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Hi there,

Happy mid-March! St. Patrick's Day is coming up, and it's four leaf clover time (I guess). 

This was the first week of solid good weather in a long time and for that I'm grateful. 

Today's Contents:

  • Weekly Song: Just a Girl
  • US government: The American Rescue Plan Act
  • OTF: Scaling High-Quality Early Childhood Education Remains Challenging
  • Good Reads

Weekly Song: Just A Girl

It was International Women's Day this week. I hope to see the day when 50% of the population does not need its own single day. But here we are. I generally don't enjoy those sorts of things for a slew of reasons that I won't opine on.

Instead, I'll leave you with the song of the week, Just A Girl, the irreverent tune by No Doubt that debuted during my middle school years. Tragic Kingdom, the album that features Just A Girl, might well have been the first album that I ever bought. Here is the music video. 

It's partially to pay respects to Sarah Everard, the 33-year-old woman who was kidnapped and murdered while she was walking home from a friend's house in South London. A walk that I myself had done plenty of times during my five year residence in the city. The man who has been charged in connection with the crime was a member of the police. Here is background on the story. 

Just A Girl by No Doubt

Take this pink ribbon off my eyes
I'm exposed and it's no big surprise
Don't you think I know exactly where I stand
This world is forcing me to hold your hand

'Cause I'm just a girl, a little 'ol me
Well don't let me out of your sight
Oh I'm just a girl, all pretty and petite
So don't let me have any rights

Oh...I've had it up to here!

The moment that I step outside
So many reasons for me to run and hide
I can't do the little things I hold so dear
'Cause it's all those little things that I fear

Government Passes a Landmark Bill 

I don't have full thoughts on the The American Rescue Plan Act, other than that there has been surprisingly limited discussion of the Act and how the $1.9 trillion of non-war time funding is an unprecedented sum that will define the public sector landscape across America for many years to come.

The funding, inflation-adjusted, is greater than what the U.S. spent fighting WWII, according to Bloomberg. Every department, every state, every city will receive an infusion. Often without many restrictions.

What are the implications? What are the opportunities? How can we, in the startup ecosystem, ensure that these resources are distributed effectively to the benefit of society? Read the full 630 pages here

It includes one-off $1,400 checks for Americans earning up to $75,000 a year. Do you (or a friend or a family member) qualify? You can check on this IRS website.

The key will be watching the bond market and the inflation indices for potential second- and third-order consequences from such a large spending increase. Will investors punish the Treasury with higher yield from such large spending? Maybe. 

Obviously the Future: Scaling High-Quality Early Childhood Education Remains Challenging

Situation: A tale as old as time. Raising young children is time-consuming, attention-demanding, and incredibly important. Around 90% of brain development happens before a child turns five years old. These are critical years to invest in the next generation.

Yet the age when one is a parent to young children (say, ages 25-45) coincides with the most productive workforce years. Parents of young children get hit with three demands simultaneously: they need to tend to their kids today; they need to provide, financially, for their family today; and, they need to build their career for an increasingly long, uncertain future. 

Inflection point: Modern life in the western world, and especially in the United States, is not designed well for working parents. Covid-19 has exasperated this fact. 

Meanwhile, the EdTech startup and venture community has begun to consider companies trying to tackle this problem. Tony Wan, in Edsurge, has written a strong breakdown of the early childhood education funding dynamics. He shows that venture capital investments for early childhood EdTech startups was $127M in 2019 with a drop in 2020. Over the last four years, $372M has been invested in early childhood EdTech. It's not very much (see chart below). The total U.S. public and private spending on child care reached an estimated $45 billion in 2019. The vast majority of that $45B spend, as I'll soon describe, is likely salaries and rent costs. 

Providing high-quality childcare and early childhood education: what does it take? Focus on what drives quality and avoid financialization.

First, let's start with defining the most critical aspects of quality early childhood education (ECE). There are two, in this order:

1) Quality Staff: Qualified Staff to Child Ratio. 

What matters the most to quality ECE is the person who spends the most time with the young children. The educator, the caretaker, the parent. 

The younger the child, the more the adults' enthusiasm for devoting time, attention, and affection to the child matters. You don't need that person to have a Ph.D. or be a renowned literary genius. You need them to show care to the child and to care consistently. That also means that one adult can only care for only so many children at a time. The younger the children, the more unmovable the child-to-educator ratio. For the earliest years, it's somewhere in the three children to one adult range. 

2) Quality Space: Child to Square Feet Ratio. 

Location and real estate quality for childcare is critical. Parents want daycare or school to be nearby their home or their workplace. The quality of the space needs to be topnotch: Temperature controlled. Good, natural light. Acoustics matter - no too loud, sound controlled. The furnishing needs to be clean and soft. These requirements make finding an appropriate location difficult, particularly finding a good location at a reasonable costs. 

The other necessary components 

3) Tools, toys, and curriculum. 

What are the physical or virtual objects that children and staff use? These are either physical toys and media, digital games and media, and advice and ideas for the adult or educator to use to engage the child. 

