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Lambda School’s Growing Pains: Big Buzz, Student Complaints
By Kate Clark Jan. 23, 2020 10:51 AM PST · Comment by Dane JasperSubscribe now
Silicon Valley has no shortage of companies promising to disrupt higher education with technology. The buzziest of them all may be Lambda School, a company that provides free coding courses in exchange for a cut of its students’ future incomes.

The online school has won a following among high-profile investors, who see Lambda as a way to help train a new generation of talent for the programmer-hungry tech industry. Several venture capitalists told The Information that they’ve held conversations with Lambda in recent months about a new round of funding for the company at a lofty $1 billion valuation, a big jump from the $150 million it was valued at during an earlier funding round last year, though Lambda says it has no immediate plans to raise money.

THE TAKEAWAY
• Lambda recently turned down a $100 million investment
• Students recently wrote a letter complaining to Lambda about a course
• Regulation of income share agreements poses risks for future growth

But Lambda is also facing potential obstacles to its future growth. Earlier this month, a group of 20 students sent a letter to the company complaining about the quality of its curriculum, asking it to reduce their obligations under the income share agreements through which they pledge a portion of their compensation once they get hired. Some investors worry that growing regulatory scrutiny of those agreements could stymie the development of Lambda and other schools that use them.

Much of the interest in Lambda School stems from the charisma of its co-founder and CEO, entrepreneur Austen Allred. He has taken an active role in shaping the company’s image on social media, sometimes personally tangling with online critics in the process. A college dropout who hails from a small town in Utah, Allred moved to San Francisco in 2016 and enrolled in the Y Combinator startup accelerator.

His big idea: Fix what he views as a broken education model in the U.S., which saddles many students with crushing debt after graduation.

Lambda itself graduated from Y Combinator in 2017 and enrolled its first paid cohort of students just months later. Allred proved to be a skilled pitchman for his vision. He has raised a total of $48 million so far from investors, including Alphabet's investing arm, GV, as well as Stripe, Tandem Capital, Bedrock Capital and Y Combinator, according to PitchBook.

“If there’s one thing I’m good at in life, it’s growing something quickly, building hype for something quickly,” Allred said on a Y Combinator podcast last year. “That’s kind of my superpower.”

Because it doesn’t get paid until its students get jobs, Allred has argued, Lambda’s interests are better aligned with the success of its students than those of other for-profit online schools.

“The reason Lambda School seems too good to be true is that the previous options were so terribly bad,” Paul Graham, the influential founder of Y Combinator, wrote on Twitter last September.

In an interview with The Information, Allred confirmed that the company held recent discussions with potential investors, though he said the investors played a larger role in prompting those meetings than Lambda did.

He said he rejected a $100 million investment offer from one of the investors. He hopes Lambda can grow without needing to raise funding again.

According to multiple people familiar with the matter, Lambda School has spoken to both top-tier venture capital funds and impact investors—which typically seek deals with social or environmental benefits—including Schmidt Futures, founded by former Google executive Eric Schmidt, and Emerson Collective, founded by philanthropist Laurene Powell Jobs. A spokesperson for Schmidt Futures declined to comment, while a spokesperson for Emerson Collective said it couldn’t confirm the discussions.

Investors, not Lambda, raised the notion of a $1 billion valuation for the company, Allred said. He added that such a figure had merit based on the company’s growth trajectory.

"Students are flooding in the doors,” he said. “The real question is how many students per year can you get hired, and if that number is 10K or more than [that] clearly there is a billion-dollar opportunity."

Unhappy Coders

Currently, Lambda offers online courses that it says are designed to teach nonprogrammers the computer science skills necessary to get coding jobs, compressing a curriculum that might take two years to teach elsewhere into nine months.

It offers students four specializations to choose from, including user experience design, data science, iOS development and full-stack web development, its most popular option, which teaches the programming languages necessary to build websites. In the future, it plans to launch a specialization in cybersecurity and, in a departure from tech, nursing.

The number of students concurrently enrolled at Lambda rose to 2,500 students this month from about 1,000 in January of last year, according to a spokesperson for the company. Lambda has a total of 150 full-time employees, including 85 people on the learning and instruction team responsible for developing its online curriculum and interacting with students during office hours, the spokesperson said. An additional 100 mentors work with students for a small fee.

Instead of paying tuition, most Lambda students sign an ISA that requires them to pay 17% of their pretax salaries for 24 months once they are hired in a job that pays them at least $50,000 annually. Those payments are capped at a total of $30,000.

