grade expectations Foreign Exchange The Tattle s Tale Big Benefits Adding seats to the virtual classroom December 2008 Ron Packard Founder and CEO K12

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1 i3 Big Benefits Why you can t afford to cut back Foreign Exchange Big opportunities in a small world The Tattle s Tale How software piracy sunk a company December 2008 Leadership Family Business Finance Technology Law Sales & Marketing Talent Management Culture $2.95 Ron Packard Founder and CEO K12 grade Adding seats to expectations the virtual classroom

2 RON PACKARD AND K12 ADD SEATS TO THE VIRTUAL CLASSROOM grad exp 42 Washington SmartCEO December

3 BY ERIC TEGLER When Ron Packard talks about his company, K12, he doesn t go on about its quarterly performance or its return for investors. Instead, he patiently explains the concept of public virtual schooling. K12 is a leader in the online public school sector, an educational outsourcing company whose web-based curriculum, management services and support are in high demand from charter schools, school districts and states across the country. We believe we ve built the best curriculum ever, Packard says, and that we have a moral obligation, not just a business obligation, to deliver that education to as many children as possible. Though that might sound like marketing-speak, you tend to take Packard seriously. He stands well over six feet with a frame that seems as wide as it is tall. His passion for K12 is evident in his demeanor and his leadership style, a clue to which is given when he cites Merck Pharmaceuticals founder George W. Merck as a business role model. Merck was fond of saying that when his company worried mostly about medicine and helping people, profits always seemed to follow. In the space of eight years, Packard has used a similar philosophy to grow K12 into a public company with over 600 employees serving approximately 50,000 full-time students using its curriculum in 21 states plus the District of Columbia. If you haven t heard of virtual public schooling or K12, don t fault yourself. Though the company is headquartered in Herndon, VA, it doesn t yet operate in Virginia or Maryland. That will likely change in the future, perhaps sooner rather than later once more people in the Washington-Baltimore region understand the concept. Photo by Bryan Burris e ectations December 2008 Washington SmartCEO 43

4 We promise to produce results as good or better than the average brick-and-mortar school and the cost to taxpayers is significantly less. virtualschooling Charter schools are elementary or secondary schools that receive public money but are free from some of the rules and regulations that apply to other public schools in exchange for some type of accountability for producing certain results, set forth in each school s charter. Though they represent an alternative to other public schools, charter schools are part of the public education system and are not allowed to charge tuition. According to the Wall Street Journal, there are now more than 1.3 million students enrolled in 4,300 public charter schools in 40 states and the District of Columbia with over 360 new schools opening in 2007 alone. Part of an educational reform movement begun 17 years ago, charter schools have steadily grown in popularity, evidenced by waiting lists over 350,000 students strong nationally. While they have generated both criticism and praise, WSJ reports that new studies show charter schools capacity to increase student achievement. A recent analysis of achievement reports found that 31 of 40 studies since 2001 have reported gains in charter schools greater than those in comparable district-run schools. Charter schools are often founded by non-profit groups teachers, parents or activists in search of alternatives to traditional public schools. Others are established by universities or states themselves. Many have no standing facilities of their own. Rather, they are virtual with a charter granted by the state, a small organizational structure/staff, and a dispersed student body that receives its instruction at home via the Internet. There are bricks-and-mortar charter schools and schools that offer a mix of physical and virtual classroom time, but K12 dominates the virtual public school market. Virtual public school students learn at home like home-schooled students, but their curriculum is more formalized and the standards they are required to meet are the same as those bricks-and-mortar public school students are required to meet in a given district or state. They may be dispersed, but they are in a public school. Parents enroll their children in public virtual school in the same fashion as they would for a normal public school. Attendance is required and each student is assigned a state- or district-certified teacher. Imagine you had a classroom and you had a teacher, children in the classroom, a computer for every child and adult volunteers at a very high ratio [usually parents but not always], Packard says, You d teach very differently. Every child could learn at his or her own pace. When they had an issue, they could ask that responsible adult. If they still had an issue, that master teacher could get involved. With today s technology, they no longer all have to be in a single room. The kids could be scattered all over the world. That s what public virtual school is. thek12model K12 has four different lines of business, but for the sake of simplification we ll discuss the company s offerings for the full-time, multi-district online public school market. K12 derives most of its revenue through enrollments in online public schools where the company charges per-student fees for its curriculum and management services, including the hiring and training of teachers. According to K12 vice president of public relations Jeff Kwitowski, the company does business with online charter schools in 17 states. There are three district-based online programs and one is a program of the state of Florida. In most instances, the schools are open to students across a state without restrictions. Each contracts with K12 to provide curriculum, management services, training or a full turnkey solution. The company s reputation helps attract students, Packard says. A typical K12 charter/public school scenario would work as follows: Parents enroll their child in the online public or public charter school as they would in any other public school. Just prior the beginning of the school year, the family would receive a 90-pound package from K12 containing all the relevant curricula, materials for the parents, and a computer that comes with an Internet connection paid for by the state or district. Packard says the most common response families give K12 is that receiving the supplies is like Christmas in September. Shortly thereafter, a K12 teacher in the area affiliated with charter school would give the family a call, establish contact with the student and often schedule a face-toface meeting. Subsequently, the student takes a placement test. Packard reports that 45 percent of students are at a different math grade level than language arts level. So they re placed at their ability level if that s behind grade level, they may take two lessons a day in a particular subject and catch up over a year or two. Following placement, the student begins the school year and goes online, logging into school every day and following a schedule for math, language, history and other subjects. After each lesson, there s an assessment (not for a grade but to demonstrate understanding) which, if passed, sends the student to the next subject. During the course of the day, the teacher can see via the Internet hour to hour or even minute to minute how the student is progressing. Interactive coursework is delivered via K12 s Web platform, and if a student does not successfully complete the day s work, it is pushed to the next day with the subsequent schedule automatically adjusted. Likewise, children who accomplish more than scheduled during a day can elect to keep on going and their schedules will adjust. Throughout, families can see what day their child will finish the school year. State law typically requires a minimum of hours of attendance per year. On the other side, each teacher instructing through K12 is given a class list at the 44 Washington SmartCEO December

