I often think about how CMO sizes will evolve over time. I’ve written about it before but this exchange between Marc Andreessen and Robin Hanson has me thinking about the issue again.
One could imagine the same thing happening with charter school organizations: the most effective scale while boutique organizations specialize.
I’m unsure if this pattern will occur with CMOs. If it doesn’t occur, or it occurs at a lesser level, I expect it will be for these reasons:
1. Schools are everywhere.
Economic activity concentrates in cities; so does talent. And these relationships are not simply proportional to population; the effect is more than that. Economic activity and top talent are not geographically distributed equally by population.
This concentration of economic activity and talent allows for private sector firms to get high market share while only operating in major cities.
The number of schools in a location, on the other hand, is directly proportional to the population.
2. Non-profit incentives limit scale.
For-profit companies have a direct financial incentive to go where the customers are.
Non-profit companies have different incentives. These incentives can be very powerful, and many non-profit organizations have scaled despite large financial incentives; but my guess is that the lack of profit incentive, on average, reduces firm size.
3. Regulatory hurdles abound.
Opening schools across different states carries a high regulatory burden. Unlike most for-profit organizations, a CMO is required to go through a strict vetting process to enter the state, as well as for each subsequent schools it opens.
Again, I’m not sure how the CMO market will unfold. We’re just starting to see numerous CMOs get above 10,000 children, so it’s hard to draw strong conclusions from the data.
But if do we see less scale in the CMO sector, the following may become greater needs:
1) Incubators: If the charter sector becomes dominated by small to mid-size CMOs, then we’ll need a lot of CMOs. This will require a lot of incubation.
2) Service Providers: Service providers can sometimes be easier to scale than charter organizations because service organizations require less frontline staff. Organizations such as Teach For America, Relay Graduate School of Education, and the Charter School Acclerator may play significant roles.
This is an issue that I will be tracking.