School for Profit

Hi, my name is Alice, and this is Mrs. Morse's third-grade music class. Would you care to join us?" Who wouldn't? Fetching classroom greeters are just one of the appealing features of the Wintergreen Interdistrict Magnet School in Hamden, Conn., a for-profit public school with an exuberant following among its students, parents and teachers. Run by Edison Schools Inc., a company whose shares are traded on the NASDAQ, the kindergarten-through-eighth-grade facility draws students from four local districts and sports a waiting list with more than 1,000 names on it. "We're a curiosity," says principal Dale Bernardoni, who explains that everyone from student teachers to politicians has come for a visit.

Once dismissed as the loony notion of free-market zealots, for-profit schools are fast winning support and jolting the $360 billion public school market, the last major sector of the U.S. economy to feel the lash of competition. The very notion seems heretical: public schools run by private companies that charge no tuition but operate classrooms for local school boards or independent chartering organizations using taxpayer money--some of which will go to shareholders as (gasp!) profit.

Today more than a dozen U.S. companies run some 250 for-profit public schools, with an enrollment of 120,000 students--there were no such classrooms a decade ago--and venture capitalists from Wall Street to Silicon Valley are eagerly pumping funds into educational start-ups. "We originally set out to raise $100 million," says financier Jeffrey Leeds, founder of one such fund. "But the demand [to invest] was so great that we raised our target to $250 million, and we intend to cap it at $300 million."

This battle for students has had a bracing effect on public school systems. In Boston, a hotbed of for-profit schooling, the city has responded by launching 11 pilot schools to test innovative curriculums. "We want children to be educated in the best environment," says Albert Holland, a Boston public school official. "We don't mind the competition."

Yet even as they grow in clout, for-profit schools are still struggling to do what their name denotes--make money. That requires taking the same government funds that the average school district spends per pupil per year--the U.S. average is $6,500--and not only providing a superior education but also squeezing out a profit. That's a tough task in a field in which "the margins are more like McDonald's than Microsoft's," as Thomas Toch, a guest scholar at the Brookings Institution, puts it.

No company illustrates the promise and pitfalls more clearly than Edison (1999 revenues: $133 million), the leading manager of for-profit schools, which pioneered the concept of for-profits in the early 1990s. Edison has since lost about $160 million while opening 79 schools with 38,000 students in 19 states. But parents are clamoring for its product. Last week the company signed deals to open a pair of schools this fall in Rochester, N.Y., and Milwaukee, Wis., and won a five-year contract to manage two schools in North Carolina.

The flurry of activity caused the boys and girls on Wall Street--all excellent math students--to raise Edison's grade. Its stock, which had fallen below $13 a share since going public at $18 last November, jumped $5.75 last week to close at $18.625.