A brief note on FutureLearn finance

“Fast-track growth”, eh?

I awoke this morning to the news that the Open University has committed a further £13m to their “FutureLearn” MOOC platform. For those reading overseas, “FutureLearn” was a late UK-centric “me-too” entry to what back then looked like an interesting trend for free online courses. For people used to the likes of Coursera and EdX, this may all seem like very small (warm) beer – but it is a useful case study in mooconomics.

Unlike the MOOC platforms you may have heard of, FutureLearn is not funded by venture capital. Rather all of their funds have come from share capital allocations and other finance from the Open University. Not including £4.9m of start-up costs, the initial OU financial commitment was for £15m of share capital linked to milestones in an (as yet, unpublished) business plan. The OU Council minutes of July 2013 give these figures (para 9.8, page 7), but the comments of council members are also worth considering.

An associate lecturer noted at the meeting (para 11.7):

“[T]he paper about governance relating to FutureLearn Limited (C-2013-03-01 Appendix 1) had been very helpful, but a number of Council members had also asked to see the FutureLearn Limited business plan. It was appropriate to delegate consideration of the financial risk to Finance Committee, although a written report on the advantages of the investment would have been useful. However, sight of the business plan might also help the Council to understand how the FutureLearn Limited business would impact on the OU operation, not just in terms of financial return and student numbers, but also in terms of staff resource, expertise and intellectual property, as this was not within the remit of either Finance or Audit Committees.”

Just to break that down – because the language of minute writing tends to flatten the drama of interventions like these – the OU Council were being asked to approve £15m of capital spending against a business plan that they hadn’t seen. Both the financial and the audit committee had seen it, but had not provided anything more detail than the vague recommendations earlier in the document. No-one appeared to have considered the implications on OU staff resource, OU expertise or (incredibly) intellectual property.

Para 11.8 is worth taking line-by-line:

“The University Secretary observed that the business plan concerned FutureLearn Limited, not the OU’s involvement in the venture as one of several partners.”

This is correct, but as the OU were (and remain) the sole source of funding for FutureLearn, which is to all intents and purposes a wholly-owned OU subsidiary.

“[…] It was Finance Committee’s role to advise the Council, as a shareholder, as to whether to invest in FutureLearn Limited.”

Again, this is the niceties of corporate structure. There was no other investor in FutureLearn, a limited company that had no income (and still shows very few signs of covering running costs, as we shall see). So it would be perhaps more correct to say that the Finance Committee should be making the case to the OU Committee to set up a wholly-owned subsiduary – using, lest we forget, public money.

“As the business plan belonged to the FutureLearn Limited board, the Committee had found it difficult to interrogate the business plan. Consequently, KPMG had been employed to scrutinise it and advise the University, through the Finance Committee, as to the robustness of its assumptions.”

So the Finance Committee (responsible for scrutinizing the business plan as a case for investment) had employed KPMG to comment on it, as they found doing so “difficult”. As neither the KPMG report (focused on audit and finance issues only) nor the Business Plan has ever been made public – or, as far as I am aware, shared with the OU council – we need to take this at face value.

“As previously mentioned, the costs were fairly certain, but the income assumptions were risky and speculative. It was unlikely that this would have been clear from the business plan, but as an expert committee it was Finance Committee’s role to advise the Council on such issues.”

Of course the income assumptions were “risky and speculative”, this was a MOOC start up! It is difficult to believe that there were any realistic income assumptions in the plan – especially as Simon Nelson has still yet to talk about any income other than the sales of certificates of completion (now £34, an ideal Christmas gift…).

Paragraph 11.11 of the minutes, wherein the Finance Director responds to the concerns of the members, is also a fascinating read. We learn that:

• The OU would be unable to claw back allocated funds in the event of FutureLearn closing
• Despite the advice of the Finance Committee, it was “assumed” that FutureLearn would be profitable.
• There was never any question of institutional partners contributing to the costs of running or developing FutureLearn as a business or platform.
• The FL business plan was phased regarding a path to breakeven (income meeting costs). The milestones by which FL could draw down share capital up to the £15m limit were linked at least partially to the level of income they could generate.
• Though the FutureLearn board was technically accountable to the council, in practice approval of further allocations of funding would be managed by the finance committee only.

Do read the whole document, but I just want to quote one more telling paragraph (para 9.9 on the OU revenue budget):

“The Council approved the proposed consolidated revenue budget for 2013/14, which showed a deficit of £9.6m after allowing for £4.9m for the costs of setting up FutureLearn Limited.”

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The filing history of FutureLearn at Companies House is where we need to go to examine the progress of the company, and extrapolate back what the initial business plan milestones may have been.

• The company was formed on 10th December 2012, and the press launch was on the 14th…
• …  but it first started acting like a company on 20th Jan 2013. New (OU) directors were appointed as the company “moved” from the offices of a PR company to the OU’s HQ in Walton Hall.
• The “launch CEO”, Simon Nelson, was appointed on 9th May, and the Just after the OU purchased £500,000 of FutureLearn shares on 8th April. Yes, that is before the capital spend was approved by Council.
• On 30th July August the OU increased their holding to £2.5million, based on the approval of the OU Council. (note that the £4.9m start-up costs were not part of the share capital allocation)
• On the 29th November (just as the first courses had commenced, following another press launch in October), the OU increase their holding to £4m.
• The first annual accounts show an operating loss of just under £2m. FutureLearn’s only non-OU income was £4,000 for video production. To clarify, this meant that FutureLearn had spent, by July 2013:
  • £4.9m of “start up” costs.
  • £1.9m of share capital
  • £4,000 of other income.
• The OU upped their shareholding to £5m on 21st March 2014. So I guess that at least one of the milestones would have been to generate some non-OU income in their first year.
• The 14th May 2013 saw the OU up their investment to £6.5m
• And the 14th July saw this increase to £7m
• On 17th December, this was increased again to £8.5m
• On 24th March 2015, FutureLearn filed their accounts for year 2. This was under the “small company” rules, so is in a different format and doesn’t tell us about their income. We learn that:
  • FL had spent £6.52m of the (then £7m of) share capital they had been allocated since launch.
• The total capital investment from the OU was upped to £11.4m on 25th June 2015, after one Peter Horrocks (OU VC) was installed as a director on the 11th June.
• The most recent allocation of share capital was on 17th July 2015, bringing the OU’s capital investment to £11.65m. There has been no further investment since that date, suggesting that no further business model milestones have been reached.

Thanks for bearing with me on that – if you just skipped to the end, know that FutureLearn have spent a boatload of money and have never showing any sign even of covering their costs, much less passing profits back to shareholders.

Of the milestones in their business model (that are linked to capital allocation), we can intuit that they have failed to meet most of the final third. The announcement of this new £13m of capital before the remainer of the initial allocation suggests that FutureLearn have not and will not meet those final milestones, so a new business plan was required.

Sadly the most recent release of OU Council minutes kept discussions about this investment confidential. So we’ll never know for sure.