Khan Academy

N9-812-074 REV: FEBRUARY 8, 201 2

WILLIAM A. SAHLMAN

L I Z K I N D Khan Academy

Sal Khan, executive director and founder of the Khan Academy, loved the fact that he could hold staff meetings outdoors. Khan Academy’s main offices were in a second floor walk-up, above a tea shop in downtown Mountain View, CA. The space included a deck large enough to hold the organization’s 14 employees. August 18, 2011 was particularly sunny and warm. Khan had gathered his staff to talk about priorities for the organization. Khan Academy was founded as a non-profit in 2009. The initial concept—free online YouTube tutorials, focused primarily on math and science— saw tremendous early success with users, donors, and foundation grants. By the summer of 2011, Khan Academy had more than two million unique viewers per month, and had raised approximately $10 million from Google Inc. (Google), the Bill & Melinda Gates Foundation (Gates Foundation), and several high profile Silicon Valley philanthropists.

The popularity of the videos drew unusual media attention, quickly making a name for Khan and the Academy. In 2010, the Khan Academy collaborated with the Los Altos School District (LASD) to launch a pilot program in three of their fifth grade and two of their seventh grade classrooms. The concept for the pilot was for students to use Khan Academy’s videos and software to learn at their own pace and master concepts before progressing. The initial pilot was deemed a success and LASD decided to use Khan Academy district-wide for all of its fifth and sixth grade classes and some of its seventh and eighth grade classes during the 2011-2012 school year. Many school districts around the country had heard of the pilot and were interested in collaborating with Khan Academy.

While Khan and his staff were excited by their accomplishments in Los Altos and the vast array of opportunities available to them, they wondered how to define their priorities while scaling quickly. As a non-profit, Khan Academy had relied on individual donations and foundation grants. Khan wondered if the Academy could sustain very rapid growth given the annual fundraising that would be required to fund its vision, and questioned whether part or all of Khan Academy should consider becoming a for-profit organization.

Background on Sal Khan and the Khan Academy

Khan was born and raised in New Orleans, Louisiana. He earned a perfect score on the math portion of the SAT while in high school, and attended the Massachusetts Institute of Technology (MIT), where he became president of his class. While at MIT, Khan received the Eloranta Fellowship which he used to develop Web-based math software for children with ADHD. He was also an MCAT instructor for the Princeton Review and a volunteer teacher for gifted fourth and seventh grade students at a public school in Brookline, MA. Khan graduated from MIT in 1998 with three

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Professor William A. Sahlman and Senior Researcher Liz Kind prepared this case. The assistance of Alison Wagonfeld, Executive Director of the HBS California Research Center, is gratefully acknowledged. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. 812-074 Khan Academy

degrees: two bachelor of science degrees in mathematics and electrical engineering/computer science; and a master of science degree in electrical engineering. Khan worked as a technical architect at Scient Corporation and as a senior product manager at Oracle Corporation before joining MVC Venture Capital (MVC) as one of its initial employees. In 2001, Khan left MVC to attend the Harvard Business School (HBS), where he also became president of the student body. After earning a masters degree in business administration in 2003, Khan joined Wohl Capital Management, a hedge fund based in Boston, as a senior analyst.

In late 2004, Khan began remotely tutoring his seventh-grade cousin, Nadia, who lived in New Orleans. She had been having trouble with unit conversions, which prevented her from moving to the more advanced math track for her grade. Khan tutored her daily for 30 minutes to an hour after work, using the phone and Yahoo Doodle as a shared notepad. Nadia swiftly caught up with her math class, and Khan began tutoring her brothers and family friends as well. Word spread and while Khan enjoyed the tutoring, he was working with up to a dozen children each night after work and quickly found himself overwhelmed.

In late 2006, a friend suggested to Khan that he make individual video tutorials that could be posted on YouTube. At first, Khan was quick to dismiss the idea, commenting, “…No, YouTube is for dogs on skateboards. It’s not for serious learning.”1 However, in November 2006, he began recording videos for YouTube using Microsoft Paint and Screen Video Recorder, a $20 software program that allowed him to capture his screen and record it at the same time. In order to meet YouTube’s time limit requirements, Khan’s initial videos were under 10 minutes in length. (He was allowed to record longer videos once he became a YouTube Partner.) Quickly, Khan’s cousins started telling him they liked him better on YouTube than they did in person. Khan joked about it with them, but understood their rationale. He noted, “They could review the videos again and again and follow up on just the exact thing they were having trouble with…..”2 “They could review topics from previous sessions without feeling embarrassed, and they could tackle new topics without the stress of someone watching over them or judging them.”3

Within about six months, Khan began noticing that people from all over the world were watching the videos. He was moved by their largely positive feedback, which motivated him to make even more videos. Khan kept his job but began to wonder if making tutorial videos could become more than a hobby. In 2007, Khan decided to set up his own domain name. He explained, “I was working for a hedge fund called Wohl Capital, and my boss was Dan Wohl. So I said, ‘I’m Sal Khan, so I’ll call it Khan Academy.”4 It also helped that Khan had the same name as a Bollywood movie superstar. Khan noted, “Whenever people do an online search for Salman Khan, my name also pops up! I get to leverage his label.”5

All of the videos were free and approximately 10 to 15 minutes in length, both to meet YouTube’s requirements, but also to create manageable “chunks” of learning. Khan initially recorded them from the guest room in his two-bedroom apartment in Palo Alto and later from a converted closet in his bedroom once his family moved to a house to accommodate their new son. Most videos took approximately two hours to produce and upload. Khan did not work from a script, and there were usually no second takes. He typically produced two to five videos a day. The tutorials were often described as folksy and down to earth. Khan did not appear in any of his videos, but was heard in the background while working on the digital equivalent of a blackboard. The videos were private, intimate, and convenient, so that a user could watch them when they wanted and replay them as many times as they needed until they got a concept. Khan added, “I’ve turned into someone who gets to learn pretty much everything and distill it down and teach it.”6

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By September 2009, Khan decided to quit his day job and work on developing the site full-time, without a salary for a year. He and his wife, then a rheumatology fellow at Stanford University’s School of Medicine, decided to live off of their savings and his wife’s small fellow stipend. Khan Academy occasionally received small donations from appreciative parents and students, but in 2010, things began to change. Early that year, Ann Doerr, the wife of renowned venture capitalist, John Doerr, learned of the Khan Academy through another parent whose child was having difficulty in math. She elaborated, “I got on the site and was blown away by it! I spent five or six hours on Khan Academy and ended up writing a check.” When Doerr learned that her $10,000 check was the largest donation the Academy had ever received, she donated another $100,000 so that Khan could take a salary. Khan described his reaction, “In dollar amount, it was a lot less than [what] Google or Gates [eventually gave me], but in terms of my own psychic safety, it was very important. We were living off of savings—we weren’t going to starve, but I couldn’t not work.”7

A few months later, in July 2010, Doerr sent Khan a text while she was at the Aspen Ideas Festival to tell him that Microsoft founder and chairman, Bill Gates, was talking about the Khan Academy to an audience of hundreds. Khan commented, “… I thought it was a joke or that maybe she’d sent the message to the wrong person.”8 In fact, Gates and his children had found the site and were fans of Khan’s videos. In October 2010, the Gates Foundation awarded Khan a $1.5 million grant to further develop the site. Stacey Childress (MBA 2000), deputy director for innovation at the Gates Foundation, elaborated on her organization’s interest in Khan Academy:

Our Next Generation Models team focuses specifically on K-12 in the United States, and our overarching focus is on how to create more personalized learning experiences for students. Technology can be an incredible enabler of that, both inside and outside of classrooms. We were really interested in the way Sal had divided his content into small, manageable, bite sized nuggets. If I wanted to learn about algebra, I could start right where I needed the most help, and move at my own pace, without having to plow through hours of content looking for just the thing that I needed. We also found it really interesting that Sal had taken the approach of a tutor, rather than trying to make a more interactive version of a textbook.

In August, 2010, Fortune magazine ran an article on Khan titled “Bill Gates’ Favorite Teacher,” and in late September 2010, Google named Khan Academy one of five winners of its Project 10100, a “call for ideas to change the world by helping as many people as possible.”9 Google provided the Khan Academy with $2 million “to support the creation of more courses and to enable the Khan Academy to translate their core library into the world’s most widely spoken languages.”10

Flush from the publicity and funding, Khan turned to his longtime friend, Shantanu Sinha, that October for help in developing the organization and hiring a team. Sinha elaborated:

I had known Sal for a really long time. We were high school math competitors back in the day in New Orleans, Louisiana. Not many people from New Orleans go to MIT, but we both ended up there and became freshman year roommates. We both studied math and computer science, and used to joke about who could take more classes. We ended up getting seven degrees between the two of us. Sal graduated faster, but I got more degrees, so I’m not sure who won!

