Indian edtech is in the early stages of its life cycle. One of the biggest lessons for investors is this: Edtech is a long-term investment.
By Ramesh Mahalingam
In his book “The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup,” Noam T. Wasserman talks about the early decisions by entrepreneurs that can make or break a startup and its team. The right time to dilute promoters’ equity and cede control is one such decision. COVID-19 induced growth in the demand for edtech and provided a window for raising funds at high valuations. Major players including Byjus were able to raise funds at over 20 times the revenue despite not being profitable. Such capital raise led to control being shared with promoters, with promoter equity in some cases dropping below 5%.
Encouraged by investors, chasing growth at all costs became the mantra in the industry. When the post-pandemic demand slowed and new funding started to dry up, several startups had to shut down. While Byju’s saga has been on the front pages of newspapers, there have been over 100 edtech startups that had shut down in the last two years. This includes companies like DUX Education, Bluelearn, Lido Learning, Front Row, and more. Leading edtech players like Unacademy and Vedantu have shed half their workforce. More than 14,000 edtech employees lost their jobs. Whatever happened to Byju’s and the industry which had seven unicorns only a year ago? How could Byju’s, which had raised $5 million and was once valued at $21 billion, go bust so fast?
Factors that fueled the growth of Indian edtech
Indian edtech is in the early stages of its life cycle. Rapid internet penetration, fueled by the Digital India initiative and the massive success of Reliance Jio in taking the internet to over a billion people, created the macro infrastructure needed for the edtech industry. A few maverick educators like Byju Ravindran of Byju’s, Gaurav Munjal of Unacademy, and Vamsi Krishna of Vedantu, who were teaching physical tuition classes, wanted their popular classes and study methods to reach more students.
READ: ‘Byju’s worth zero,’ says founder of once India’s biggest edtech startup (October 18, 2024)
Edtech, as we know it today, was born due to these star teachers and many others who took their highly successful physical classes online. Alok Pandey of Physics Walla failed the Indian Institute of Technology’s Joint Entrance Exam (IIT-JEE).. However, he had a unique way of teaching physics for the JEE and took it online with his YouTube channel in 2016. By 2019, he had two million followers. The edtech industry grew rapidly in just a few years, funded largely by founders between 2014 and 2019. Then COVID-19-induced pandemic happened.
COVID-19, a game changer
The pandemic brought a rush of students to online learning. Several marquee private equity firms like Sequoia, Tiger Global, and Blume, decided to jump on to the edtech bandwagon with large ticket investments. With investments of $1.4 billion in 2020, $4.7 billion in 2021, and $2.4 billion in 2022, the new hyper expansion phase of edtech started. The influx of these massive financial investments led to edtech spending enormous amounts of money to acquire students. The Customer Acquisition Costs (CAC) reached 80% during these years. Well-funded startups started buying companies within and outside India. The acquisition of Akash Education for $1 billion in 2021 by Byju’s was the clearest signal that a valuation bubble was brewing in the industry.
READ: Future of education: From classrooms to online to peer learning (May 31, 2022)
Expenses grew faster than revenue, with losses even exceeding revenue. Edtech signed up celebrities to endorse their offerings. Byjus’s signing Lionel Messi as brand ambassador and sponsoring BCCI (Board of Control for Cricket in India) cricket matches was a clear sign that promotional spending was becoming unsustainable.
The return of sanity
A sign of sanity has returned to the edtech scene at present. Investors are much more cautious. In a sign that private equity has learnt its lessons, the investment levels dropped from its peak by 90% to $300,000 in 2023. Most companies have scaled back their investment in CAC. Several companies have started offering physical classes in a number of cities with the hope of attracting students who like the touch and feel.
Not too big to fail
Byju’s will be part of many case studies. At the core of their failure was over ambitious promoters who were aided and abetted by private equity, with both overestimating industry growth rates and underestimating the Customer Acquisition Costs (CAC). Investors gave free reign to promoters to spend money with very little governance and oversight. Lessons have been learnt at great cost. One of the biggest lessons for investors is this: Edtech is a long-term investment. It takes time to build course materials which appeal to students, and takes even more time to acquire students. The focus should be on qualitative educational outcomes and students will come when they see value.
READ: Mark Zuckerberg’s philanthropic arm invests $50 million in Bengaluru-based Byju’s (September 9, 2016)
Learnings from the U.S. edtech
Indian edtech can also learn from its more mature U.S. counterpart. Even the largest U.S. edtech companies are struggling to attain consistent levels of profitability. 2U (owns edX) went public a decade ago and reached a market cap of $5 billion at its peak only to declare bankruptcy earlier this year. Not a surprise since it lost money every year since it went public. Stocks of companies like Chegg, Coursera and Udemy continue to languish due to low profitability. Their stock market valuation is at historically low levels. The key lesson – there is no quick money in edtech. It takes resources, patience, and a solid strategy.
Future is bright
The Indian edtech market is worth $8 billion, growing at 25% CAGR (Compound Annual Growth Rate). The three most important reasons for edtech to move online will always remain: Lower cost of online learning; travel time saved by students; shortage of quality teachers. Generative AI will further help the quality of online learning and has the potential to bring costs down. As long as companies play the long game, maintain their focus on learning outcomes and keep their CAC low, they will have their place in the future of Indian education.
(Ramesh Mahalingam is a former CFO at a leading Services company and is currently a board member at Marius Pharma. He is a keen observer of the Indian Edtech industry.)