Microcredentials and Macro-dollars: How an Online Ad Led 2U's Chip Paucek to Make a $120M Bet

Chip Paucek is an entrepreneur’s entrepreneur. After two other startups sputtered, Paucek cofounded and runs 2U, which made its debut on the public market in March 2014. It closed that first day at $13.90 and has since grown to more than $50 a share. He lives the product, too: Paucek earned his own MBA by taking classes through 2U’s program with North Carolina’s Kenan-Flagler Business School. In this conversation with EdSurge’s Betsy Corcoran, Paucek talks about the business of delivering digital education--and just what the role of the CEO involves.The conversation is part of our Thought Leader Interview series on the future of education, recorded live at the ASU+GSV Summit. Below is an edited and condensed version of the conversation, or watch the complete interview.EdSurge: Let's start with 2U making its first acquisition. One of the things that you've always told me is "focus, focus, focus, focus." And then you go out and you buy a company. What's going on? Is this the beginning of an empire?Paucek: We acquired a company out of South Africa called GetSmarter that we thought had remarkable overlap with 2U from both a cultural, a mission, and ultimately serve a product-fit perspective. So I have preached to you and to others that focus may be the most powerful asset of the great entrepreneurs. That’s something that's a bit under the radar. If you look at the great entrepreneurs, they really have stayed very focused.We’ve been building what we think is the world's best online education for nine years now, and we've recently started calling it digital education because of the bad rep that online education has. But GetSmarter fits perfectly with 2U from an expansion standpoint. Primarily because the team there and the company not only feels a tremendous amount like 2U, but they have a people-mediated approach to short courses instead of degrees.When I say people-mediated, I think you know our hashtag is #NoBackRow. It's driven by weekly live classes, physical immersions, clinical placements. It’s not your grandfather's version of online ed. GetSmarter applies that approach to short courses. Here’s the difference: Today 2U offers the most heavily certified digital program. An example would be our recent announcement with the University of Southern Calif., the number one school in the country for physical therapy, and our first client to build an [online] Doctor of Physical Therapy program. It's a three year program. Its intent is to certify students at the doctorate level--which leads to a life-changing opportunity. GetSmarter occupies the other side [of the spectrum]. It offers open enrollment--which provides much greater access for people still working--to with some of the world's most impressive schools including MIT, University of Chicago, University of Cape Town, and Harvard.What’s so interesting that GetSmarter completion rate is 88 percent. Thatshocked me. Name something like that. And why? Because ultimately it’s “people-mediated” as they call it. We call it “No Back Row,”; they call it “people-mediated.” What does that mean? You end up with a tutor and a group of 12 [students]. And what’s 2U’s current average weeklylive class size? 12. So there are remarkable similarities.How did the deal come together? I actually got an ad.Like an ad on the internet?I clicked an ad for an MIT course from GetSmarter, and I was like, "What is this?"You're kidding me! This could be the single most successful ad in the history of education.It's a true story. I clicked on the ad and was really surprised that the program was at MIT and it was offered by a company I had never heard of. When I clicked through, I found this incredible company that was in South Africa. Which is, I believe, the only reason I didn't know about them.I called up the founder and then about a month later I flew to South Africa. It was just me and one other 2U [employee]. And by the end of that two-day trip, we made a tentative offer.As you think about the future of digital education, where do you see microcredentials fitting in? They seem to have a lot of momentum. Short courses result in a certificate. That’s what the former MOOCs [such as Coursera and Udacity] have driven toward for a business model and they’re getting some revenue and scale out of it. We started in what I think is a much tougher place to start and built a business in the degree space—at the core of the university. It’s very difficult to pull off and very expensive. We raised a lot of venture capital. The important thing is not that we raised it; we spent it. And we learned from those mistakes over the years. And we didn't expand very much until our fifth year. [Even so, the acquisition of GetSmarter] immediately does internationalize 2U and it does get us into certificates.Do you think that we'll see universities themselves starting to offer certificates and microdegrees? They have for years; they do today. That’s what the continuing education group at most schools do, for the most part. You don't see that many degree programs in continuing ed groups. These are, generally speaking, revenue-generating sectors for the schools.You’ve worked hard to become one of the big success stories in online education. That probably means people are coming after you, right? 