We came out here to Silicon Valley around the same time, in the late ’90s. After the bubble burst we decided to get a real business education—Sal went to HBS and the hedge fund world, and I went to McKinsey & Company (McKinsey). I was an associate principal, focused on the high-tech space and operational transformations. Sal had been working on this part-time over

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the last four or five years. When it looked like we would get the funding to build a full-fledged nonprofit organization, I joined as president and COO.

I was the first hire and, in the beginning, we were literally finding the office space, getting the Internet set up, and building the IKEA furniture. We found an accountant and got a lawyer to make sure we were actually registered properly as a nonprofit. We spent a lot of time recruiting, and we hired some rock star engineers. Literally, the first week that I joined, we talked to Los Altos about our vision of the classroom of the future. Much to our surprise, they agreed with our thinking and wanted to do a pilot almost immediately. I became our point person to coordinate with the school district.

Khan Academy began the pilot with the LASD in November 2010. Alyssa Gallagher, assistant superintendent of curriculum, described the school district’s rationale behind working with the Academy:

One of our board members knew someone at the Gates Foundation and set up a very informal meeting to introduce us to Sal and Shantanu. Both my superintendent and I recognized that the Khan Academy was doing something very interesting in education that very much aligned with some of the work we were doing in our district. We saw it as a tool to help individualize and differentiate learning, and as a way to provide teachers with the data they needed to be able to enhance instruction and small group learning.

There was very little internal debate about working with Khan Academy. We had no intention of replacing teachers with computers, and we weren’t throwing anything out with regard to the good teaching we were already doing. When we first started, while the videos were there, the backend software piece was not as built out. We were very interested in having our teachers help craft and define the navigation system and problem sets. We started the pilot with four different classrooms, and quickly added a fifth.

The staff at the Khan Academy spent the next several months refining its Web site, and in particular, its backend “knowledge map,” “dashboard,” and practice “exercise” or problem sets for the LASD and other users. (See Exhibit 1 for images.) The knowledge map provided users with a trajectory of content flow and a progression path of increasingly challenging exercises. The dashboard allowed educators to track individual student and summary classroom data on usage and learning progress. The exercises were designed to assess proficiency in a concept. In general, users were encouraged to complete ten exercises accurately before moving on to the next module. However, as Childress noted, the assessment process was complicated, especially in public school settings. She elaborated:

In the last couple of years, over 40 states have adopted the Common Core State Standards. For the first time, rather than all 50 states having separate sets of academic standards, 80% of the states have now agreed to a common set of academic standards. As a result, there’s an opportunity to help accelerate student performance against this high set of internationally benchmarked standards.

Our initial grant to Khan was to help him map the content he already had to these new standards. Part of that is helping create more precise and accurate diagnostic assessments. Another part is helping students know where on the Khan Academy Web site to find the most relevant videos. Another part is helping users understand if they are actually grasping the content and not just consuming the videos. Our goal is for parents and students to know that Khan Academy content

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corresponds to what the students are being asked to do in the classroom. (See Exhibit 2 for the Gates Foundation milestones associated with its grant.)

In addition, the Academy focused on its back office operations. Sinha reflected, “We were trying to drive translations, manage the pilot project, and hire a team. We had some speaking engagements and requests for interviews, but most of the day-to-day work was building the software platform and trying to get the organization set up.” Khan continued to focus on making instructional videos and in March 2011, was a featured speaker at the 2011 TED Conference, and introduced by Bill Gates. Sinha noted, “After that we started to get a ridiculous number of inbound emails and messages that we just didn’t have the time to answer. Our strategy was to take two seconds to look at them. If they looked exciting, we followed up. If not, we ignored them. We probably had to ignore 99% of what came our way.”

Khan Academy in 2011

By the summer of 2011, Khan Academy had over 2,600 YouTube video tutorials on topics ranging from math to physics, history and finance. The site drew approximately 2 million unique viewers per month, had 57,275 subscribers, and was the 98th most subscribed YouTube channel. 11 While the growth in Khan Academy users had been purely viral, Sinha noted the key triggers:

After three or four events, our usage suddenly went way up. When the Fortune article came out, we went from 50,000 to 200,000 users a month; when Google announced Project 10100, we went up to a million users a month; and when Sal spoke at the TED conference, we went to two million users a month. What’s great for us is that we have been able to retain the spikes in user volume. Normally, when an organization does a big PR push, they see a big spike in usage, but it tends to come right back down. Fortunately, we’ve been able to keep 60% to 70% of our new users after a major news event. (See Exhibit 3 for Khan Academy’s corresponding donation growth chart.)

Sinha believed that most people who used the site were high school or college students, looking to supplement their classes with outside help. However, he also believed that Khan Academy users spanned the spectrum of age categories, from elementary school students to retirees. He added, “It’s all changing so fast. Since the TED talk and our pilot with Los Altos, a lot of people are encouraging their children to use our site. Now we have another demographic of younger kids—probably fourth, fifth, and sixth graders—working mainly on the math videos and problem sets.” In addition, it was difficult to track the age and gender of students under 13 because of online privacy regulations. Approximately 85% to 90% of Khan Academy users were based in the U.S., followed by users in Canada, England, Australia, and India.12 The Academy planned to translate its videos into ten languages within the next 18 months, and expected India to be a major opportunity for additional growth.

Khan Academy’s mission was to “…[change] education for the better by providing a free world- class education to anyone anywhere.”13 When asked about Khan Academy’s brand, Sinha responded:

There are a few things that I think are unique about Khan Academy. One is that we are focused around the individual and student-centric learning. I think we also stand for accessibility. We’re free, we’re online, we’re a nonprofit, and anybody with an Internet connection can access our site. But, we also stand for a specific kind of quality and approach to learning. More than anything, what we’re trying to build is a place that people think of in K-12

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education as one of the notable names and notable brands. Today, you have Sesame Street in preschool, and then you have MIT and Harvard and Stanford at the collegiate level, and there’s nothing really in between. In some ways, what we are trying to build is an online institution that fills the void in K-12, but is also for lifelong learning, at a very, very deep level.

As of August 2011, Khan Academy had 14 employees, and was planning hire six more by the end of the year. The organization had a second office two blocks away, and was signing a third lease on an adjacent space. Khan and Sinha were surprised by the level of talent they had been able to attract to the organization. Khan noted, “We have an amazing development team and staff, and we just hired John Resig. He wrote jQuery, the most used JavaScript library, and is the guy in his field. And, he comes to us with a followership in the tens of thousands of people who want to help him on his latest project.” In addition to the funding Khan Academy had received from the Doerrs, Google, and the Gates Foundation, the organization also attracted leading Silicon Valley philanthropists such as Signe Ostby and Scott Cook (founder of Intuit) and Reed Hastings (founder of Netflix). Sinha added, “The people that we resonate most with are ex-entrepreneurs and engineers—people who have built something and care about education.” (See Exhibit 4 for Khan Academy’s funders, Exhibit 5 for Khan Academy’s management team and Exhibit 6 for its board of directors.)

LASD Pilot

Sinha provided more background on Khan Academy’s decision to do the LASD pilot:

We had no funding for it and it wasn’t on our immediate priority list. However, we thought about it from the standpoint of what would help our brand and what would help education in general. From the beginning, we’ve always wanted to focus on creating the best experience for the user. We realized that if we were actually working with students, we would be much more likely to build a really useful product. That’s one of the fundamental principles of agile software development—the more feedback you get from the customer, the better the product. So, we saw the pilot was very valuable from a pure product development standpoint. The other thing we recognized is that the pilot would be great for what Khan Academy can stand for—the new model of blended learning within the classroom.

Khan was also enthusiastic about the pilot and implementing Khan Academy in the classroom. He added:

We want to see classrooms that are made more engaging by allowing every student to work at their own pace and master concepts before progressing. In a traditional model, students have a fixed time to learn material and the variable is how well they learn it. We want to fix the expectation of mastery—so everyone should get an “A” level of understanding—and the variable is when and how long a student has to learn things. This more flexible, student- focused curricula also frees time for creative activities and deep explorations that are pushed out by the existing model of education.

According to Gallagher, the LASD initially identified fifth grade as the starting level so that technical skills would not be a factor and because laptop carts were already available in the classrooms. The district also chose two seventh grade classrooms focused on pre-algebra readiness, where the students had been historically less successful at math. Each classroom had approximately 28 to 30 students. Teacher “readiness” was also a factor in structuring the pilot. The district sought teachers who were comfortable incorporating technology in the classroom, who would be flexible with their teaching plans, and willing to take risks to enhance differentiated and individualized learning. Gallagher elaborated:

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We presented Khan Academy as a great tool for teachers, where they would have access to an incredible Web site, and where they could help define exactly how they would want the tool to help them. That resonated with the teachers, and it was very exciting for our pilot team to be meeting frequently with the Khan Academy developers. The teachers provided everything from high level conceptual feedback to help with small design features such as where the buttons should go. Even the students got involved in providing feedback to the Khan Academy developers. It was pretty powerful for our teachers and students to be so involved in the design loop.