5 Photos courtesy of K12 beginning of the year. The teacher-student ratio varies depending upon grade but typically averages 50 students per teacher. Working from home, teachers communicate with families at the start of the school year, ensuring their readiness. High school instructors do daily or several-times-weekly Web sessions on topics in each course (high school teachers specialize in one subject). All teachers offer help on-demand. For instance, if a child is struggling with fourth-grade fractions, he or she can consult directly with the teacher on the phone, on the Web through white board sessions, or in a face-to-face meeting. All teachers in the K12 system run monthly field trips for grades K through 8 so students can socialize and meet one another. The company works with approximately 1,500 teachers nationwide, and in Pennsylvania for example, there are about 200 public online schoolteachers working with K12. Essentially K12 s services are paid for by the state though the funding comes indirectly through the public charter schools in this example. It s a pretty sophisticated model and there are other lines of revenue but none of it would exist had Ron Packard not decided to help his daughter with her homework. otherparentsmightwantit Packard thought his destiny was on Wall Street. As an undergraduate at the University of California, Berkley, he worked at Goldman Sachs while earning a B.A. in economics and mechanical engineering. As a Hughes scholar, he spent his undergraduate summers writing an image-processing language. Later, he would add an MBA from the University of Chicago. Packard did go to the Street, working in New York for Goldman and management consultant McKinsey & Company. After four years at McKinsey he was hired by a client to run a business it was establishing in Chile. Packard says he enjoyed the move to South America and was still taking in Chile s delights when infamous junk-bond investor, Michael Milken, called his office. His reputation notwithstanding, Milken had established the Milken Family Foundation in 1982 to support education and medical research. In the late 1990s, Milken was launching an education investment fund, and Packard s savvy investment skills had caught is attention. He offered Packard a position as director and strategist for his Knowledge Universe Learning Group, guiding its educational investments. Back in the United States and nine months into his new job, Packard took on the post of CEO of a private pre-school chain (Knowledge Schools), which Knowledge Universe had just acquired. The responsibility was added as he continued his role as an investment strategist for KULG. A high-ranking executive with an advancing career, he was also an involved parent. Going over his daughter s math homework with her one night, he was also a frustrated parent. I was working with my daughter on her homework from a public school, he remembers. I wasn t really happy with the math work she was doing. As an engineer, I thought I d just teach it to her myself. I went online to see what the best public and private schools did in math courses. There was nothing like that, however. What there was were thousands of little supplemental math sites. Nowhere was there a site that explained, This is first-grade math, or This is second-grade math, and if your child passes this test, they re on par with the best kids in the world. I thought that if I built something like that, other parents might want it. Packard recalled his own exposure to self-paced and remote learning. Even as early as the 1980s when I went to Berkley, I took astronomy selfpaced, he says. You d read a book then go into a center and take a test once a week. It was OK, but it wasn t interactive. But in 1999, he realized the Internet could change that. What it could do was allow interaction on a real-time basis, he says. Previously, there were correspondence and CD-ROM-type courses through which you couldn t interact instantly a teacher couldn t grade a child s work the same day. The idea he had while working with his daughter quickly morphed into building the entire school, the entire curriculum. Packard was ambitious enough and wellconnected enough to take a shot at making it reality. In 2000, he wrote a business plan and ran it past former Secretary of Education and Drug Czar Bill Bennett, who was convinced by the concept. At the time, Packard had noted the 10 percent per year increase in the number of home-schoolers, but he wanted to go a different way. The idea was, Packard explains, could we create public education online? It s very different than home schooling. In providing curriculum and management services to charters and others looking to establish virtual public schools, Packard s proposed company would have to operate within a framework (state-approved curriculum, certified instructors, standardized, proctored state tests) that allowed for comparison of results, both educational and financial. That was attractive to investors. His idea was compelling enough to attract $10 million in initial capital from his boss, Milken, and from Oracle CEO Larry Ellison. Packard elected to open the company in Virginia because of its tech-friendly business climate, its low start-up costs compared to California, and the educational connections it promised. After hiring a few initial employees, Packard made good on that promise by hiring John Holdren, head of the Charlottesville, VA-based educational non-profit curriculum provider and adviser Core Knowledge Foundation. Holdren s connections with the University of Virginia and in the educational community in general helped attract a respected core of educators who began to build the fledgling company s curriculum. Strong though his connections were, Packard s timing couldn t have been worse. The most challenging time the company had was the spring and summer of December 2008 Washington SmartCEO 45