3U, 4U, 5U, 6U.Absolutely! They’re all taking aim. Even the sale of Kaplan University to Purdue University represents a different competitive approach. What else do you see on the horizon? Well, I think we're way too early in the history of this general adoption [to predict the outcome].If you look at the $80 billion we spend in the U.S. on graduate education, the question you should ask yourself is, ‘Why?’ Why should you pick up your life, quit your job, and move to attend a great graduate school if you can get everything you would get on that physical campus in the online environment? And the answer is you can. The same quality level. Same admissions standards. Often, the same faculty is teaching you. The value proposition for graduate education is simply better done this way.In the same way, when Tesla insiders talk about the addressable market for cars, they don't talk about it as a segment. They talk about it as the whole thing. Because in time we will get away from fossil fuels, right? We believe that in graduate education--that it will evolve this way.So, I don't think it's an appropriate time in the evolution of our industry to talk about share gains. While we do think we are gaining [market] share, I would rather have everybody win. Because the biggest challenge for 2U are preconceived notions that online education is dismal. As more top schools do this, we thinks it puts more wind at our back. So I welcome the competition.Is there anyone you’re watching closely? We keep an eye on everybody. I think it says a lot about the state of online education that a broad-based, well-respected institution like Purdue would embrace digital learning that way. I think that's a big positive for everybody, including me, in the space.I did say to the CEO of Kaplan, who's a good friend, "Welcome to our space." I can't tell you if [the recent acquisition] will be successful. I can tell you that I learned the hard way that this is a very complicated business. It's not just software code. There are a lot of people involved. There's a lot of business processes involved. Most importantly: We know we're not in charge. It is a partnership expressed in a revenue share but we are the subservient partner. It is their program.Let's look ahead this year and maybe the next year. What do you see happening to you? More universities? More verticals?We have a high-class problem. The high-class problem is we have a lot [of resources]. I was just in discussion with an advisor of ours and he said, "What is your biggest challenge right now?" And I said, "Bandwidth." We are all busy folks. That's great. I'm not gonna complain about it. The smallest violin in the world is playing for me.So, over the course of the next year? Is 2U still staying out of undergrad education? Well, 2U had made an effort to go into the undergrad side. That turned out to be one of those moments when sticking to your focus is a really good idea.[Going into undergraduate education was] really, the one time in our nine-year history that we did something entirely different. And it is, without question, our biggest failure in nine years. But we learned ton. We believe that ittaught us a lot about approaching that market. We’ll be careful with undergrad.Let’s talk about the role of CEO.Well, I’ve had a difficult career as an entrepreneur. I'm thrilled that 2U is a big win. You know, I’m thrilled with the opportunity it's provided me. But I learned the hard way ... You know I started a company, ran it for a decade, and ultimately it failed. The show produced a bunch of famous celebrities, which is pretty funny ... And the PBS show I ran did well and believe it or not is still around ... But the business lesson for me is that it wasn't about me. It's about team. That is, without question, something that I think about with our size and our scaling at this point .. 2U has a collection of pretty incredible talent. We’re all aligned on a big opportunity. And we do think we're changing the world. We feel pretty strongly that we're now being recognized a little bit for the kind of change that's happening. We just passed $1.5 billion in tuition generated for our partners. I mean, that's not a tiny number. And it's not about the money, it's about what drives that number. Which is the retention rate of the students. Like, ultimately students are having life-changing opportunities in these programs.I spend a fair amount of time on our company culture. I think that's a big part of a CEO's job. I'm pretty comfortable making decisions. I make them quickly and I don't obsess over mistakes. I just try not to make them twice.We assembled a collection of people [that can] brighten a room. You can train someone to have a skill set; you can't train the spirit. And that's what this company is. It's a remarkable collection of people that I have some role in aligning towards a common goal. And that's kind of my job. So, I spend a lot of time on culture.

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