The district made a conscious decision to have each student start with the very first Khan Academy module on basic addition, and work their way up to the tutorials relevant to their grade level. Initially, the students worked on the Khan Academy modules for a portion of their math class each day. Gallagher estimated the process for most students to get to grade level took approximately two weeks. Throughout, the teachers could monitor each student’s performance on the Khan Academy dashboard and adjust their teaching plans accordingly. Gallagher described the next phase:

A lot of people associate Khan Academy with “flipping” the classroom which implies that all the students go home and listen to the same lecture each night and the next day all work on the same problems in the classroom. That’s not actually how we use it. We’re trying to group students by ability level and provide some individualization in learning. Not all students are working on the same concepts at the same time. Some might be watching a video or working on exercises. Some might be getting a mini-lesson in an area they are still working on, and some might be working with the teacher in highlighting or emphasizing a standard fifth grade lesson.

It’s not as integrated as it could be, partly because it’s not taught in the same modules. While Khan Academy’s videos are fairly closely aligned to our grade’s standards, they are not broken down in the same way. For example, in our fifth grade curriculum, mean, median, and mode are taught as separate skill sets, and a teacher would dedicate time to each one. In Khan Academy, they are combined into one ten-minute module. So, we’re not ready to assume that just because a student finishes a module they know everything they need to about a topic.

The biggest value-add of using Khan Academy is two-fold. First, it gives the students immediate feedback to the answers they have given on the problems, without having to wait for someone to grade their homework. Second, it gives teachers constant data about where their students are so that they can influence their instruction.

Gallagher estimated that Khan Academy was used during, on average, 40% of the classtime or less in the pilot classrooms. Usage varied by student and topic. Some children raced ahead and were highly motivated by the “badges” awarded on Khan Academy’s site for completing modules or success on problem sets. Others worked slowly and more methodically. Gallagher also noted that some of the children had to be taught to be active listeners, while others had to be encouraged to spend more time on difficult concepts, rather than skipping over them.

The district assessed the success of the pilot using internal benchmark tests, attitudinal surveys of students and teachers, and anecdotal teacher feedback. Sinha recalled, “We were a little worried about the test! The other fifth grade class followed the standard grade level curriculum which was closely aligned to the tests, but many of the students in the pilot had raced ahead and were doing trigonometry and other higher level math.” The results for the fifth grade pilot were slightly, but not significantly, better than the traditional classes. However, Gallagher noted, “It’s hard to gauge

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because we are fortunate to be in a very high performing district, where 96% of fifth grade students are proficient in math, regardless of whether or not they were in the pilot. That said, the results showed that using Khan Academy did not hinder what the students were learning.” However, the results for the seventh grade pilot did show a significant increase in performance on the standardized test, with most students jumping two levels, from “below basic” to “proficient.” (See Exhibit 7 for LASD pilot test results.)

The attitudinal surveys showed increased ownership and engagement, and a broader awareness of grade level concepts relative to the bigger picture of math learning. Anecdotally, the teachers reported that using Khan Academy allowed them to see gaps in their student’s learning that they might not have been able to identify before. Gallagher summarized, “We think Khan Academy is a very good tool that, if incorporated with other strategies, makes an excellent teacher even better.” For the 2011-2012 school year, the LASD district decided to use Khan Academy across all 40 of its fifth and sixth grade classrooms, and to do an additional pilot in seventh and eighth grade classrooms where students were at or below grade level proficiency in math.

Khan Academy’s success with the LASD led Khan and Sinha to consider partnerships with additional public school districts. Khan elaborated, “All of a sudden we were getting calls from ten school districts a week. We started to wonder what level of support each school district would require and how many schools we could work with at once. We wanted to develop best practice models for schools and test our effectiveness across a variety of districts.” As a result, Khan Academy posted a notification on its Web site, seeking a small set of schools to partner with for pilot programs in the fall of 2011. Over 250 applicants responded by the July 2011 deadline, and Khan and Sinha planned to select 10 to 15 school districts for additional math pilots.

That summer, the Gates Foundation approved another $4 million grant to the Khan Academy. Childress elaborated:

The next round has a few goals, many of which are related to the first round and continue to improve the user experience. In addition, there are other big objectives. The Los Altos pilot was a happy accident. I don’t think any of us would have predicted that Khan would have moved this quickly into the public schools. And, the attention Los Altos got around the country means that Khan Academy is getting more requests to go into schools than it can accommodate at this point.

The Los Altos pilot was small. It was in a really high-capacity school, both in terms of the stability of the teaching force and the existing academic success of the students. There’s a lot to think about in going into schools where the variables are different. So, a big part of our work over the next couple of years is to help Khan Academy experiment and devise a replicable implementation model. What does it look like when teachers adopt Khan Academy at their schools? How do they integrate it into their instructional plans? What can we learn about whether or not the content works better for some learners versus others, depending on learning style and where they are in their own learning trajectory?

Will Khan Academy be more effective for some students than others? Will it work better in some classrooms with certain types of teachers than others? A big part of our funding is helping get Khan Academy into 50 classrooms over the next couple of years, in grades 5 through 9, across ten to fifteen school districts. We expect that most but not all of them will be in California, and we are purposefully looking for some diversity in terms of student population, grade level, and teacher tenure to see what we can learn across the sample in an effectiveness study we are funding.

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Trends in Education

In late summer 2011, approximately 50 million students were enrolled in nearly 100,000 public elementary and secondary schools in the United States. Of these students, about 70% were in pre-K through 8th grade, and 30% were in grades 9-12. On average, the current expenditure per student at public schools was projected at $10,591 for the 2011-2012 school year, consistent with the previous few years. An additional 6 million students were at 33,000 private schools.

Two of the biggest shifts from the previous decade related to rise of charter schools and the changing ethnic composition of U.S schools. From 1999 to 2009, the number of students enrolled in public charter schools more than tripled from 340,000 to 1.4 million students. In 2009, about 5 percent of all public schools were charter schools. During this same time period, the percentage of public school students who were Caucasian decreased from 68 to 55 percent, and the percentage of those who were Hispanic doubled from 11 to 22 percent. (See Exhibit 8a for excerpts from the 2011 Condition of Education report issued by the U.S. Department of Education, and Exhibit 8b for test results from the 2009 Program for International Student Assessment.)

Areas of Innovation

Education critics in the U.S. had noted a lack of innovation in K-12 education. Teaching models in 2011 looked remarkably similar to those from the last century. The vast majority of students continued to attend a brick and mortar school from approximately 8:30am to 3:30pm for nine months a year, where they sat in a classroom with a single teacher who imparted information to the students.

However, there were a few new teaching models that were beginning to gain traction in the U.S., most notably the concept of “blended learning.” Blended learning represented a combination of teacher-based classroom learning and online delivery of material. Most blended models gave students some control over time, place, path and/or pace of the online portion of their learning.14 The models varied on a number of dimensions, including time spent online, location of online learning and modifications to classroom schedule. (See Exhibit 9 for six models of blended learning.)

There were a number of schools throughout the U.S. that were beginning to experiment with incorporating online components. In some states such as Florida, virtual schools had become increasingly popular due to the lack of qualified teachers in the public school system. Blended learning advocates believed, “Online learning has the potential to be a disruptive force that will transform the factory-like, monolithic structure that has dominated America’s schools into a new model that is student-centric, highly personalized for each learner, and more productive, as it delivers better results at the same or lower cost.”15 Nevertheless, critics were quick to point out challenges such as: required policy modifications, universal access to Internet-enabled computers, and finding the right materials to map to the educational standards.

Educational Companies

The vast majority of educational materials and programs were created by a handful of large publishing companies such as McGraw Hill, Pearson, Scholastic, and Houghton Mifflin Harcourt. (See Exhibit 10 for financial data on selected publicly traded education publishers.) The companies had provided traditional materials (e.g., text books, math worksheets) for decades, and most changes had been incremental in nature. In recent years, the publishing companies showed some interest in newer educational models—Pearson bought online learning platform e-College in 2007, and Houghton Mifflin Harcourt announced an Innovation Fund focused on identifying new ideas. In September 2011, McGraw Hill announced plans to spin off its education unit, creating a new

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company (McGraw Hill Education) with revenues of $2.4 billion. According to the company, the spin-off would provide “greater flexibility to develop and deploy new products and services to address secular trends toward digital education platforms and to pursue higher-margin opportunities in educational services such as online instructional and school digital services.”16

Although the larger companies had demonstrated an interest in incorporating digital technologies, most of the innovation in the classrooms had been lead by entrepreneurs. Organizations such as KIPP had launched over 100 new schools across multiple geographies, and smaller experiments have popped up throughout the country. For example, an organization called Rocketship Education implemented a blended model to help Hispanic students in San Jose, CA by relying heavily on online English tutorials. High Tech High in San Diego, CA used computers and technology in every aspect of school. The digital content in such experimental programs had been culled from a wide variety of sources, with no dominant player providing the majority of the material.