6 Photos courtesy of K , he says. Two things were going on. One, it was an enormous effort to build every lesson, every grade curriculum in grades K through 2 and all those systems. If you had come to our offices, you d have seen 110 people, which is everyone we had, working seven days a week, day and night. We had people sleeping in the office. It was start-up in its purest, most grueling, most beautiful form. The fact that K12 had employees at all was impressive. As the tech bubble burst in mid-2000, people lost their jobs and what was once a hot labor market became ice cold. While jobs were scarce, the last thing most people wanted to join was another Internet start-up. But K12 was an idea in which people believed, Packard says, and they gave it their full energy. It amazes me, even to this day, he says. While attracting quality employees might have been tough, attracting capital should have been harder. By 2001, the venture capital market was at a standstill. Packard needed to raise $40 million for a pre-revenue Internet company. Amazingly, he got it from a group of wealthy individuals across the country. By any logical view of the environment at that time, there s no way that round of financing should have been raised, Packard says. But it was. As hard as Packard s employees worked to build a curriculum for kindergarten though the second grade and to simultaneously build the company s Web platform, he worked to get buy-in from crucial partners: the states. He began as with investors by pitching a dream. It went something like this: When you create a public virtual school, you give every family in a state an educational choice, Packard says. If for some reason the local school isn t working for your child, you now have a choice. Unless they have economic means, most families in this country don t have that choice. When a state makes this public policy, they create the most democratic form of education. They re offering a choice that every child in the state can potentially take. Secondly, we promise to produce results as good or better than the average brick-and-mortar school and the cost to taxpayers as a whole is significantly less. We might be getting 70 percent of the funding a traditional school gets. Packard s connections allowed him to put that message to U.S. Undersecretary of Education Eugene Hickcock and to Gov. Tom Ridge of Pennsylvania. Both men liked the idea, and Pennsylvania became the first state to host a K12-serviced charter school in September The confidence of one state led to the acceptance of another when Gov. Bill Owens of Colorado contacted Packard and signed his state on the same year. The political ability to get states to do this was a big part of our success, Packard says. In the early days, I had nothing to show them, so the first two [states] were absolutely critical. Once Pennsylvania and Colorado were running, other states felt easier about the idea because they could see it, touch and watch it work. itworks K12 commenced its first school year with 1,000 students and grades K through 2. The second year it added grades 3 through 5 and signed on schools in Ohio, California and Idaho. Gradually the company built its entire K through 12 curriculum and expanded into the 21 states it currently services. Schools using K12 are currently skewed to the south and western parts of the country. Packard wants to better penetrate the northeast and especially Virginia where the company is headquartered. For whatever reason, school change has occurred faster out west, he says. We re not really sure why. We re hoping we ll be in the northeast in a much bigger way. It could be a cultural difference out west, but I won t rest until we re in all 50 states. Getting there will hinge on getting the K12 message out. Initially, Packard and his staff adopted a Field of Dreams build-it-and-they-will-come approach. In the company s early years it relied on direct mail and, because of the concept s novelty, free newspaper coverage. They figured that the choice offered by the company would attract families who were unhappy with, or whose children weren t succeeding in, local bricks-and-mortar schools. They were largely right. Despite the home-schooling vogue, four out of five students come to a K12 online public charter school from traditional bricks-and-mortar schools. Trouble was, they needed more. Key to that was explaining the concept of online public virtual education and how K12 could advance it. This, Packard decided, could be done by holding openhouses. K12 ran ads in target-market newspapers and held seminar-like meetings in local hotels. One of our challenges was that it s very hard to appreciate how good this is until you can see it in action, he says. These face-to-face open houses were very critical because our Web marketing wasn t nearly what it is today and you could win people s trust. Part of establishing trust was convincing potential online charter school families that K12 s system, and the idea itself, wasn t too good to be true. We heard that a lot, Packard says. People would say, We re going to get all this curriculum material, be part of the public school system and be able to do this in the environment we choose? That s too good to be true. But families that heard the message generally embraced it. I had moms come up and hug me, thanking me for doing this, Packard says. Often those most grateful are parents of children who have fallen behind or who have special needs, he adds. That online virtual public education works is confirmed by the fact that K12 has direct competitors like Apollo Group (whose businesses include the online University of Phoenix), DeVry and Blackboard, and peripheral competitors like Apple Edu- 46 Washington SmartCEO December

