to improve your revenue and you have to improve your profit year to year (it’s a public company), but you can’t make a huge investment unless you’re really certain you’re gonna have a big return, three/four/five years down the road.
For a new company or a new startup, what’s the “critical point” where you will invest in a new company?
It’s usually a little bit past the angel round, so the companies usually have already raised some capital from friends and family and some angel investors, and they actually are close to launching their product, and that’s about the point we’d come in. We’re early investors, but we’re not the earliest. We’re the earliest of VCs, but we’re not angel investors. We want to see some traction, we want to see that you’ve got a product and a plan and people on board and that kind of thing.
You have invested in a company in China (www.yaolan.com) and have already exited successfully; could you share this story with us? and also your observation and forecast about China’s education market? What kind of opportunities might interest you in the future?
I’ve had a love affair with China for a long long time; I’ve been there over a hundred times. And I really wanted to—my friend, this guy named Anthony Chang, he was educated at Stanford and Harvard, and he’s also an ex-VC, and we decided to look at the China education market, because we thought there was a big need to help moms solve their education problems for their young children. We weren’t that interested in higher ed in China, or regular grade school, once the government really controls the curriculum; we were interested in the zero-to-six-year-old group. And so we looked at all kinds of different companies. We looked at chains of preschools, we looked at English learning platforms, we looked at I-chu training platforms, we looked at direct marketing companies, we looked at retail stores, and we settled on Yaolan. And we settled on Yaolan because it was founded by a professor from Beijing Normal University, whose intent was to help answer moms’ questions about education. So the typical question is: “In Chengdu, I have a child, age three, where should I go to help him learn English?” Or there’d be health questions: “What do you think about XYZ brand of powdered milk?” That kind of thing. Or, “What vegetables have iron in them, my child needs more iron.” And we would answer all those types of questions. Now a lot of the answers we had resident on the site; if we didn’t have the answer, our comment to the mom was that we’d get the answer to her within 24 hours.
And so, when we invested in the business, when we bought it, about 3 million moms were using it. We built it to about 15 million moms using it more than once a month. And we had a lot of sponsors that wanted to sponsor different parts of it. SmithKline Beecham wanted to sponsor information on vitamins, et cetera.
The point with Yaolan was, we built it into being much more successful by having sponsors like New Oriental and Procter & Gamble and SmithKline Beecham and other Chinese companies, and we added a lot of content and we really answered a lot of moms’ questions, and they really liked using the site. But a private equity firm offered us a lot of money for it, and prior to the U.S. election, we weren’t sure what was gonna happen with U.S.-China relations, with Trump and Clinton. We didn’t know who was gonna win and we were worried about that, and so as a board we decided to take that offer and sold the company. But I loved Yaolan, I loved the idea of young kids’ education in China, before the government gets involved, I think there’s a lot of opportunities for improving preschools, for improving English learning, certainly the whole area of I-chu is important in China, and citizenship. And the whole area of games—educational games is important in China. So I’m very positive on China on early childhood education. I’m not that interested in improving your readiness for taking the gaokao test to get into college, but early education, I’m interested in that. It’s very hard for U.S. companies to move into China, but there’s opportunities for both U.S. and certainly for local Chinese companies to be successful in China; I think they are, there’s a lot of good examples.