Open and Free Educational Resources

MIT was one of the first universities to provide its course materials for free online, when it began its Open CourseWare initiative in 2001. Several colleges, universities, and non-profit organizations followed suit by providing some form of online educational offerings, although few had achieved widespread usage and adoption by the general public. Two for-profit online video aggregators, TeacherTube and Academic Earth, were launched in 2007 and 2009, respectively. TeacherTube provided a free online community for sharing instructional videos. Members were encouraged to upload videos, rate, and monitor the site. Academic Earth offered free access to video courses and full-length lectures taught at top U.S. colleges and universities, such as Harvard, Yale, and MIT. In August 2011, Stanford University made headlines when its free online course on artificial intelligence, taught by two Silicon Valley experts, initially drew more than 58,000 students from around the globe.17 (See Exhibit 11 for selected free online education resources.)

Growth Options

As Khan and Sinha thought about scaling Khan Academy, they recognized that the organization had already shifted from its initial focus on creating content to a dual focus on creating content and implementing across school districts. Childress reiterated, “The transition to a model that includes more work on the ground in classrooms with teachers is really important, really interesting, and really hard. It’s a very different proposition than just making the online, free, and easily accessible application as engaging and as widespread as possible.”

Many of Khan’s advisors believed Khan Academy growth should center on expanding to additional school districts. While the Gates Foundation was targeting 50 schools over two years, one board member believed Khan Academy should double in size every year for the next five years. Donor Signe Ostby added, “If Khan’s vision is to revolutionize education, then classroom integration must be part of that vision.” Sinha explained his views:

Rather than just implementing in as many schools as fast as we can, we’d like to first build a compelling case study for why Khan Academy works so well. We’d also like to make implementation so easy that anyone can use Khan Academy in a classroom anywhere. Our whole strategy has been a kind of grassroots, parent- or student-driven change to the educational system. Right now, the conversation is, “Why should we use Khan Academy in

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this school?” In three or four years, we’d like all the students, parents, and teachers in the school to be asking, “Why aren’t we using Khan Academy?”

We’re building out a five-person school implementation team. It will probably be a mix of teachers and educators, former operational change consultants, and maybe people from Teach for America. Their role will be to serve as coordinators to go into the schools, explain what Khan Academy is, and plan and design the pilot, including figuring out which classrooms would be best suited for it. They will also be visiting the schools to provide teacher training and coaching, and to organize and coordinate regular feedback sessions. At the same time, they will serve as a customer feedback arm for Khan Academy, by understanding how our product’s being used and driving requirements back to our development staff. Eventually, we’ll make teacher training and implementation videos, and organize events for schools from different districts to talk to each other and foster teacher collaboration.

In addition to expanding into schools, Khan was very interested in continuing to develop new content in subject areas beyond math and science. Already, Khan Academy’s “playlist” included videos on the 2008 financial crisis, history, venture capital, and healthcare and medicine. On the organization’s Web site, Khan wrote, “My goal is to cover everything. Yes, everything! My goal is to keep making videos until the day I die (which hopefully will not be for another 50 to 60 years). Should give me time to make several tens of thousands of videos on pretty much every subject.”18

However, Khan also recognized the merits in expanding Khan Academy’s faculty. The organization was considering working with outside experts, particularly for videos focused on subjects beyond Khan’s general areas of expertise. Regardless of how they found new talent, the Khan Academy executives recognized that the process would have to be very tightly managed. Khan noted, “I don’t think I am the only person who is capable or the only person who should be doing the videos. But, we’re not a crowd-sourced 100 faculty member site. Eventually, maybe we’ll have a small group of 5 or 10 people who will create content in a way that will connect relatively seamlessly with our users.” Sinha added, “We will need to be very careful about how we go about doing this. Part of what makes us different is the quality and consistency of our brand, and Sal is very central to that.”

In addition to creating broad and deep content for the site, Khan and Sinha were also interested in enhancing the network effects of Khan Academy. Khan elaborated, “We have two million people on the site every month, but it’s still a relatively solitary experience for a user on Khan Academy. There’s no reason why we can’t encourage communication between people so they can help and tutor each other. We will need the platforms to support that type of thing and integrate more with sites like Facebook.”

Khan Academy was continuing to translate its videos into foreign languages, and saw the potential for tremendous growth opportunities overseas, particularly in developing countries. Khan and Sinha believed Khan Academy could be especially useful in countries with Internet access, but limited educational systems. In addition to the translation work funded by the Google grant, Khan Academy was also partnering with international organizations that were translating and posting the videos on their own Web sites.

Khan Academy executives were regularly approached by celebrities, representatives from colleges and universities, and political and civil leaders around the world. While Khan and Sinha were exploring partnership possibilities with a high profile sports personality and an elite U.S. university, they recognized the need to move slowly. Khan noted, “A year ago if anyone was remotely capable of helping fund us, or if they were just someone important, we would stop what we

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were doing and meet with them. Now, we’re not desperate for funding and we don’t want people to get too excited about Khan Academy too fast. We’re not prepared to do too many things right now.” He also added his concerns about the impact of rapid growth on the organization, “I think our challenge at this point is not to grow too fast. Right now we have a very small number of highly productive people. At some point in an organization—I suspect it’s around 50—productivity per person really starts to drop off. People aren’t as aligned, and for whatever reason, they often don’t feel like the end product is a direct result of their work.”

Business/Organization Model Alternatives

Khan Academy is an IRS-recognized 501c3 not-for-profit organization. My goal is to make it self-sustaining in the next five years. — Sal Khan, Khan Academy Web Site

In interviews with the press, Khan had repeatedly expressed his desire for Khan Academy to remain a not-for-profit organization. He commented:

One of the main motivations for being a not-for-profit is the idea that we could be a new type of institution for a new time in history. The Harvards and Yales were established soon after the European colonization of North America. The MITs, Stanfords, and the state university systems came out of the industrial revolution. We are in the midst of at least as big of an inflection point right now because of information technology and the Internet. The Khan Academy could be one of the new major institutions for this new period in history; an institution that makes education a worldwide right rather than a privilege.

In one news article Khan noted, “The for-profit guys, as soon as they incorporate, they start lobbying for grants and selling into school boards and become essentially dependent on navigating this huge bureaucracy, and they completely lose sight of the end user.” When Khan was beginning to think about leaving his hedge fund job to work on Khan Academy full time, he met with a venture capitalist to talk about possible financing options. He reflected, “Meeting one was a lot of fun. It was like, ‘Hey, you can make a salary to do this, and if it all works out you’ll be rich.’ But then meeting two was like, “Let’s focus on this market because we can monetize this.’ And so…I said no. It was too much fun to give up the fun part of it, regardless of the upside.”19 On Khan Academy’s Web site, Khan wrote:

When I’m 80, I want to feel that I helped give access to a world-class education to billions of students around the world. Sounds a lot better than starting a business that educates some subset of the developed world that can pay $19.95/month and eventually selling it to some text book company or something. I already have a beautiful wife, a hilarious son, two Hondas, and a decent house. What else does a man need?20

However, Khan continued, adding, “With that said, if you are a social venture capitalist and are looking to deploy capital with the highest possible social return per dollar invested, we should talk. I think you’ll find that there is no more measurable, scalable, and high impact way to educate the world.”21 Khan recognized the challenges associated with trying to do something “game changing” while having to rely on donors each year in order to execute. He elaborated:

I think as long as we continue to execute and grow our user base, we should be able to attract foundation funding. If we can get into several thousands of classrooms and reach tens of millions of students outside of classrooms with a budget that is leaner than those at most

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high schools, I think it’s a pretty compelling ROI [return on investment]. Assuming we can reach a certain number of students and create content that goes on forever even if the organization were to go away, I’m hoping we’d have no trouble asking the foundations for more money. Ideally, they’d respond, “Of course. This is a no-brainer. “

But, there is the broader question of getting to real sustainability and accomplishing things on a really grand scale. I think there are several ways we could go about doing that. One of my motivations for being a not-for-profit is that I don’t want Khan Academy to be the next McGraw-Hill. I want it to be the next Stanford or MIT. Along those lines, we are considering raising an endowment. Instead of having endowed chairs for professors, we’d have an endowed chair for video lecturers, for designers, or for engineers. For example, our lead developer could be the “So-and-so Chair of Engineering” at the Khan Academy. If someone made a donation at the multi-million dollar lever, that role could be filled in perpetuity. We’re starting to think about finding a development officer who has been pretty successful in the university fundraising world to see if they would want to come on board.

The other thing that we haven’t completely tapped into is the goodwill of our user base. At some point last year, people started asking why they couldn’t donate online to Khan Academy. I spent a day setting up a PayPal account and then donations for $20, $30, and even $500 just started coming in. We have a lot more information on our users than NPR or Wikipedia does. We know what videos people have been watching and all the rest. At the rate that we’re growing, if we could get an average of $0.50 to $1.00 per user a year, we should easily be able to cover our run rate.

