Scaling High-Quality Early Childhood Education Remains Challenging

The value is in the human interaction

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

Yet when one is a parent to young children (say, ages 25-45) coincides with a critical period in their careers as well. Parents of young children get hit with three demands simultaneously: they need to tend to their kids today; they need to provide, financially, for their family today; and, they need to build their career for an increasingly long and uncertain future. 

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

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

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

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

1) Quality Staff: Qualified Staff-to-Child Ratio. 

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

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

2) Quality Space: Child to Square Feet Ratio. 

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

The other necessary components include:  

3) Tools, toys, and curriculum. 

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

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

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

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

Why is ECE always going to be a challenging business? The majority of the value is in the immovable costs. 

You get what you pay for on human capital (point 1) and real estate (point 2). For the rest (points 3 and 4), you try to minimize the costs and complications. And that's what most people do.

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

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

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

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

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

The only way to get around the iron cost laws is the old fashion way, which will remain obviously the future: 

Call on your family members/community members and use your house or theirs. That's why so much of early childhood education will stay informal - the financialization still leaves the service too expensive for the majority of parents.

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

Further reading: