Natively Integrated Education: Lambda School
In Part I: Why There Isn’t a Dominant Aggregator in Online Education, I discussed why there hasn’t been a successful Aggregator in online education. I then argued that education is better served by a Natively Integrated Company.
Lambda School, a 9-month, full-time online immersive Computer Science academy, is currently the most ambitious company in the EdTech space. Let’s take a look at how it is Natively Integrated, the risks it faces, and how it can overcome those risks to build a successful business that changes the career trajectory for thousands or millions of people.
How is Lambda School Natively Integrated?
As a refresher, a Natively Integrated Company is one that:
Leverages technology to integrate supply, customer relationships and operations from day 1
Builds relationships with customers to build products that resonate
Takes principal risk to achieve 1) and 2) and capture a larger share of profits
Lambda School CEO, Austen Allred, wrote in a July 31st Wired piece that when the incentives of the school and the student are aligned, “comprehensive programs become table stakes because the institution has an economic incentive to get students hired at jobs they love.”
Comprehensive programs - in which the business controls its supply, customer relationships, and operations - are at the core of Natively Integrated Companies. In Lambda’s case, we call it Natively Integrated Education.
Before we dive in, it’s important to make a distinction between online educations and Lambda School.
In Part I, we discussed online education platforms. For the companies who operate them:
Supply = the courses on the platform
Customers = the people who take the courses
Operations = the activities that go into running the platform
The most important thing to realize about Lambda School is that its students actually represent its supply. For Lambda School:
Supply = employable students
Customers = companies who hire those students and indirectly pay Lambda School
Operations = the curriculum, the job placement team, and the activities that go into running the school
Keep that in mind as we look at how Lambda School creating Natively Integrated Education across the three defining characteristics of a NIC. We will go in reverse order (3, 2, 1) because it is important to understand the concepts in 3 and 2 before moving on to 1.
3. Takes principal risk to achieve 1) and 2) and capture a larger share of profits
Just two years ago, it seemed like a crazy concept: your education is free until you get a job, at which point you pay your school back.
Today, Income Share Agreements, or ISAs, make that possible. Lambda partners with Leif to manage its ISAs, but Lambda is the one on the hook for its students’ success. If its students don’t get hired, Lambda loses money. On the other hand, the more money a Lambda graduate makes, the faster Lambda makes money. Incentives are aligned.
Here’s how Lambda’s ISAs work:
A student has the option to pay $20k upfront or enter into an ISA. The below points assume she chooses the ISA
If she graduates and doesn’t have a job or makes less than $50k, she pays Lambda nothing.
While she is employed and making over $50k, she pays Lambda 17% of her salary, monthly, for 24 months.
Lambda caps the total payments at $30k, meaning that once the monthly 17% payments get to $30k, she stops paying Lambda.
If at any point, she becomes unemployed, she stops paying Lambda during her unemployment period.
After 5 years, whether she has paid $30k or less, the graduate is off the hook and stops paying Lambda.
In the extreme case, if a Lambda student graduates and doesn’t find a job for 5 years, Lambda loses money on that student.
But here’s the magic part: if a Lambda student maintains a salary of even $65,000 while employed, Lambda makes more on that graduate in 2 years than if the graduate had chosen to pay $20k upfront, even assuming that Lambda earns a 5% annual return on the $20k once the student has paid it.
The chart below shows Lambda’s earnings from a graduate who either enters into an ISA or pays Lambda $20k upfront, with the following simplified assumptions in addition to the mechanics laid out above:
$78k salary, maintained over the course of 24 months (based on most recent cohort average salary)
$20k upfront payment is invested at 5% return per year
The graduate is employed for the full 24 months.
The graduate’s salary does not drop below $50k during the employment period.
As seen in the chart above, under these assumptions, Lambda generates a strong financial outcome from the ISA.
By Year 2, Lambda has made more money from the student on the ISA than if the student had paid upfront.
Over the 24 months, Lambda makes $4,470, or 20%, more than they would have if the student had paid upfront.
Lambda has the potential to generate significantly better returns from the ISA than they do from an upfront payment by taking principal risk and aligning its incentives with students.
2. Builds relationships with customers to build products that resonate
Lambda designs its curriculum in partnership with its customers: potential employers. In fact, Lambda says as much on its website:
Instead of designing a curriculum based on existing computer science education and plopping it online, as many of the early MOOCs have, Lambda has worked hand-in-glove with the people who ultimately determine whether Lambda is successful or not: employers who hire its graduates.