One of the best ones I've seen is Kinedu, which is an app that suggests age-appropriate activities for parents and caregivers to do with young children. Kinedu is founded by Luis Garza, who previously founded a chain of preschools in Mexico, and Melissa & Doug who thoughtfully focus on physical objects and non-screen games using the Power of Play pedagogy. Also see early mover Tiggly, that built iPad games that included manipulatives; it's a great idea, but no longer an independent company. 

The most distant from quality is 4) Back office support and overheads, now as SaaS. 

Of course, to run a professional early childhood education center requires a back-office system for things like billing, taxes, licensing, compliance, scheduling, and recruiting. That's where it seems like Brightwheel (which recently raised $55M) and ProCare software have found their spot in the market.

Why is ECE always going to be a challenging business? The value is in the immovable costs. You get what you pay for on human capital (point 1) and real estate (point 2). For the rest (points 3 and 4), you try to minimize the costs and complications. And that's what most people do.

Let's start with a simple example. If you want to run a small-scale center consider the economics of the child-to-adult ratio. Let's say you want 40 hours a week at $20/hr (you won't pay minimum wage, right?) + 20% gross-up for benefits, taxes, recruiting, etc. In that case, the minimum you'll pay just in labor for one professional is $3,840 a month. And if the right child-to-adult ratio is 1 to 3, there's not many ways to spread this around. You also then need to add in rent costs for the facility and then extras like toys, curriculum, food. And then add on the overheads in management and set up. It's a lot. How many parents have salaries that can justify that expenditure, especially for more than one child? 

Who pays and how much? Parents, employers, or the government. Or some combination of the three?

You could have employers pay for childcare. But nothing is free, so there will be trade-offs. The more the corporation pays, the more that will trade off with salary size and growth, other benefits that go into the total cost of ownership calculation for an employee. If the total cost of ownership goes up, employees are going to work longer hours because the business won't hire as many people, or the business is going to hire more contractors who won't require benefits. It also creates inequities between those employees who decide to be parents and those who choose to not.   

One example of a strong direct delivery player is Vivvi, co-founded by Ben Newton, who has extensive experience in the market. You can see the focus on quality in how they describe the offering. I'm sure the first sites are quite premium as you can imagine by their locations in Manhattan. 

Research, conducted by Vivvi calculates a high ROI to corporates: By offering care and learning as a benefit, you can expect to see a 49% average reduction in turnover and a 30% reduction in absenteeism. Retention, recruiting & productivity enhancements generate $630k in measurable savings for a group of just 10 parents, and $75,000 in savings to each employee over the course of their enrollment. This represents a 30X ROI.

The only way to get around the iron cost laws is the old fashion way, which I posit will remain obviously the future: Call on your family members/community members and use your or their house. That's why so much of early childhood education will stay informal - it's because the finalization is just too expensive. 

Bottom line: Building a tech-enabled business to move the needle in the early childhood education provider sector is extremely difficult. The greatest solutions are going to come from family life choices, employer flexibility, and to some extent, the quality of tools. There is always room for top-notch enterprise SaaS applied to a particular vertical. Similarly, there is always a place high-quality toys and curriculum will be critical. Some parents will need to use of early childhood centers and facilities like Vivvi; those will be parents who are most able and incentivized to pay. 

Further reading:

Sensible Investing: Good Reads

The end of Silicon Valley as we know it by TIm O'Reilly,  His four reasons explained here:
  1. Consumer internet entrepreneurs lack many of the skills needed for the life sciences revolution.
  2. Internet regulation is upon us.
  3. Climate response is capital intensive, and inherently local.
  4. The end of the betting economy.
He takes direct aim with series of predictions: Many of the markets where fortunes will be made are regulated; navigating regulated markets also takes skills that are conspicuously missing in Silicon Valley. Finally, as Theranos demonstrated so vividly, it is harder to sustain a hype balloon in a scientific enterprise than in many of the markets where Silicon Valley has prospered. Many Silicon Valley investors have been lucky rather than smart. They may not do so well in a world where capital must be directed toward solving hard problems rather than toward winning a popularity contest.

Private Schools Have Become Obscene. Yes, yes they have. Great writing by Caitlin Flanagan.  

Anatomy of a Bubble. Good read in the Bireme Capital Q420 LP Letter.  They have some great lines:
  • We believe that the prospects have never been better for value investors than they are today...We are convinced that today is the day to go all-in on value.
  • Rising expectations beget new investors, new investors beget higher valuations, and higher valuations beget rising expectations.
  • This valuation flywheel has been spinning in overdrive over the past year, a phenomenon maybe best exemplified by the Goldman Sachs Non-Profitable Technology Index. Established in 2014, this index was flat and uneventful until 2020, when it went parabolic, quadrupling in less than a year (that's it below)

2021 Bain PE Report: Deal count drop but transaction size increases. The big, get bigger. Deal multiples are at record levels with more and more debt. 

Thanks for reading, friends. Please always be in touch. 


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Katelyn Donnelly
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