However, Khan was aware that historically, the Gates Foundation had not put funds into endowments. Khan was also open to developing other revenue generating ideas, or creating a hybrid model where the Khan Academy core would remain a non-profit, but an affiliated division would be a for-profit organization. In addition to long-term financial sustainability, Khan was concerned about the Academy’s ability to attract top engineering and developer talent without being about to provide market rate salaries and stock options. According to a recent New York Times article, “Computer whiz kids have long been prize hires in Silicon Valley. But these days, tech companies are dreaming up new perks and incentives as the industry wages its fiercest war for talent in more than a decade.”22 Recruiting and retention were major concerns among Khan Academy board members as well. Childress noted, “How long and at what scale is it going to be possible to attract rock star developers at non-profit salaries for something more than a year or two service job? If we’re really serious about bringing the power of technology and the Internet into K-12, can we really keep paying non-profit wages?”

One revenue generating option was selling to corporations. Khan explained, “Every time I make a speech, CEOs come up to me and tell me that they need to be doing this sort of thing for their corporate training. They want their managers to create videos the way we make videos, with modules and badges for achievement, whether they’re for accounting or supply chain management.” Khan would not be making the videos for companies, but instead Khan Academy would be sharing best practices and its platform for firms to make their own knowledge management and corporate training materials. He noted, “This would be easy for us because we already have the platform and in no way does it conflict with our mission of creating a world-class education anywhere. The corporate training videos would be proprietary content that someone else would develop for their own use.”

Another opportunity the Khan Academy executives were reviewing was the possibility of licensing the Khan Academy name. Sinha explained, “We’re also looking at the Sesame Street model,

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which relies partly on individual donations, but also on licensing its brand in a very smart way. Maybe we’d have a Khan Academy approved textbook, or a series of iPad applications, or group of educational games or books for children.”

Sinha also believed the organization could charge for value added services, particularly around school implementations. He elaborated:

Right now, we’re not charging schools for our teacher training and consulting services, in part because we’re focused on the product and use case, and there’s not a lot of value in putting in an extra barrier to getting the right school pilots today. There are a lot of schools out there, and in just a few months we had 250 applications. If we can show success in our fall 10 to 15 pilots, we expect there will be a lot of schools that will want to partner with us.

We would not charge to use our core product, but there is no way we could continue to provide labor-intensive professional services without some revenue model. If we did go this route of being hands-on in the school transformation process, we believe it would have to be through a separate organization. Currently, we are about the platform and the content creation. Getting a ground force of multiple trainers to cover the nation and drive school transformation is something that would overwhelm us and change the culture of our organization. We would have to spin off a separate entity, or partner with another organization to do it. Many of the potential partner organizations in that world are for-profit. However, we’d have to question how much business we’d want to give a for-profit without getting substantial benefits back, when we’ve created a lot of the value they are monetizing. Also, our brand is closely tied to the nature and success of these school implementations, so there is a risk in delegating that responsibility to others.

Regardless of the opportunities Khan Academy decided to pursue, organizational structure remained an issue. Khan noted, “The idea of having a separate for-profit entity is just an idea and a way to fund Khan Academy. Khan Academy, the not-for-profit itself, could be a significant stakeholder in that entity. The employees could be part-time employees or contractors for that entity. We don’t know. But, it would solve one of our biggest problems of providing growth capital and competitive compensation packages so that our people don’t walk into Facebook and get enough options that with an IPO they can be millionaires.”

Ted Mitchell, president and chief executive officer of NewSchools Venture Fund and a Khan Academy board member, described what pursuing some sort of for-profit hybrid model might look like for Khan Academy:

The capital markets in education are crazy, and they don’t function very efficiently or well, either in the startup world or in the mature company world. That has to do with a sales cycle that is attenuated and fragmented, with a really uneducated purchasing cadre in schools and districts, and with the abundance of very, very large, oligopolistic operators, who have dominated the sales scene—the big publishers.

It’s a very difficult market for people to work in, whether it’s not-for-profit, or for-profit. We have, I think, only recently seen a loosening of that. Khan Academy is in the fortunate position of riding the front edge of that wave, and so it has available to it not only an abundance of philanthropic capital that has fueled its growth so far, but the potential to raise significant amounts of traditional venture and investment money.

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I think that the fact that Khan Academy has that choice is both a testament to the power of the enterprise itself and to Sal’s vision. I also think it suggests that there may be a systemic change afoot in the education capital markets.

That said, I think that the reasons that Khan Academy should go ahead and gain access to the for-profit capital markets are threefold. One is that the odds are that it creates access to greater amounts of capital faster than the philanthropic capital markets typically provide, and so it would be a better fuel supply for the kind of extraordinary growth that Khan is experiencing.

Second, it provides a pool of capital that would help provide incentives to the next generation of Khan Academy employees, particularly the top-flight engineers that the organization has relied on and will continue to rely on as it builds out further. A flush pool of capital would give those people not only a salary commensurate with their capabilities, but equity potential as well.

The third reason to raise traditional venture and investment money is that it would establish Khan Academy in a capital market in which the rewards are more consistent with achieving metrics of success. One of the things that’s most complicated about the philanthropic capital markets, is that they do not necessarily reward success. Philanthropic capital markets tend to be trendy, and they tend to over-invest at the start of exciting enterprises and under-invest when it’s time to scale.

However, recent findings suggested the jury was still out on hybrid models for non-profits. In the last few years, several dual-mission organizations ended up dividing or dissolving.23 One reporter observed, “On occasion, the need to generate returns for investors overwhelms the social mission. In other cases, the business falters altogether and cannot support the non-profit.”24 (See Exhibit 12 for excerpts from a news article on the subject.)

Newer models, such as LC3 companies, which could raise funds from capital markets but put social good ahead of profitability, and B Corporations, for-profit companies certified for providing social and environmental good, were evolving.25 (See Exhibit 13 for data on selected social enterprise business models.) As Khan thought about the future organization and model for Khan Academy, he focused on four different options. First, Khan Academy could remain as is, continuing to exist purely as a not-for-profit organization. In this scenario, the Academy could add an endowment or more aggressively solicit donations from its user base. Second, the Academy could remain a non-profit, but add revenue generating products and/or services. Third, Khan Academy could adopt a hybrid non- profit and for-profit model. Finally, Khan wondered if he should re-think his predisposition against becoming a for-profit, and follow the leads of companies such as TOMS or Newman’s Own, with a social enterprise mission.

As he headed outside to the office’s deck, Khan struggled with which model would make the most sense to ensure Khan Academy’s survival through economic cycles and over the long-term. However, the more immediate questions for his staff that day centered on how to prioritize the many opportunities available to the organization, and how quickly it should grow. Khan recognized that the decisions Khan Academy made about its growth strategies would influence its choice of business models. On a different front, Khan felt a constant sense of urgency with regard to developing more content in order to preempt any potential competitors. He couldn’t wait to get back to his office to start making more videos.

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Exhibit 1 Images of Khan Academy Knowledge Map, Dashboard, and Exercises

16 Khan Academy 812-074

Exhibit 1 (continued)

Source: Company.

17 812-074 -18-

Exhibit 2 Gates Foundation Milestones from 1st Round Grant

APPENDIX A – Khan Academy (OPP1025663)

Please complete the chart by providing an update for each milestone in the highlighted column. If applicable, add comments about any external factors or challenges. You can discuss these further in your narrative.

Anticipated Anticipated Actual Progress or Original Status/ Progress or Progress or Completion Baseline Completion Completion September 2011 Year 1 Year 2 GRANT OUTCOME 1 Build a core team for the Khan Academy to

build out the platform and allow Salman Khan to focus more on content production Khan Academy 5 person team Salman Khan only has staff of 5 Milestone 1-a continuing to Grantee hires competent expert staff person working on Team of 15 core members build out members to build out platform Khan Academy beyond Salman platform Khan Milestone 1-b Salman produces 1000 new videos over 2 ~1800 current > 2500 videos ~2300 total ~2800 videos years (for a total of ~2800 at the end of 2 videos complete videos years) without sacrificing quality. (Anticipated) External Factors

or Challenges

GRANT OUTCOME 2 Map Khan Academy content to the Common Core and have Common Core-focused navigation Volunteer working Milestone 2-a First revision Refined Establish an advocacy and resource No mapping group supporting completed implementation mobilization working group mapping Milestone 2-b First version of Build first implementation of many-to- No Common Core First revision Refined mapping complete; many mapping from the Khan Academy navigation completed implementation working on navigation materials to the Common Core

812-074 -19-

 Lack of “certification” from Common Core (Anticipated) External Factors  Ambiguity of Common Core standards or Challenges

GRANT OUTCOME 3 Build review and summative assessment functionality into learning application Built first First Milestone 3-a No summative Refined Working summative assessment implementation implementation assessment implementation functionality for k-12 mathematics topics assessment of assessment (Anticipated) External Factors or Challenges

GRANT OUTCOME 4 Improve discovery and distribution by enhancing user interface, better integrating into platforms such as Facebook and developing additional partners Very initial work has Milestone 4-a Implemented Implemented Refined First major redesign begun Completed Facebook Milestone 4-b Only Google now Implemented Implemented Open ID /Facebook authentication authentication Milestone 4-c 300,000-500,00 2,000,000 1,000,000 2,000,000 2 million unique users per month (Anticipated) External Factors  Lack of traction growth with users or Challenges

GRANT OUTCOME 5 Create test-prep materials for high stakes assessments such as Compass and Accuplacer Potentially Milestone 5-a Have not been able to more videos Sal produces videos taking Compass and Doesn’t exist Both done obtain materials if we can get Accuplacer practice test materials Have not been able to Milestone 5-b Doesn’t exist Implemented Mapping of Khan Academy content to obtain materials

812-074 -20-

Accuplacer and Compass skills (Anticipated) External Factors  Obtaining learning materials and practice problems from the test makers or Challenges

GRANT OUTCOME 6 Enhance data and analytics in order to optimize the interface of the site, the content itself and reporting and analytics for various stakeholder groups (students, parents, teachers) Milestone 6-a Basic individual reporting for students and Very basic today Fairly refined Fairly refined Very refined parents Milestone 6-b None Implemented Implemented Refined Aggregate reporting for teachers (Anticipated) External Factors or Challenges

Source: Company.