7 SPS Consulting is a full service staffing and recruitment firm specializing in accounting, finance and administrative placements. There s nothing more satisfying than having created an enterprise from just an idea. cation. Packard thinks his company has a big leg up, however, stressing that none of his competitors has a curriculum as well-designed and interactive as K12 s. K12 went public in December of Recent financial developments might slow the growth of the business, but with over a million students attending charter schools and two million more home schooled, market watchers estimate the virtualschool industry could produce annual revenue of $5.5 billion to $11 billion. K12 reportedly generated $140.6 million in 2007 from its online and other revenue streams. These include the provision of curricula and materials to bricks-andmortar schools. The company also provides custom-tailored online programs for school districts that want to offer accelerated learning or blended learning wherein students attend a teacher-led classroom 50 percent of the time and learn at home via the Internet the other 50 percent of the time. Individual courses, AP language and a variety of electives are offered, as well. K12 can provide school districts with curriculum for license, be it for a single course or a grade level. Relieving states of the burden of developing curricula themselves is increasingly attractive to budget-challenged education departments. And there are also direct-to-consumer sales. Finally, the company offers home-school curricula and its own private virtual academy, which compares favorably (at lower cost) with private schools around the country. Jeff Kwitowski stresses his firm s commitment to its clients, referencing the fact that company employees refer to the charter and district schools they work with as our schools. Technically they re not, but we re so different from a publishing company that drops books off every five years and says, Good luck. We take personal responsibility for the education of these children, he says. Packard echoes the sentiment, affirming that his sole purpose is to give children and families a better education. His role as CEO and entrepreneur goes hand-inhand with that mission. It kind of is what I expected. It s not easy, he says. I ve been on bridge loans a couple times. I ve lent money personally to make the payroll a couple times. I ve done the whole thing but there s nothing more satisfying than having created an enterprise from just an idea. In some small way the world is a little bit different because you created this. The fact that we ve created a workplace where 600 people have chosen to work is very rewarding. That s what entrepreneurship is all about. In 2008, K12 added South Carolina to the list of states in which it serves online public charter schools and it is actively examining opportunities in Canada and Mexico as well as overseas markets where Packard feels his model will work as effectively as it does in the United States. In 2007, Packard received the James P. Boyle Entrepreneurial Leadership Award from Education Industry Association, but far as K12 has come, he says he feels it has much further to go. Eight years on, I feel like we re just starting the company, he says. CEO SPS has been a leading provider of both temporary and permanent accounting and administrative personnel. With over 10 year s experience, we pride ourselves on exceptional service that we extend to each and every one of our customers Woodmont Ave, Suite 1100 Bethesda, MD Office: Fax: kmolkara@spsconsult.net These are the leaders we support. There are more than 100,000 peopleworkingforyouat thousands of nonprofits across your community providing afterschool programs for disadvantaged youth, job training, environmental conservation and so much more. Make a tax-deductible contribution that helps them all. Support best practices in management, training and technical assistance that helps nonprofits succeed in meeting the critical needs of your community. Make a difference invest today. Contact Center for Nonprofit Advancement CEO Glen O Gilvie at gleno@nonprofitadvancement.org or give a charitable contribution to the Center for Nonprofit Advancement at December 2008 Washington SmartCEO 47