On the Venture Stories Podcast, investor Mike Maples argued that the college system isn't working: we have too many colleges that are overcharging relative to their ability to get students hired.
According to Maples, Lambda's biggest innovation wasn't its use of ISAs. Its big innovation was this idea of working with employers to understand the skills that they need to hire for, and designing its curriculum around those skills. So, in partnership with employers, they build, learn, iterate, build learn, iterate. To give the process extra juice, Allred leverages his Twitter presence to continue to learn what employers need:
This approach seems to be working. Lambda claims that 86% of its students are hired within 6 months and making at least $50k. Compare this with the 2015 study from the National Association of Colleges and Employers, which shows that 58.5% of 2015 graduates were employed in full-time jobs within 6 months of graduation, at an average salary of $48,400 according to Payscale.
1. Leverages technology to integrate supply, customer relationships and operations from Day 1
Technology enables Lambda to build and distribute a curriculum to students without the cost or geographical limitations of a physical campus. The ISA structure is a departure from the revenue models of both traditional higher education and online education to-date. Together, technology and ISAs enable Lambda’s Natively Integrated approach.
By aligning its incentives with students’, Lambda can integrate its supply (employable students), its customer relationships (potential employers), and its operations (curriculum, hiring team, school-running activities) to build a growth loop. Here's how it works:
Lambda works with potential employers (demand) to build a curriculum (operations) that will produce the hires (supply) that they need to fill their open engineering roles
Lambda educates students using this curriculum, giving them the skills they need to get hired
Lambda Student Success team gets early graduates hired, allowing them to pay their ISAs and creating success stories and new potential employers within target companies
Lambda and Allred distribute its students’ success stories via Twitter
Potential students are attracted by the success of Lambda graduates and apply
Those students are educated with the skills they need to be hired based on a curriculum that is updated based on employer and graduate feedback
Graduates who are now at hiring companies 1) give feedback to improve the curriculum now that they are on the job, and 2) hire more recent graduates
Austen tweets about all of it, attracting more students and more potential employers
And on and on....
(Note: Lloyd Alexander does a great job talking about this loop in more detail here.)
Only by using technology to integrate supply, customer relationships, and operations from Day 1 has Lambda been able to build the flywheel that has generated its early success.
Now that we have established how Lambda School is Natively Integrated, let’s quickly go back to the framework we used in Part I to examine why no online education platforms have become Aggregators. We can now see how a Natively Integrated approach addresses the three main issues:
The Job To Be Done is complex
The Job to be Done at Lambda School is simple: “I need to get an engineering job.”
Supply is not sufficiently modularized
Differentiated courses, built hand-in-hand with potential employers, are a strength for Lambda School since they are owned by Lambda and designed for a specific outcome.
Success requires real effort from the user, and is not guaranteed
Lambda School has established a program that is purpose-built to get students hired, and has aligned incentives such that students don’t have to pay if they don’t get a job that pays them more than $50k. Success is never guaranteed, but Lambda loses along with its students if success is not achieved.
What could go wrong for Lambda?
Natively Integrated Companies can still fail, and Lambda School is no exception.
Coding bootcamps are shutting down, hampered by high cost-structures and low-quality education. ITT Tech, one of the largest for-profit vocational schools, shut its doors in 2016. Just this week, 2U lost 65% of its value in one day. And there's the risk of becoming the DeVry of coding schools - not taken seriously by academics or employers despite high enrollment.
For every startup, there are a million things that could go wrong. If we look back in 5 years, and Lambda has failed, what could have gone wrong for them specifically?
Let's take a look at three of the things that could prevent Lambda from achieving meaningful scale.
1. Employers weren’t satisfied with the product
This is the biggest risk to Lambda, and it is why the company puts such a strong focus on improving its curriculum in conjunction with potential employers.
Lambda exists to produce graduates who can make a positive contribution in entry-level technical jobs. Because of the great job Lambda has done marketing itself, and because of the training it’s given its students, it has been increasingly successful in placing its graduates in jobs. The real test is now: do those students perform?
Coding bootcamps have been around for less than a decade, and there is still skepticism that they can churn out candidates who are as strong as the people who have spent 4-6 years in undergrad and even a masters program learning engineering.
This is a criticism that Allred is aware of. He recently took to Twitter to acknowledge that many companies have stopped hiring from code schools, before pointing out that Lambda is the only program that many of them haven't turned off.
