Harvard Business Model Case Study

I’m going to throw you a challenge. Assume you have to start a university that would become the richest and the most prestigious educational institutions in humankind’s history. 

What plan of action would you create? What business model would you choose? How would you make it financially viable for the centuries ahead?

A predictable approach would be to build a sustainable brand by providing top-notch education, establishing artificial scarcity by making applicants go through a challenging selection process, and ensuring students get placed in high-income jobs. In exchange for all of this, students would be willing to pay exorbitant fees. 

But that’s not, for the most part, the business model used by Harvard University—the richest and arguably the most prestigious educational institution of our time.

Of course, Harvard is home to a top-notch education, has stringent selection criteria, and provides enviable job opportunities. Still, it’s not student fees that have kept Harvard afloat for more than four centuries since its founding in the 16th century. 

So then, how does Harvard make money?

A Harvard education, obviously, does not come free of cost. Depending on the financial background, Harvard does provide aid to students, but the student tuition it collects is not enough to fund operations.

Two other revenue streams support the University — endowment, and donations. For the initiated, an endowment is an aggregation of assets invested by an educational institution to sustain in perpetuity. 

Where does the endowment capital come from? It comes from alumni or people who believe in the University’s mission. But endowments are different from donations. Endowment money is geared towards a specific cause specified by the donor, like developing the library or research in a particular field. 

Endowments are not unique to Harvard. Universities like Yale, Stanford, Princeton, MIT, and many others have endowments. What makes Harvard’s endowment special, however, is that its 41.9 billion dollar endowment is the largest among all university endowments. 

Yale’s endowment, the second-largest, trails behind Harvard’s by more than 10 billion dollars. 

While Harvard’s endowment has existed since the 16th century, it has grown disproportionately in the last fifty-odd years. In 1974, the endowment was worth $1.1 billion. By 1984, the endowment doubled to $2.5 billion. Ten more years later, by 1994, it doubled again, to $6 billion. In another ten years time, by 2004, it almost quadrupled to $22 billion. 

By 2008, Harvard’s endowment ballooned to $36.9 billion, but the financial crisis slashed its value by a third. It was only in 2015, seven years after the recession, that it recovered. Despite the coronavirus slowing down growth, the endowment’s value grew by 1 billion dollars, from 40.9 billion dollars in 2019 to 41.9 in 2020. 

The endowment’s incredible performance post-1974 begs the question — what caused the endowment to grow so much? 

Up until 1974, Harvard’s endowment was managed conservatively and consisted of fixed-income investments. But things took a new turn when the University set up the Harvard Management Company(HMC). Moving from a third-party portfolio management model to an internal management model gave Harvard more control over the endowment’s investing strategy.

Before the founding of HMC, the endowment funds were invested in bonds and blue-chip companies(major corporations with reliable returns). HMC broadened the scope of investments — shifting assets from a domestic portfolio to a global portfolio, transitioning from public securities to private securities. This change in investment strategy turned the fate of Harvard’s endowment.

Now, one might ask, if Harvard has so much money in an endowment fund that keeps growing, can it not provide education free of cost to all students? 

To answer that question, we need to understand the underlying structure of the endowment. Harvard’s endowment is not like a personal bank account, wherein the money could be removed and used for anything at any time. Since donors designate their contribution’s purpose, over 80% of the endowment’s funds are restricted. Plus, the endowment is supposed to be a source of support to the University’s mission into perpetuity. So, Harvard can access only a limited portion of the funds every year.

In the fiscal year that ended on June 30, 2020, Harvard used 2 billion dollars of the endowment, making up one-third of the University’s total operating revenue that year. The remaining two-thirds ($4 billion in the fiscal year 2020) came from other sources, like student tuition and fees, and donations made directly to Harvard, instead of its endowment.  

And that’s how Harvard University runs itself, by using a portion of the endowment yearly and complementing it with student fees and donations.  

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