Khan Academy 812-074

Exhibit 3 Khan Academy Donations Growth Chart

Source: Company.

Exhibit 4 Approximate Funding for Khan Academy as of the Summer of 2011

Total $5.5 million Bill and Melinda Gates Foundation

$3.0 million Silicon Valley Community Foundation (Reed Hastings) $2.0 million Google, Inc. $1.0 million Valhalla Charitable Foundation (Signe Otsby and Scott Cook)

Source: Company.

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Exhibit 5 Khan Academy Management Team Biographies as of August 2011

Sal Shantanu Founder & Executive President & COO Director As President and COO, Being founder and faculty Shantanu focuses on overall means Sal's busy setting organizational strategy, the vision for the Khan partnerships, and operations. Academy and expanding our library of educational Before teaming up with Sal videos. (his college classmate and Before quitting his job as high school math competitor), manager of a hedge fund Shantanu was an Associate to run the Khan Academy Principal in McKinsey & full time, Sal also found Company's Silicon Valley time to get three degrees office, and received four from MIT and an MBA from degrees from MIT. Harvard.

Bilal Ben Dean of Translations Lead Developer

Bilal coordinates the Ben started by volunteering translation of Khan for Khan Academy after Academy content into watching one of Sal's talks other languages. and feeling left with no choice but to help. Prior to joining Khan Academy, he was VP Ben was previously VP of Development for Global Engineering at Fog Creek Education Management Software, where he spent five Systems (GEMS), an and half years learning how international network of to push bits around with private schools. He small, fast teams. completed his MBA and MA in Education from Stanford and a BS in Actuarial Science from Urbana-Champaign.

Jason Marcia Lead Designer Software Engineer As Lead Designer for the Marcia designs and builds Khan Academy, Jason's any and every piece of the responsible for how things Khan Academy software with on the site look and how a constant focus on the users interact with those experience of our learners. things. Marcia was a Program Prior to joining the Khan Manager for Microsoft before Academy, Jason headed joining the team. She up the design team at Fog received her BS and MS in Creek Software (and Computer Science from worked with Ben). Stanford, with a specialization in human computer interaction.

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Exhibit 5 (continued)

Jessica John Chief of Staff Dean of Open Source

As Chief of Staff, Jessica John works to get more focuses on operations and people contributing to Khan partnerships. She is Academy and builds the front- behind the scenes end of the platform. coordinating and smoothing the path for the John is the creator of the rest of the team to do jQuery JavaScript library, amazing things. amongst a number of other Open Source projects, and Life before Khan Academy the author of two books on included stints at McKinsey JavaScript development. and Company (where she worked with Shantanu) and Yahoo! She is an alumna of Stanford and UC San Diego.

Desmond Charlotte Software Engineer Office Manager

Desmond was always As Office Manager, Charlotte fascinated by the concept focuses on operations. of teaching at scale, so once he discovered Khan Prior to joining Khan Academy he couldn't resist Academy, Charlotte was the getting involved. Business Manager and Director of Admissions of The Desmond used to work on School for Ethics and Global ranking and metrics at Leadership (SEGL) in Bing. Before that, he Washington, DC. Charlotte studied mechatronics was the first hire at SEGL and engineering at Swinburne helped open the school. She University, Australia. received her BA from Haverford College.

Source: http://www.khanacademy.org/about/the-team, accessed October 20, 2011.

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Exhibit 6 Khan Academy Board of Directors

Sal Khan Founder and Executive Director, Khan Academy Shantanu Sinha Chief Executive Officer, Khan Academy Ann Doerr Silicon Valley Philanthropist Ted Mitchell CEO, NewSchools Venture Fund Jonathan Goldman Director Analytics & Applications, Aster Data Ryanne Saddler Former Teacher, Castilleja School, Palo Alto, CA

Source: Company.

Exhibit 7 LASD Pilot Test Results for 7th Grade Pilot Classes

Source: http://www.khanacademy.org/about/blog, accessed October 20, 2011.

Exhibit 8a Excerpts from U.S. Department of Education, The Condition of Education

Selected Education Statistics - 2011

Section 1: Participation in Education  Enrollment: From 1999–2000 to 2008–09, the number of students enrolled in public charter schools more than tripled from 340,000 to 1.4 million students. In 2008–09, some 5 percent of all public schools were charter schools From 2008–09 through 2020–21, public elementary and secondary school enrollment is projected to increase from 49.3 to 52.7 million students. Some 10 percent of all elementary and secondary school students were in private schools in 2009–10 (indicator 4).

 Ethnicity: Between 1989 and 2009, the percentage of public school students who were White decreased from 68 to 55 percent, and the percentage of those who were Hispanic doubled from 11 to 22 percent. In 2009, some 21 percent of children ages 5–17 (or 11.2 million) spoke a language other than English at home, and 5 percent (or 2.7 million) spoke English with difficulty. Seventy-three percent of those who spoke English with difficulty spoke Spanish

24 Khan Academy 812-074

 Special Education: The number of children and youth ages 3–21 receiving special education services was 6.5 million in 2008–09, corresponding to about 13 percent of all public school enrollment

 Advanced degrees: Between 2000 and 2009, undergraduate enrollment in degree-granting postsecondary institutions increased by 34 percent, from 13.2 to 17.6 million students. Projections indicate that it will continue to increase, reaching 19.6 million students in 2020. Postbaccalaureate enrollment has increased every year since 1983, reaching 2.9 million students in 2009. In each year since 1988, women have made up more than half of postbaccalaureate enrollment. In 2009, postbaccalaureate enrollment was 59 percent female

Section 2: Learner Outcomes  Reading: Between 2007 and 2009, there was no measurable change in the average grade 4 reading score on the National Assessment of Educational Progress (NAEP); the average grade 8 reading score, however, increased 1 point. At grade 12, the average reading score increased by 2 points between 2005 and 2009. In 2009, White students at grade 12 scored 27 points higher in NAEP reading than Black students and 22 points higher than Hispanic students. Neither score gap was significantly different from the respective score gaps in previous assessment years. In 2009, the average U.S. combined reading literacy score for 15-year-old students was not measurably different from the average score of the 34 Organization for Economic Co-operation and Development (OECD)-member countries. The average U.S. score was lower than that of 6 OECD countries and higher than that of 13 OECD countries

 Math: From 1990 to 2009, average grade 4 NAEP mathematics scores increased by 27 points and average grade 8 scores increased by 20 points. At grade 12, average scores increased by 3 points between 2005 and 2009 In 2009, White students at grade 12 scored 30 points higher in NAEP mathematics than Black students and 23 points higher than Hispanic students. Neither score gap was measurably different from the corresponding score gaps in 2005

 Science: Thirty-four percent of students at grade 4, some 30 percent of students at grade 8, and 21 percent of students at grade 12 performed at or above the Proficient level in the NAEP science assessment in 2009

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Section 3: Student Effort and Educational Progress  High School Graduation: In 2007–08, about 75% of public high school students graduated on time with a regular diploma. In general, the status dropout rates for Whites, Blacks, and Hispanics each declined between 1980 and 2009. However, in each year during that period, the status dropout rate was lower for Whites and Blacks than for Hispanics

