An Education Revolution? Investors like Michael Milken and Larry Ellison are betting that Chicago's UNext can change the face of college online.
By Arlyn Tobias Gajilan

(FORTUNE Small Business) – Most people watched the Chicago Bulls during the 1996-97 season and dissected the team's offensive plays, took bets on its championship potential, or struggled for adjectives to describe Michael Jordan's fadeaway jumpers. Not Andy Rosenfield. A lawyer, economist, University of Chicago professor, and Bulls season-ticket holder, Rosenfield spent much of each game perched in his United Center skybox with fellow professor Gary Becker, talking shop with the Nobel Prize-winning economist. During breaks in the action, Rosenfield and Becker lamented about how the likes of Harvard, Yale, and the University of Chicago were the domains of an exclusive few. The men also discussed, among other things, how academia might survive in the new economy. "We both love basketball," Rosenfield says, "but we're not the kind of people who sit around talking about sports stats."

Uh, we guess not. The skybox chatter led to a startup that its founders and investors insist represents nothing less than a revolution in the business of online education. By the end of 1997, the Bulls had won the NBA championship, Jordan had won an MVP award, and Rosenfield had become the founder and CEO of UNext. Financed with big bucks from the likes of Oracle's Larry Ellison and former junk-bond czar Michael Milken, Rosenfield's three-year-old, 650-person company has spent more than a hundred million dollars to build a purely Internet-based university. Rosenfield has recruited brand-name talent and a big-name board (including Becker, two other Nobel laureates, and former U.S. Secretary of State George Schultz), developed new educational software and technology, and forged partnerships with elite schools, including Columbia, Stanford, Carnegie Mellon, the London School of Economics, and the University of Chicago. UNext's ultimate goal: to offer degrees to anyone who can't attend or get into a top-tier school, and to provide executives, consultants, and other business people with continuing education.

Whether he'll be able to do all that and make a profit isn't clear, of course. But it's safe to say that investing in the business of online ABCs has, by any number of measures, a lot of potential. In 1999, for instance, private investors bet $981 million on the online education sector, up from $81 million in 1997, says Boston's, a research firm. Furthermore, the corporate online training market produced about $1 billion in revenue in 1999 and will reach $11.4 billion by 2003, according to International Data Corp. Merrill Lynch says the online market in higher education totals $1.2 billion and may grow to as much as $7 billion by 2003.

So it's no surprise that e-learning has become an entrepreneurial hotbed. When UNext opened its virtual doors in summer 2000, Jones International University, Capella Education, and the University of Phoenix Online were already offering degrees and certificate programs. Today, scores of startup "edu-companies," such as Powered, Educational Video Corporation Inc., DigitalThink, and Centra, either provide online courses or technically assist brick-and-mortar schools that are holding classes over the Internet. Traditional schools like New York University and the University of Maryland are spinning out their own for-profit e-learning divisions.

Rosenfield's entry is called Cardean University, a UNext subsidiary named after Cardea, a Roman goddess who guarded doorways (think Web portals). Fully accredited, Cardean began with 24 specialized business courses last summer. Nestled in a suburban Chicago office park, across the street from a Home Depot, it now offers 80 courses and an MBA program, and it plans to grant other graduate degrees as early as this spring.

What's so different about Rosenfield's school? Unlike its competition, which relies heavily on transcribed lectures, streaming video presentations, and rote memorization, Cardean employs what academics call problem-based learning. With that method, long used at schools such as West Point and Harvard, Cardean confronts its students with imaginary but realistic corporate crises as a way of teaching accounting, marketing, management, and other business topics. UNext also has an impressive roster of top-tier colleges and a brain trust that includes scores of the top education scientists in the U.S. Plus it's got great technology. Instead of just relying on students to e-mail their assignments, for instance, Cardean instructors can track students' progress through course materials, mouse-click by mouse-click, using software that UNext created. "It's a unique and powerful approach to online education," says Peter Stokes of

Rosenfield learned to transform ideas into currency at an early age. The eldest son of a lawyer and a professor, he recalls that dinnertime conversation in his family's suburban Chicago home verged on the Socratic. "We had a dictionary in the dining room," says Rosenfield. "It was expected of us to argue about words and ideas." The better the debate, the more spirited the evening. Making regular guest appearances at the Rosenfield's dinner-and-debate sessions were noted economist George Stigler and Nobel laureate Milton Friedman. Family outings often involved heading over to the nearby University of Chicago for a lecture or to The Art Institute of Chicago for exhibits.

