Edtechs have a reality check moment. Will they survive it?

In its glorious days, this much-touted segment saw an influx of investments to the tune of $4.1 billion in 2021, almost doubling over 2020 and growing nearly seven times since 2019.
In its glorious days, this much-touted segment saw an influx of investments to the tune of $4.1 billion in 2021, almost doubling over 2020 and growing nearly seven times since 2019.

Summary

The edtech business thrived when children were cooped up at home during the pandemic, but as normalcy returned and investment taps started running dry, trouble started brewing. Is any relief in store?

Blame it on the operational challenges of Byju’s, the erstwhile poster child of the edtech space, or the unending funding winter for startups, but the once-promising sector seems to be losing the plot. That’s an embarrassing about-turn for a segment that became a household phenomenon during the pandemic as remote learning drove many companies to a boom. But it’s possible for edtech to bounce back from its short-term challenges once funding improves, given the evergreen demand for learning, some experts say.

In its glorious days, this much-touted segment saw an influx of investments to the tune of $4.1 billion in 2021, almost doubling over 2020 and growing nearly seven times since 2019. Close to three-fourths of this came through late-stage deals, suggesting a focus on more established firms. Two edtech firms featured in the top five funding rounds among all Indian technology startups that year: Byju’s ($864 million) and Eruditus ($650 million), data from financial aggregator Tracxn shows. The segment also went on an acquisitions spree.

Soon the tables turned. A pall of gloom descended as the world returned to normalcy with a looming recession that made investors wary. They tamped down on investments and funding plunged over 90% in the post-pandemic period. “The drying up of funding and the reduction in mergers and acquisitions (M&As) reflect a broader market correction and a more cautious approach from investors, who are now seeking evidence of long-term viability and profitability rather than just rapid growth," said Karan Gupta, co-founder and director at Kapso, an M&A firm for small-scale enterprises.

Not frothy anymore

Earlier, with money sloshing around, valuations ran through the roof. But as differentiation became key, edtechs finally got a reality check as many saw sharp corrections, even outside India. “Most seasoned and insightful investors and founders knew that the surge the industry saw during the covid years was unsustainable in the regular course," said Ravi Bhushan, founder and chief executive officer of BrightChamps, an edtech firm. “A correction in the growth trajectory was bound to happen, and, again, most long-term players were prepared for it, and had planned for it."

Some key edtech players have seen significant drops in valuations. Several factors are at play, one of them being possible regulatory risks in the future. “Apart from saturation in certain segments that caused increased competition and pricing pressure, changes in government regulations and policies could impact the operations for edtechs, which could impact growth prospects and valuations [further]," said Minal Anand, founder of GuruQ, an edtech firm.

Downsizing days

As things go downhill, edtech firms have wielded the layoff axe. The sector had a nearly 42% share in all startup layoffs in India since 2022, as recorded by a tracker run by Inc42. The next on the list, consumer services had a 21% share. “A lot of the edtech business models were sales-driven and went on a hiring spree, which is normalizing now," noted Dinesh Singh, partner, Leo Capital. However, since many of those employees were on the cheaper side, the overall cost-saving may not be that high even though the numbers seem huge, he said.

Gaurav V.K. Singhvi, an angel investor, said that in the good times, companies hired a lot of staff with the hope of significant growth that didn't materialize. They believed the pandemic would never end, but when they had to lay off employees, it was viewed as a massive layoff, and this had a very bad effect on the industry, he added.

Sector outlook

Now the sector seems to be tailspinning into chaos. Altogether 712 edtech firms have shut operations since 2022—around 606 in 2022 and 106 in 2023. (But they are not alone, as far more companies closed down in the consumer, enterprise applications and retail segments). “The reliance on continuous funding rounds for expansion, rather than building sustainable revenue models, left many companies vulnerable when investor sentiment shifted," said Gupta.

However, undaunted by the fusillades, some companies could manage to navigate the troubled waters. “Those with strong fundamentals and the ability to adapt to changing market conditions are likely to sail through the storm and emerge as winners in the long run," Anand said. Looking ahead, the sector may see some consolidation, where stronger players with sustainable models may absorb smaller ones. “The future of edtech would likely involve more strategic partnerships between educational institutions, technology companies, and non-profits to create more integrated and comprehensive learning solutions," Gupta said.

 

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
more

topics

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App