The reason that Lambda may succeed where others fail may be the curriculum itself. Lambda claims to pack as much content and hands-on experience into its 9 month program as engineering majors receive in 4 years, and leverages technology to constantly evolve the curriculum and distribute it to thousands of students.
That said, it is early days for Lambda and the on-the-job success or failure of its earliest graduates will set the course for the company.
2. The hype caused its valuation to exceed its utility and metrics
Lambda School has raised over $48 million and was valued at $150 million in its January 2019 Series B. As we have discussed, the opportunity is massive, but thus far, the high water mark exit was set by General Assembly at $412 million.
Allred's Twitter presence, the company's strong and clear mission, and the tangibility of its graduates' success stories make it an appealing early-stage investment. For Lambda to show sustained success, however, it needs to create value, and revenue, commensurate with its valuation.
At the end of the day, Lambda is a modern vocational school, and it needs to prove that its Natively Integrated approach can create results and revenues to justify what is likely to continue to be a very high revenue multiple (approximately 60x based on estimated revenues of $2.5 million).
This brings up a related risk, one that may be more dangerous to Lambda's long-term prospects than whether it can grow into its valuation.
The money you take dictates how your business needs to grow. Unlike traditional educational institutions, Lambda is expected to grow at a venture-backed pace, and there is likely a limited pool of high-potential candidates. In fact, today, Lambda accepts only about 5% of its students, or as many as they feel confident they can place in good jobs. In order to maintain its trajectory, Lambda may have to accept lower and lower caliber of student, which could lower employer trust, and reverse the flywheel that we discussed earlier.
3. Increased competition
No successful company goes unpunished. Lambda's very public success will likely attract new competitors with similar curricula and job placement machines, giving tops students a choice among programs.
Jeff Bezos says, "Your margin is my opportunity." As we saw earlier in the post, the ISA structure allows Lambda to earn more than they would if a student paid $20k upfront. I wouldn't be surprised if we saw copycat programs spring up that offered students a lower payment rate - first 16% of salary, then 15%, etc... until risk-adjusted ISA payments equal what students would otherwise pay upfront.
Combined with the pressure to hit venture-scale growth, this increased competition could accelerate a downward spiral, as Lambda fights to attract high-quality students while needing to grow at an increasing rate.
How can Lambda overcome these risks?
Every startup faces competition, risks and challenges, and I believe that Lambda's Natively Integrated approach gives it as good a shot to be successful as any online education program to date. By evolving the business as rapidly as they evolve their curriculum, they can further mitigate the risks they face.
One big opportunity for Lambda beyond what it's currently focused on is to start a continuing education or job re-training program. In building out a productive technical curriculum, relationships with employers, and a product management cycle that incorporates employer needs in real-time, Lambda has laid the foundation to go beyond training prospective employees, to training current employees.
The path from B2C to B2B is well-worn, and in fact, helped produce one of the biggest exits in the online education space: Lynda.com's $1.5 billion sale to LinkedIn. Lynda.com became LinkedIn Learning, which, among other things, offers continuing professional education to the employees of its corporate customers. Cementing its relationships with employers in the form of contractual revenue is one way that Lambda can reduce some of the risks and uncertainties we discussed in the last section.
I'm rooting for Lambda - if they succeed, they will create opportunities for thousands or millions of people where none existed previously.
Cool, so now we have a Natively Integrated Tech Education. What's Next?
Beyond Lambda, opportunities abound. Education is much more than just classes and technical training. Harvey Multani recently pointed out on Twitter that College is being unbundled across multiple dimensions:
Some of these aspects of the college experience are best served by platforms. It would be creepy (and potentially illegal outside of Nevada), for example, to build a Natively Integrated Dating Pool.
Other aspects of the college experience seem to be ripe for a Natively Integrated approach. Two aspects of college life that are missing from this list are the Library and Extracurriculars. Most of what has been unbundled to date covers the functional aspects of the college experience - the courses, the training, food, housing.
But what makes college magical is the serendipitous interactions a campus creates room for: going to the library to study, only to look up from a conversation with friends two hours later and realizing that you got no studying done; the ability to meet and learn from with the leading thinkers who come to campus to give lectures; the opportunity to engage regularly, in-person with people who share your interests but bring novel viewpoints - from the student newspaper, to the debate team, to the myriad affinity groups.
This is an area that has huge potential as more of these interactions have come online, and one that I am going to be exploring. More to come!
Huge thanks to Greg Hayes, Dan McCormick, Dror Poleg, and my beautiful wife, Puja, for their feedback and comments!