The crowded landscape of programs teaching non-technical people to become software developers has been a proving ground for a new model of education financing: income share agreements (ISAs). With an ISA, students avoid paying tuition upfront or taking out private loans, instead paying a percentage of their income for a time after graduation after they’re earning a minimum income.
The model aligns education providers with students’ career outcomes, and one startup is staking a claim to be the leader in the space; Kenzie Academy, a year-long program with a physical campus in Indianapolis — and a student body that’s 66 percent online — announced a partnership with Community Investment Management (CIM) earlier this week that provides $100 million in debt to cover the operating costs associated with students who defer payment through ISAs.
Kenzie co-founder and CEO Chok Ooi says that core to Kenzie’s mission is the goal that its graduates “can stay in the heartland and attract more jobs so that someone coming out of the Midwest no longer has to move to Silicon Valley or New York to have a successful career in tech.” This $100 million is one of the largest commitments yet to financing ISAs and Kenzie is using it to recruit a more diverse population of students who may not be able to afford tuition or qualify for student loans otherwise.
I interviewed Ooi to understand how Kenzie differentiates itself from competitors, how it has iterated its model to improve retention and job placement and how he expects the ISA market to evolve over the next couple years. Here’s the transcript of our conversation, edited for length and clarity:
Eric Peckham: The landscape of software developer training programs is crowded. Where did you see an opportunity to do something different, and how do you position Kenzie relative to others in the market?
Chok Ooi: My co-founder came from Galvanize, so we observed firsthand the proliferation of tech and coding boot camps. These are typically short-term, three-to-five month programs and they tend to do well serving people with college degrees. I would say that they are disrupting the masters’ program space. We saw a major gap in programs that serve a much larger demographic of people who are much earlier in their development. People who never went to college, or did a little bit of college and dropped out, or just never had a professional work experience. A three-month training is insufficient to get them to a point where they could land a technical job and be successful.
We saw an opportunity to bring high-quality tech education to the American heartland that is 12 months in length. For about two-thirds of our students, this is their first post-secondary credential training.
We are giving them not just the technical skills, but elements from a traditional four-year college as well, like critical thinking, problem-solving and communication skills.
Compared to those other bootcamps or training programs, is Kenzie targeting different job outcomes for its graduates?
We did a survey of our students that asked them to name the top five tech companies they desired to work for. None of the Silicon Valley companies made the list other than Salesforce. Indianapolis is the second largest Salesforce office outside of San Francisco. The rest of the companies our students named were companies like DMI and Zylo that people in Silicon Valley don’t hear about but are doing very well in the Midwest. Their friends work there. They’re a fabric of the community. If we really want to create job opportunities for the rest of America, we cannot adopt the Silicon Valley mindset.
Kenzie Academy co-founder and CEO Chok Ooi.
So how do you evaluate technical aptitude and critical thinking in the admissions process? What’s that process look like, and how has it evolved over the last couple of years? What have you learned in order to make that more effective?
Prior to founding Kenzie, I started a company nine years ago called AglityIO. The model for AgilityIO was similar to companies like Andela. We were trying to solve the talent crunch in the Bay Area by recruiting and training people with the raw talent in Vietnam. Today, that company works with Google, Uber, NerdWallet, Meetup.com and 150 other tech companies. So I’ve experience in developing processes to identify raw talent in this context.
As people are doing the online assessments, we collect data points of how long it takes for them to solve the problem, what their different decision points are and things like that. Then as they get enrolled in Kenzie, we continue to collect attendance data, grades, and then placement data and use that to look at success and failure cases. We constantly refine our assessment.
Are you seeing any particular pattern or cluster in the applications you’re receiving or the candidates you’re accepting in terms of prior field of employment or aspect of their background?
We have very diverse demographics. We require students to at least have high school GEDs, but we also have people with master’s degrees. A big part of our student population came from food services and retail. In fact, 67% of our students were making less than $30,000 a year before Kenzie.
We have accountants, former private investigators, security guards, etc., so a very diverse group of students. We have an attorney who became a software engineer in Indiana.
We also partner with The Last Mile to include students who were previously incarcerated and provide them with a second chance.
Our model allows us to accommodate people from different experiences, learning styles and learning speeds. Students with higher education degrees tend to complete Kenzie earlier than 12 months, while students need the full 12 months to become job-ready.
What’s the graduation rate of the program now?
We have an 85% graduation rate, and a 90% job placement rate six months out of graduation.
How has that changed over time?
The quality of cohorts is going up every single quarter. We start a new quarter every quarter. The retention rate has been ticking up and placements are happening faster as well. That has a lot to do with us constantly refining our admissions assessments and also that a lot of our students come to us through referrals. Star people attract other star people.