If students don’t find jobs within five years of completing their Lambda coursework, they don’t have to pay. A portion of students choose to opt out of their ISAs by paying a $30,000 fee upfront, which the company increased from $20,000 this month.

Some students have been disappointed with the quality of Lambda’s online education. Earlier this month, 20 of the 22 students in a current Lambda user experience design cohort—a group of people who start the course at the same time—sent a 13-page letter to Lambda’s leadership detailing their concerns about the organization and quality of the school's curriculum.

‘As we grow, we know there may be bumps in the road.’
In the letter, viewed by The Information, the students said they felt like “guinea pigs” who were being asked to test a new curriculum taught by inexperienced instructors. Because instruction was poor, the students said, they turned to YouTube and Medium to learn the fundamentals of user experience design, which they had expected Lambda to teach them. When students independently presented those concerns to the school, Lambda’s leadership told them their difficulties were merely representative of real-world issues they would soon encounter, the students wrote in the letter.

Lambda has since halted enrollment for the user experience design program—the company’s newest. In a message responding to a student for the course that The Information viewed, Lambda program manager Jessica Pense wrote the program was “not paused because something was dramatically broken,” but rather to focus on the teaching curriculum and development. Allred said Lambda made the decision to pause the program before it received the letter from students.

“As we grow, we know there may be bumps in the road,” Pense wrote in the letter responding to a student.

Two students in the group that sent the letter told The Information they have asked Lambda to release them completely from their ISAs because of their disappointment with their education. Other students said they are still negotiating with Lambda about lowering how much they owe it under the ISAs.

Allred said the company has a “mechanism” and a team in place to review student complaints and requests for release, but he declined to elaborate further. “Sometimes the right thing to do is to forgive the ISA, and we have a process for that,” Allred said.

This month, Lambda updated its student guide to include a clause that some students viewed as an attempt to quiet complaints about the school. While Lambda has long encouraged students to use Twitter and Medium to chronicle their educational experiences, it added language allowing the school to take punitive measures for student actions that “adversely impact the mission and/or values of Lambda School,” including activities on social media.

Allred said that this was an attempt to prevent students from harassing each other online and that the school is working to make sure the policy is better defined. Allred himself frequently uses Twitter and other forms of social media to promote Lambda School and to debunk critiques of the school.

“I’m learning to check myself in those instances, but it’s hard,” Allred said. “My inclination is always to correct people if they are wrong, but [it] turns out that’s not the proper comms strategy and it turns people against me.”

Regulation and Accountability

The use of ISAs is spreading among educational institutions, but policymakers and investors are still wrapping their heads around the concept, which could pose issues for startups like Lambda as they seek to grow.

ISA terms can differ dramatically from institution to institution. For example, Holberton School—a Lambda competitor—asks for 17% of a student's salary with an $85,000 cap for its in-person two-year course. Purdue University offers ISAs as a supplement to student loans, as does University of Utah, among others.

“It’s still early days for ISAs,” said Shauntel Garvey, a general partner at Reach Capital, which invested in Holberton School. “People are structuring them as they go and seeing what’s working and what’s not working.”

ISAs currently exist in a legal gray zone. No laws currently in place explicitly govern the agreements, though this summer the Senate introduced a bipartisan bill in support of creating a legal and regulatory framework for them. The U.S. Department of Education is currently considering federal support for ISAs, which may lead to further regulation.

If disputes between students and schools arise over the agreements, the students’ only recourse is to complain to their school. According to Lambda School’s ISA contract with its students, it relies on a third-party organization to hire law firms that collect money from students who don’t make the payments promised under their ISAs.

“Given how quickly the space is growing, it’s concerning,” said Alison Griffin, a senior vice president at Whiteboard Advisors, a social impact agency focused on federal education policy. “For this space to really take off and for more education and institutional providers and even more students to feel like they are entering into a new contract with certainty, they need to have some assurance that there are protections.”

Lambda has withdrawn from one effort to provide greater visibility into how successful its students are in finding jobs. Lambda previously submitted data representing some of its early graduates to a nonprofit organization, the Council on Integrity in Results Reporting, which independently validates enrollment numbers, graduation rates and median pay rates for graduates of coding schools. The organization’s study for the first half of 2018 showed that 85.9% of Lambda’s students found employment in their fields within 180 days of completing the program.

Lambda, however, didn’t submit data for subsequent reports. Instead, Allred said, the company plans to publish a report of its own on its website by the end of the quarter, rather than submit data to CIRR.