Non-linearity - The holy grail for financial analysts

Non-linearity is a much-bandied about term in the financial world. It is essentially that aspect of a business model that results in revenue growth far ahead of costs growth. In essence, if you have a business with a revenues of 100 bucks and profit of 10 bucks. If you double your revenues, your costs should grow by less than 100%. Or, with revenue growth, profit margin keeps going up.

Financial analysts chase non-linear models for a simple reason. Everyone wants to invest in something that will double or triple in a few quarters time. This can happen only if bottom-line grows much quicker than top-line. Ergo, the need for non-linearity.

Every single fund manager, every single analyst/flunky chases non-linerity as if it is the best thing since sliced bread. Any model you explain to them, they will return with intelligent-sounding questions like - "Where is the inflection point?", "When does the non-linearity kick in?", "When will revenue momentum result in better asset-utilization". All bullsh*t ways of trying to figure out non-linearity.

What analysts fail to realise that non-linearity might not be the best scenario for all businesses. Non-linearity can be achieved in businesses that can be standardised and can be delivered at multiple locations at the same time. Investors' fetish for non-linearity leads to unnecessary standardisation in some industries. Standardized things are easy to manage and are non-linear. So, it is a great thing for both manager and investor.

Now, why am I moaning so much about non-linearity in an education-related blog? Because, recently in India, we have had a surge of investments into non-linear education models. We have had technology enabled revolution in content delivery like never before. At least the money chasing these models is like never before.

Anyone who has taken class will tell you about the relationship between teacher and a student-group. Contact with 2 eye balls can tell you whether you are getting across or not, whether the pace of the class is too quick or too slow, whether you need to find another way of counter-intuitively describing the same thing. The best teachers are the ones that can improvise, ones that can create an auxilliary example based on the feedback from body language of students, ones that can go the extra yard in driving something across.

Technology removes all these. Standardised content-delivery is the worst thing that can happen to quality of education. Ed Smith explains this beautifully here.

Think about all your great teachers. All of them would have stood out for their ability to improvise and convey something. Teaching is a very creative job. If you strangle the creativity out of it, you are in trouble. Intuition, spontaneity are critical.

Having said that, standardization has a lot to offer. I think standardization can work beautifully in 3 specific cases - i) when standardized content is a supplement to teacher-delivered content. I miss something, I go online and check this out. ii) when the teacher is very poor, or non-existent. Like corporation schools in India, where Educomp and Everonn are making a difference now and iii) In absolute high-end stuff. Like teaching how to build a MOSFET. There are probably 50 people in India who can do this. Of this probably 10 are good. If you take this content and put it on the web, then a lot more people can use it. Ventures from IIT Madras and MIT are trying to do precisely this. Check out NPTEL.

Forcing non-linearity where it does not fit is not good. In my view, it works in both ends of the spectrum. Perhaps technolgy will come up with a way where it can make sense for the vast segments in the middle. Perhaps we will have video phones becoming ubiquitous in a few years time. Perhaps we will have a way where a teacher can connect with 15 students even if they are in different parts of the world. Technology has a way of making us take giant leaps. Hopefully, we will see something like that. My only concern is the fact that we are trying to chase non-linear models even before the technology breakthrough has come in.

Fermat Education - Introduction

This blog has been created with a view to publishing relevant articles on the education sector in India. In the period from 2006-2010, education has become the "hot" sector in India and everyone seems to have an opinion on the direction this sector will/should take over the next few years.

The top down indicators are straightforward - India has huge middle class, which will only get bigger; and will only end up spending more and more on education. Depending on your source, you can different large numbers to support this core hypothesis. And with global money-printing close to an all-time high, we are seeing investments rushing into this sector. On this blog, we will not be focusing on the money flowing into this business, neither will we be focusing on the top down analysis of market sizing. We will discuss the different models that are coming up in this space and try to give our views on this.

Although we will try to be as objective as possible in running this blog, it is probably best to mention the institutions to which we are linked. In some form or other Fermat Education (the blog), is linked to 4GMAT, TopGRE, AIEEE.BE and Ascent Education. Kindly bear this in mind in order to filter out our biases.

As far as the education sector in India goes,
1. It is very likely that the market has not yet hit upon the right model to reach out and provide education to Indians of all stripes. In our view, the various models that are out there currently each carry some fairly big flaws that need to be ironed out if we have to have a breakthrough
2. Technology, as it stands now, will be an enabler to provide some supplement to the prime education channels. Current technology cannot create a substitute for traditional delivery models
3. Education is essentially a non-linear market. (This is linked to point 2) and all new models have to keep this in mind when planning their expansion.

More to follow. I forgot that this was meant to be merely an introductory piece.