On the financing side, you have three payment options for students: paying upfront, paying on a monthly payment plan, and financing via an ISA (income share agreement). What’s the distribution of students across those?
Last year, it was around 60% choosing ISAs. With the latest cohort right now, about 85% of our students use ISAs. We had a strong mandate to increase diversity in our student population so this year, with our later cohorts, 55% of our students are non-white. We’re around 36% women, 3% other and the rest were male. We’ve invested heavily working with the right partners and acquisition channels to increased diversity.
Which acquisition channels have been most effective in sourcing high potential talent from underrepresented demographics? What could other companies that want to recruit a more diverse population of students learn from your customer acquisition?
It is a mix of digital marketing as well as offline partnerships. The beauty of our model is that we are on the ground in a lot of these communities. We work with state unemployment offices, we work with nonprofits, we work with temp staffing firms. Through these partnerships, we have access to hundreds of thousands of target students who we could market to.
I think it’s interesting that you have a $100 upfront commitment fee as part of the ISA financing. This is uncommon among ISA-based programs I’ve seen. I assume you implemented that to vet students’ commitment level and reduce churn. Once you implemented that with a cohort, did you see a pretty substantial difference?
You nailed it. Over the last two and a half years, we experimented with different levels. We started as high as $1,000. Our goal is not to burden our students, but like you said, they need to have skin in the game. We eventually found that, in terms of retention rate and everything, there’s not much difference between $100 and say a $500, particularly for the demographic that we serve. Our sweet spot proved to be $100, at which price people feel like it’s not a free ride and therefore they’re committed.
In higher education there’s a lot of regulation around the way salespeople can be incentivized and the way you can market a program to potential students. Does Kenzie fall under those regulations, or is it different because it’s not a traditional, accredited university program?
We’re non-Title 4, and therefore we are not part of the regulation. But separately, we do set very high bar and standards.
Is there a particular regulation or legal clarity that you’d really like to see in this space? Is the lack of legal clarity on ISAs holding back the business?
Our biggest fear has been that bad actors would come into this ISA space and create predatory ISA plans that would taint the well for everyone else who is trying to do the right thing. We are really looking forward to federal legislation in consumer protection. Good players like Kenzie can continue to use ISAs as an access tool, to essentially democratize access to people who are being priced out of traditional higher ed.
Also, we would love to have clarity on the treatment of ISAs in personal bankruptcy. Student loans today are not dischargeable in bankruptcy. We would love to level the playing field, making both student loans and ISAs dischargeable. We want to make them as much as equal as possible so that there’s more transparency in terms of risk and it makes it easier for investors to back ISA investments.
Let’s talk about investors then. You just announced a $100 million debt facility from CIM (Community Investment Management). How did that come together and how does it impact Kenzie’s operations?
We’ve spoken to private equity firms, hedge funds, foundations, and then we found that CIM, which is the sole investor in this $100 million investment, is the best partner for us.
CIM provided us with a reasonable cost of capital. As part of this $100 million investment, we dropped our ISA rates from 17.5% of income down to 13% and reduced our cap from 2.5X to 1.75X the estimated tuition cost. We’re probably one of the most affordable 12-month programs in the college alternative space.
As our cost of capital goes down and we realize operational efficiency, we will pass the savings along to our students. Students are used to seeing cost of education go in one direction only — up. We hope to show that a student centric program like Kenzie can reduce cost and burden for students over time as we scale.
This is one of the largest ISA funds ever raised. We hope to use our market position to push for ISA best practices and help shape the industry to create student-centric financing.
Is it essentially debt that is being backed by the ISAs as the collateral?
It’s attached to the cash flow of ISAs. The big fund from CIM allows us to serve tens of thousands of students that we otherwise would not be able to serve unless we went on to raise large amounts of equity financing.
Will the entrance of traditional capital markets come from traditional lenders or other institutional investors? Or is there inherently this layer of impact investor capital that is willing to provide a lower cost of capital and will give a financial advantage to the top leagues what partner with them.
The impact investors are mostly the early money in. As the market develops and more data is available, the traditional capital markets will come in, and they’ll be in typically much bigger capital amounts that will come in. I’m pretty sure there’s always going to be room for impact investors to play a role, especially impact investors who care about certain demographics and segments, for example.
What’s the timeline for there to be enough outcomes data in the market that we’ll see a much bigger flow of capital into the ISA space?
Given how fast the space has matured, I would say to give this another two years or so. A lot of our programs are growing. Many of our peers are growing at a very rapid clip, and enrolling a lot of students, as are we. We’re going to have at least two, three, four years of data that will hopefully make the asset class very attractive to more traditional capital market investors.