 College: The immediate college enrollment rate after high school increased from 1975 to 1997 (51 to 67 percent), declined from 1997 to 2001 (to 62 percent), then increased from 2001 to 2009 (70 percent). Gaps in immediate enrollment rates by family income, race/ethnicity, and sex have persisted over time About 54 percent of male and 60 percent of female first-time students who sought a bachelor's degree and enrolled at a 4-year institution full time in fall 2002 completed a bachelor's degree at that institution within 6 years. In 2010, some 32 percent of 25- to 29-year-olds had completed at least a bachelor's degree. Between 1975 and 2010, the gap in bachelor's degree attainment between Whites and Hispanics widened from 15 to 25 percentage points, and the gap between Whites and Blacks widened from 13 to 19 percentage points Greater percentages of the population ages 25 to 64 had earned a bachelor's degree or higher in all reporting OECD countries in 2008 than in 2001 (21 vs. 15 percent). The percentage of the U.S. population with a bachelor's degree or higher was 32 percent in 2008, compared with 28 percent in 2001. Between 1998–99 and 2008–09, the number of degrees earned increased by 41 percent for associate's degrees, by 33 percent for bachelor's degrees, and by 49 percent for master's degrees. In 2008– 09, females earned the majority of all associate's, bachelor's, master's, and doctoral degrees awarded

 Remedial Work: In 2007–08, about 36 percent of undergraduate students considered to be in their first year reported having ever taken a remedial course, while 20 percent had actually taken one in that same year. At public 2-year institutions, about 42 percent of students had ever taken a remedial course

Section 4: Contexts of Elementary and Secondary Education  Spending: Total expenditures per student in public elementary and secondary schools rose 39 percent in constant dollars from 1989–90 through 2007–08, with interest on school debt increasing faster than current expenditures or capital outlay. Total variation in instruction expenditures per student has increased among public school districts since 1997–98, primarily due to an increase in the variation between states. In 2007, the United States spent $10,768 per student on elementary and secondary education, which was 45 percent higher than the OECD average of $7,401. At the postsecondary level, U.S. expenditures per student were $27,010, more than twice as high as the OECD average of $12,471

 Poverty: In 2008–09, greater percentages of Black, Hispanic, and American Indian/Alaska Native students attended high-poverty elementary and secondary public schools than did White or Asian/Pacific Islander students. In 2009, some 19 percent of 5- to 17-year-olds were in families living in poverty, compared with 15 percent in 2000 and 17 percent in 1990

 Teachers: A larger percentage of full-time teachers held a postbaccalaureate degree in 2007–08 than in 1999–2000. Forty-nine percent of elementary school teachers and 54 percent of secondary school teachers held a postbaccalaureate degree in 2007–08, compared with 43 percent and 50 percent, respectively, in 1999–2000. In 2008–09, some 8 percent of public school teachers left the teaching profession compared with 16 percent of private school teachers. Another 7 percent of all teachers moved from their 2007–08 school to a different school

Source: http://nces.ed.gov/programs/coe/overview.asp.

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Exhibit 8b International Education Test Results

Source: Sam Dillon, “Top Test Scores from Shaghai Stun Educations,” The New York Times, December 7, 2010. http://www.nytimes.com/2010/12/07/education/07education.html?pagewanted=all, accessed October 18, 2011.

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Exhibit 9 Selected Examples of Blended Learning

Source: Michael B. Horn and Heather Staker, “The Rise of K-12 Blended Learning,” Innosight Institute, January 2011, p.5, http://www.innosightinstitute.org/innosight/wp-content/uploads/2011/01/The-Rise-of-K-12-Blended- Learning.pdf (accessed October 20, 2011).

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Exhibit 10 Financial Data on Selected Educational Publishers

Fiscal Year Ended Latest 12 Months Ended 6/30/11 5/31/2011 (In MMs, except per share amounts) McGraw Hill Pearsona Scholastic Revenue $ 6,367 $ 9,204 $ 1,906 Gross Profit $ 3,672 $ 5,057 $ 963 EBIT $ 1,817 $ 1,113 $ 98 Net Income $ 828 $ 2,029 $ 39

Cash & Equivalents $ 1,325 $ 881 $ 105 Long-term Debt $ 1,198 $ 3,051 $ 160 Stockholders' Equity $ 2,255 $ 8,382 $ 740 Total Assets $ 6,944 $ 15,600 $ 1,487

Shares Outstanding -MMs 301.3 799.9b 34.6 Stock Price 6/30/11 $ 41.91 $1,886.66 $ 26.60 Market Capitalization $ 12,627.5 $15,091.2 $ 920.3

Source: Adapted by case writer based on company 10-Ks, 10-Q's and Thomson Reuters. a In U.S. dollars, assuming exchange rate as of June 30, 2011 of 1.60430 USD per GBP. b Weighted average shares outstanding.

Exhibit 11 Selected Examples of Free Online Educational Resources

MIT Open CourseWare Introduced in 2007, MIT’s Open CourseWare includes notes assignments, exams, and multimedia resources on almost all MIT courses from anthropology, architecture, biological engineering and cognitive sciences to political sciences, economics and management.

The Gutenberg Project Started in 1997, it hosts more than 33,000 e-books for free download. About 100,000 e-publications are available through its affiliates and partners including wikibooks. Popular titles include: The Adventures of Huckleberry Finn by Mark Twain, the Complete Works of William Shakespeare, and Metamorphosis by Franz Kafka.

WikiEducator Supported by the non-profit, Open Education Resource Foundation with financial backing from the Commonwealth of Learning, the foundation was proposing to start OER University, a virtual institution.

Connexions Started at Rice University in 1999, the site was created “to view and share educational materials made of small knowledge chunks called modules that can be organized as courses, books, reports, etc.” It has 17,738 modules on arts, business, humanities, math and statistics, science and technology, and social sciences in a variety of languages and over one thousand publications. The site boasted more than 2 million visitors a month.

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Exhibit 11 (continued)

TeacherTube Launched in March 2007, the site was created to provide free instructional videos for teachers, schools, and home learners. The TeacherTube community was encouraged to upload educationally relevant videos, rate them, and preserve the integrity of the site.

Academic Earth The site was launched in March 2009, “with the goal of giving everyone on earth access to a world-class education.” The organization provided free video courses and full- length lectures from leading scholars at top U.S. universities such as Harvard, Yale, and MIT. The videos covered a variety of subjects, from physics to philosophy, and from economics to English literature.

Source: Adapted by casewriter from organization Web sites and “Best Free Online Education Resources,” Hindustan Times, March 16, 2011, available from Factiva, http://www.factiva.com (accessed July 7, 2011).

Exhibit 12 Excerpts from New York Times Article

Hybrid Model for Nonprofits Hits Snags

Since its founding in 2003, the GlobalGiving Foundation has used its Web site to channel more than $30 million to charitable projects like buying seeds for farmers in Zimbabwe and feeding orphaned chimpanzees.

ManyFutures provided the technology platform on which the GlobalGiving Web site operated, and which it hoped to sell to others. But the company never broke even, even though it paid nothing for the platform, which had been donated to ManyFutures. In late 2008, GlobalGiving converted its loans into ownership of the company, paying Ms. Kuraishi and Mr. Whittle just $12,000 for their stakes.

They had invested $1.4 million. “I lost a large majority of my net worth doing this,” Mr. Whittle said. “It’s been personally very painful.”

GlobalGiving is one of the most prominent examples of the hybrid model of social enterprise that married a profit-making business to a nonprofit organization. Such dual-mission companies have sprouted over the last decade as a means of addressing the financing difficulties faced by many nonprofit groups, particularly as they need capital to expand. “It is virtually impossible to grow a social enterprise in any significant way relying wholly on donated money, earned revenue and debt financing, which are the only sources of financing available to nonprofits,” said Allen Bromberger, a lawyer with extensive experience in nonprofit financing. “These hybrid structures allow social enterprises to tap conventional investors interested in making profits while continuing to pursue their social missions.”

…Within the last two years, several ventures have split up or been dissolved. For example, World of Good’s commercial unit was bought by eBay, and its nonprofit arm is now struggling to stand on its own. Another prominent hybrid, Pura Vida Coffee, almost collapsed. And some, like GlobalGiving, demonstrate how hard it is to “cash out” of a venture that is not purely commercial. It wound up using foundation grants to prop up its losing profit-making partner.

Mr. Whittle said two things drove their decision to create a hybrid. “We looked at the philanthropy and didn’t think we could raise the capital required to support the technology, and we wanted to impose a brutal bottom-line discipline on what we were doing,” he said.

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Exhibit 12 (continued)

Investors have increasingly voiced concerns about hybrid groups. “This conjoined structure really has problems,” said Kevin Doyle Jones, a partner at Good Capital, one such investment firm. “Embedded in it is an inherent risk that individuals are profiting from donations that were made for public benefit.”

…Concerns about the hybrid model surfaced in a very public way earlier this year when a tiny nonprofit in Seattle, Unitus, abruptly announced that it was letting go almost all of its employees and no longer accepting donations.

The award-winning nonprofit had helped commercialize the microfinance industry through its profit-making venture capital arm, which had made investments in several microfinance banks that were poised to go public, generating huge returns for investors, some of whom were Unitus board members.

