Drinking from the Firehose #142: 📚 Back to school. 📚


Americans acquire vocational skills from one of two places: formal institutes of education, or the job site itself.

Formal education is front-loaded in the first 25 years of life. According to The Council of Economic Advisors, expenditures on education peak around $14,000 per year per capita in our teenage years, with 90%+ of that spend coming from government sources. As we enter college, that government expenditure drops to around $6,000, but the total expenditure remains at $14,000 thanks to private sources. The expenditure tapers off to around $4,000 in our 20's, $3,000 in our 30's, $2,000 in our 40's, and so on. Nearly all these dollars in our older years come from private companies, but the magnitude of the investment is almost an order of magnitude smaller in adulthood.

This system was set up in a pre-industrial era, when the skills we needed for a lifetime of work were unlikely to change. Then, within a single generation, the internet came along. It created an entirely new industry and disrupted old many ones. Of the world's 10 most valuable companies in 1997 (see this neat animation), only 2 were tech companies (Microsoft, Intel). Two decades later, 7 of the top 10 were tech companies, including two from China. As technology has changed the very nature of work itself, a generation of Americans who grew up in the old system have found themselves ill-prepared for a new economy.

Re-skilling Americans may be one of the greatest economic opportunities of our time. Given the lack of government funding for adult education, however, this opportunity won't be unlocked without an innovative financing mechanism for those who wish to transition from one career to another.

Enter the Income Share Agreement (ISA). In the context of education, an ISA allows a student to pay her tuition after she graduates with a portion of the income she earns on the job. Unlike a student loan, which typically has a fixed coupon and amortization schedule, ISAs have a fixed percentage of income, for a certain period of time, up to a dollar cap. The ISA is therefore more like equity than debt and scales in proportion to income.

The beauty of ISAs is that they create alignment between the student and the educational institution, especially when held on the balance sheet of said institution. The latter only gets paid when the former switches careers successfully and remains employed. ISAs compare favorably to student debt, which must be paid whether or not the student is employed, frequently even in bankruptcy.

While ISAs were first introduced in academia to finance a conventional 4-year degree, they are a better fit for vocational education today. Short duration, high impact classes that result in a job transition, yielding a multiple of income, can generate healthy IRRs for ISA investors and minimize the time students are out of the labor market. As ISAs begin to steal share from the $100B+ students borrow each year, their cost of capital should decline. With a lower hurdle rate, ISAs could be offered to students in longer programs with smaller income bumps and lower IRRs. Such a virtuous cycle could drive ISAs to significant market share, by starting with adult education and working backwards.

Along this theme, this week I announced Lightspeed's lead investment in Flockjay, an online academy to train and support top sales teams (see blog post below). The company has already demonstrated its ability to drive career changes for students entering the field of sales from a variety of diverse backgrounds. Absent the ISA, many of Flockjay's students would not be able to attend the program.

I would love to find more examples of companies building platforms on which ISAs can drive meaningful economic change for individuals. If you know of any, please send me the feedback on Twitter at @ataussig, so the rest of the community can participate in the discussion. Thanks!


Come fly with me: Announcing Lightspeed’s investment in Flockjay, an online academy to train and support top sales teams.

ISAs are an innovative financing mechanism for education because they create alignment between the institution and the student. Flockjay, therefore, only makes money when it (1) admits the right students, (2) educates them well, and (3) places them in jobs where they (4) perform at a high level. Flockjay both “underwrites” the risk of a student’s future success and helps her achieve it.



For the dogs.

I have to admit it: I was highly skeptical when PetSmart announced its acquisition of Chewy for $3.35 billion in 2017. When was the last time a declining same-store-sales retailer purchased an internet disrupter and actually made the business better as a whole?

The Chairman of private equity sponsor BC Partners said as much:

“Everyone thought it was stupid,” Mr. Svider says. “It was not an easy decision putting $3 billion into a company that was losing money.”

Now that Chewy is a public company worth nearly $10 billion, we can get a sense for what makes it so special -- intense focus on the customer (animal and human). Its public filings show clear negative net revenue retention, making Chewy one of only a handful of consumer companies with such metrics.

The fix for direct e-commerce.

Stitch Fix* announced a new product initiative that allows users to purchase variants of pieces they've previously purchased. As a customer, I've long been waiting for the company to roll out à la carte purchases. This is a really smart way to do it, consistent with the company's data-driven approach.


The rest of the story.

You wouldn't expect the New York Public Library to be the next hottest thing on Instagram, but its "Insta Novels" are a big hit. Imagine your favorite public domain stories like Alice in Wonderland in glorious Instagram format. The account has nearly 400K followers and pins the best examples at the top of the profile.


Flight of the unicorns.

CBInsights released a list of all 390 global unicorn companies and revealed that the majority are based outside the U.S. Moreover, of the 21 companies on the list worth $10B+, only 11 are based in the U.S. If these trends continue, it will become increasingly difficult for technology investment firms to achieve top tier returns without a global footprint.


Shedding light on Planet 9.

I wrote about the potential existence of a 9th planet a few weeks ago. Some new research has a different theory to explain the observed displacements of bodies in the outer reaches of the solar system. So-called "Planet 9" may be a primordial black hole that wandered into our neighborhood and got stuck in a distant orbit. The downside of this theory is that the black hole would be the size of tennis ball and nearly impossible to image from Earth.


Bad guy in a box (video).

Some of you may have seen Billie Eilish open this season of SNL with a neat performance of her chart topper "Bad Guy." I loved this video of her talking through prep for the performance, which included a homemade iPhone video of the schematic for the rotating box.