Given that he marinated in matters of the mind for most of his young life, it's not a shock that Rosenfield, 49, grew up to become a professor, an economist, and a lawyer. But an entrepreneur? "In my early twenties, I thought all I wanted was to be a full-time law professor and economist," he says. But while at law school during the late 1970s, he found himself fascinated by the huge corporate mergers and acquisitions that closed out the decade. He tapped two of his law professors, and together they formed Lexecon, an economic consulting firm. "At the time I thought of it as a summer job," says Rosenfield. While still attending law school, he transformed that summer job into a 35-person company. By the 1980s Lexecon had built up a moneyed client list that included Michael Milken, who hired Rosenfield to assist with his legal defense in 1988, shortly after the Securities and Exchange Commission charged Milken with insider trading and stock manipulation. (Milken later pleaded guilty to six felony counts.) As Rosenfield's company grew, so did his taste for business, his Rolodex of contacts, and his personal fortune.

By the time Rosenfield and Becker began their skybox discussions in 1996, the idea of starting a business that would also double as a university didn't seem too far-fetched. For years the two had discussed Becker's Nobel Prize-winning theory of human capital, the idea that an economy's real assets aren't its factories and equipment but its educated work force. The global shift into an information economy, they reasoned, would create a vast imbalance between the supply and demand for high-quality education. "We knew all of that to be true," says Becker. "But Andy saw the business opportunity."

To exploit that opportunity, Rosenfield did what academics do best: research. For six months he visited friends and colleagues at universities around the country, picking their brains, deconstructing the higher education market, and analyzing how for-profit schools functioned. He also studied up on the history of distance education and the rise and fall of correspondence schools. "We looked at many possible solutions," says Rosenfield. "We wanted to start with a blank piece of paper."

Turns out his answer wasn't on paper. It was on the Web. "We didn't set out to become an Internet startup," says Rosenfield, who at one point even considered buying a failing university in Mexico or Eastern Europe and reviving it with his and Becker's teaching theories. "We wanted to be an education company. But by 1997, the Internet was getting pretty hard to ignore."

Before he could achieve such lofty goals as revolutionizing online education and offering degrees to students worldwide, Rosenfield needed money. Fortunately his lifestyle bore no resemblance to that of the stereotypical college professor whose career has enriched his mind more than his bank account. Rosenfield had made a very good living as president and then chairman of Lexecon. To start UNext, he used what he calls a "not insignificant" portion of his personal fortune. Then he hit up his old client Milken, who in 1997 had teamed with Larry Ellison to create Knowledge Universe, an investment firm and incubator of education-related startups.

In addition to investing an undisclosed amount for a 20% stake in UNext, Milken placed a few invaluable calls on Rosenfield's behalf. One of them was to Meyer Feldberg, dean of Columbia University's graduate school of business. "Mike told me that Andy was someone I should meet," says Feldberg, who had already been brainstorming with other Columbia administrators to get the school's courses online. "We knew distance learning was like a freight train," says Feldberg. "We knew we could get run down, get onboard, or get out of the way." By the time Rosenfield came calling, half-a-dozen companies were already looking to form a partnership with Columbia. "None of them was the right fit," says Feldberg. Most were headed by brash entrepreneurs who knew nothing about how closely research universities guard their courses and intellectual property. Most were seeking exclusive partnerships, which Columbia considered impossible. Rosenfield, in contrast, was an educator as well as an entrepreneur. He came from the same gene pool, as it were. "We hit it off immediately," says Feldberg.

By the end of their 1998 meeting, Columbia and UNext had come to terms. Columbia's top teachers, like accounting professor Michael Kirschenheiter, would work with UNext to create online courses offered through Cardean. UNext would shoulder all development costs, pay Columbia 5% of the venture's profits, and allow the school to work with other online education companies or develop Web-based classes. Plus, if UNext went bust, it would pay Columbia $20 million. Rosenfield struck similar no-risk deals with Stanford, LSE, CMU, and Chicago. In return for this generous offer he got the stamp of approval from some of the best names in the education business.

But can Andy Rosenfield make a buck? The course offerings and impressive new technology don't come cheap. Creating the company's first four classes cost a hefty $1 million per course, and in its first three years UNext has gone through $120 million. To break even, Rosenfield admits he'll have to burn through $70 million more. He is also mindful of his industry's cautionary tales: California Virtual University, started by the California Board of Regents in 1997, folded last spring, citing financial reasons. Western Governors University, a joint initiative of 17 states, opened its digital doors to much fanfare last year but has enrolled fewer than 200 students, far less than it projected. "Online education is a fragmented and turbulent new industry," says's Stokes. "No one knows exactly what for-profit business models will work. Everyone out there is working off their best educated guess."

Rosenfield insists that his company won't become an extremely expensive lesson on how not to create an online education firm. At press time UNext had signed deals with 14 companies (including Barclays Capital and Time Warner, FSB's parent) that will pay for their employees to take Cardean classes. UNext is also trying for even more lucrative deals in China and Brazil, where there are many more students than colleges. "We're building a company that has a huge potential for profit and an even bigger potential to do good," Rosenfield says. "It simply takes a lot of money to do something that's different and will make a difference."