…For many hybrids, however, neither partner is achieving its mission and, as Unitus found, pulling them apart is tricky. “These tiered capital structures where you have some mission-oriented capital combined with commercial capital can be challenging,” said Laura Callanan, a consultant in McKinsey & Company’s social sector office. “When everything is going well, everyone is getting along and interests are aligned. But when financial challenges hit, the fact that there are different objectives creates questions about how the pain is shared.”

When World of Good Inc. was sold to eBay and the GreaterGood Network this year, its nonprofit half was effectively orphaned, stripped even of its name.

World of Good Inc. had been established in 2004 to help connect small artisans around the world to major retailers. World of Good Development, its nonprofit partner, was charged with developing a free online tool to help calculate a fair wage and improve negotiating power with buyers.

“Those activities needed to be done in the public interest, and so we put that tool into open-source space,” said Priya Haji, chairwoman of the nonprofit board and a founder of the company.

Traditional venture capital supported World of Good Inc. The nonprofit held a 5 percent stake in it and was to receive 5 percent of its profits. “The nonprofit’s work never benefited the business,” Ms. Haji said.

Nor did the business’s operations ever benefit the nonprofit. “They were never profitable, so we did fund-raisers to support the organization,” said Holly Boyer, a board member of World of Good Development and its former executive director. “The business would host a fund-raiser and sell products where we were part of the event and would speak and talk about our work and get half of the proceeds from the sales.”

When World of Good Inc. was sold in February, the nonprofit got a $100,000 grant from eBay and its shares were retired. Ms. Boyer said the grant was intended to help the nonprofit rename itself, since eBay purchased the World of Good brand. Whether the nonprofit got a fair deal for its stake in World of Good Inc. is unknown.

…Pura Vida Partners, the nonprofit partner of Pura Vida Coffee, also is changing its name, the result of a similar divorce imposed by Jeff Hussey, a no-nonsense investor who took control of the company in 2009, having sunk more than $3 million into it to keep it afloat.

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Exhibit 12 (continued)

“The business model was flawed,” Mr. Hussey said. “Whenever you have an organization of human beings with a blurry mission you get blurry results.”

Pura Vida was created in 1998 by John Sage and Chris Dearnley, former classmates at the Harvard Business School.

They set up a foundation, Pura Vida Partners, and gave it ownership of the company. But when the company needed money to grow, it could not get access to traditional lines of capital because of its ownership structure, a problem that led it to embark on a series of complex financial transactions involving wealthy private investors, including Mr. Hussey. “There was a lot of pretzel logic and gymnastics to create financing vehicles and structures that would let us continue to grow and continue our social mission,” Mr. Sage said.

Those transactions diluted the nonprofit’s stake in the company to 9 percent by 2009, when Mr. Hussey took over. “We could either agree to the dilution or lose the business — and all the funding streams for the nonprofit that had been established through the business,” Mr. Sage said.

Mr. Hussey purchased the nonprofit’s final shares for $200,000. “I overpaid,” he said. “I had to because of the laws governing nonprofits.”

Today, the Create Good Foundation, as the nonprofit will be known, is a stand-alone charity that supports clean water and economic development projects in the areas where the profit-making company, Pura Vida Create Good, buys its raw materials.

“Our goal now is to sell coffee, wine, tea, chocolate and other things and do it profitably,” Mr. Hussey said. “There’s nothing blurry about what we do and why we do it.”

Source: Stephanie Strom, “Hybrid Model for Nonprofits Hits Snags,” The New York Times, October 25, 2010, http://www.nytimes.com/2010/10/26/business/26hybrid.html (accessed October 13, 2011).

Exhibit 13 Selected Examples of Social Venture Models

Hybrid Non-profit (linked non- For-profits with Earned profit and Impact with a Social Model B Corporation Non-profit Income for-profit) Investors Mission Description New type of Fueled by tax- A 501(c)(3) Nonprofit and Funding by Organization organization that deductible that generates a for-profit patient that makes a uses business for donations— revenues. are linked investors social impact social good. To cash from Works well either with seeking social through become B individuals, when user has one as a and products or Corps, businesses public grant some ability to subsidiary or environmental through must prove that funding, or pay and when two entities results. donations. they care as much money from non-profit can are bound by about society and foundations. As offer valuable long-term the environment as of 2010, nearly goods or contracts. they do about 1.3 million services. profits 501(c)(3) organizations were registered with the IRS in

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U.S.

Examples Method (eco- American Girl Scouts of Mozilla Acumen Fund Seventh friendly cleaning Heart America Foundation Generation products) Association formed a for- DBL Investors (cleaning Teach for profit (invested in products) National Public America subsidiary to Tesla) Radio oversee Newman’s the Firefox Own Web browser.

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Exhibit 13 (continued)

Hybrid Non-profit (linked non- For-profits with Earned profit and Impact with a Social Model B Corporation Non-profit Income for-profit) Investors Mission Advantages Draws in certain Major Generating The nonprofit J.P. Morgan's Social types of “impact foundations income frees remains tax Global mission can investors”; enables direct nearly all an exempt and Research be a potent co to get their funding organization eligible for division marketing and discounted toward from total foundation estimates that recruiting tool products/services 501(c)(3)s. dependence grants. The there is a $1 and an Don’t have to on for-profit can trillion effective pay taxes. philanthropic raise investment differentiator dollars. unrestricted opportunity from the funds from over the next competition. angels and 10 years in VCs and businesses make tax- that serve deductible people earning donations to less than its nonprofit $3,000 a year partner. Can with potential also pay profits of $667 more for billion. talent.

Disadvantages Hard to qualify; Need to keep Often need Can be Deals tend to Must quantify Must take raising funds two staffs: one complicated. be small and financial extensive rating from donors. to work on Require it’s hard to results and exam Funds are philanthropic separate quantify social social impact, often restricted. goals; the boards and return. which is no other to management easy task. No handle staffs, guarantee business side. significant that the social Potential crossover in mission will conflict of leadership be preserved interest. All might signal a as the 501(c)(3) must conflict of company give priority to interest to the grows. the nonprofit's IRS. stated mission.

Source: Adapted from Inc. Magazine, “How a Business Can Change the World: A special report on the innovative business models social entrepreneurs are inventing,” Inc. Staff, May 2011, http://ht.ly/4M7WK, accessed October 13, 2011.

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Endnotes

1 “The Future of Streaming Online Video; New Approaches to Education Over the Internet,” PBS: The Charlie Rose Show, May 4, 2011, available from Factiva, http://www.factiva.com (accessed July 7, 2011). 2 Sian Griffiths, “The Maths Guru; Salman Khan’s Online Tutorials Have Gone Global Since Bill Gates’ Children Tuned In,” The Sunday Times, June 12, 2011, available from Factiva, http://www.factiva.com (accessed July 7, 2011).. 3 Salman Khan, “Review—Turning the Classroom Upside Down—Why not have lectures at home and ‘homework’ at school—and let students learn at their own pace?,” The Wall Street Journal, April 9, 2011, available from Factiva, http://www.factiva.com (accessed July 7, 2011).. 4 “The Future of Streaming Online Video…” 5 Ashish Kumar Sen, “Bookmark: The Prof Who Keeps His Shirt On,” Outlook, June 28, 2010, available from Factiva, http://www.factiva.com (accessed July 7, 2011).. 6 “The Future of Streaming Online Video….” 7 Alex Wagner, “Can Sal khan Reform Education in America?,” www.huffingtonpost.com, April 4, 2011, (accessed September 19, 2011). 10 Google Blog, , (accessed September 19, 2011). 11 Ashish Kumar Sen, “Bookmark: The Prof Who Keeps His Shirt On.” 12 David A. Kaplan, “Bill Gates’ Favorite Teacher,” CNNMoney.com, August 24, 2010 http://Money.cnn.com/2010/08/23/technology/sal_khan_academy.fortune/ondex.htm (accessed September 19, 2011). 13 Khan Academy Web site. 14 Definition based on article by Innosight Institute. Michael B. Horn and Heather Staker, “The Rise of K-12 Blended Learning,” January 2011, p.3. 15 Ibid. p.2. 16 http://www.publishersweekly.com/pw/by-topic/industry-news/financial-reporting/article/48642- mcgraw-hill-education-to-become-standalone-business.html 17 John Markoff, “Virtual and Artificial, but 58,000 Want Course,” The New York Times, August 15, 2011, http://nytimes.com/2011/08/16/science/16stanford.html (accessed October 12, 2011). 18 Khan Academy Web site. 19 “The Future of Streaming Online Video….” 20 Khan Academy Web site. 21 Ibid. 22 Claire Cain Miller and Jenna Wortham, “Silicon Valley Hiring Perks: meads, iPads and a Cubicle for Spot,” The New York Times, March 25, 2011,

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http://www.nytimes.com/2011/03/26/technology/26recruit.html?pagewanted=print (accessed October 13, 2011). 23 Stephanie Strom, “Hybrid Model for Nonprofits Hits Snags,” The New York Times, October 25, 2010, http://www.nytimes.com/2010/10/26/business/26hybrid.html (accessed October 13, 2011). 24 Ibid. 25 Ibid.

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