Mint Explainer: India's edtech crisis may be more severe than appears

With the global macro-economic crisis and offline coaching centres resuming classes after the pandemic, the edtech sector has plunged into a crisis. Well-funded unicorns are being forced to become leaner and meaner even as they expand into physical classes.

We tell you why the tide has turned so swiftly for the poster boys of the edtech revolution.

What created the edtech valuation boom?

The pandemic upended the private tutorials in India. As physical classes became impossible, many smaller coaching institutes had to fold. But a crisis is often an opportunity as well. The pandemic paved the way for the emergence of a new boy in town—the online-coaching startups or the edtech model.

Even though edtech appeared tailored for the pandemic, it wasn't an entirely new concept. In fact, between 2014 and 2019, almost 4,500 edtech start-ups were born, many dying premature deaths and only about 5% managing to raise funds to expand. Most of these edtech ventures have focused on test preparation (from K-12 to entrance exams), and online certification.

Launched way back in 2011, Byju’s immediately became the poster-boy of edtech in India and rapidly expanded during the pandemic, organically as well as inorganically. It became India’s first edtech unicorn in 2020. Unacademy became the second in the same year. UpGrad, Vedantu and Eruditus also vaulted over the $1 billion valuation soon after. Very recently, Physics Wallah has joined this elite club.

These success stories spawned many more edtech start-ups. By the end of 2021, the industry had a market size of around $2 billion. Edtech soon popped high up in the list of the most funded sectors in India—at No. 3.

Funding winter and beyond

The big boys in edtech had seen it coming with dark clouds hovering over the global economy as central banks sucked out easy money from the markets.

Unacademy expected a funding winter for the next two years, said co-founder and CEO Gaurav Munjal in a letter to his employees at the end of May. "We must survive the winter," urged Munjal, asserting cost-cutting would become the mantra at the unicorn. Unacademy has been trying to right-size, laying off many staffers. It has given marching orders to 600.

"Capital will be scarce for upcoming quarters," confessed Vedantu co-founder Vamsi Krishna in a blogpost, also in May, attributing it to the global macro-economic turmoil, with the war in Europe and the hawkish stance of central banks. Vedantu laid off around 400 employees in May, about 7% of its workforce.

Byju's has been more circumspect in its public statements, claiming it's still a net hirer and would continue to expand. But it's obvious that the times have changed for it as well. It has been kept waiting for funds by Sumeru Ventures and Oxshot, which had committed $250 million to the company. The company said it was due to "macroeconomic changes" and the capital would flow in by August. Meanwhile, founder Raveendran has already contributed 50% to the latest fund raising round of $800 million, signalling his commitment and confidence in the long-term prospects of the company. Byju’s has retrenched at least 500 from its group companies Topper and Whitehat Jr, and that may well be a conservative estimate.

Not that, as we said, the funding tap has completely turned off. In recent weeks, Physics Wallah joined the unicorn roster while upGrad doubled its valuation in its latest fund-raising round in June. But clearly, investors are tightening their belts, scrutinising business models closely, and becoming more conservative on valuations. So, the profitability of startups will be under the lens, even though funding lines remain open, often through follow-on rounds.

The return of offline tutorials

Was the unabashed romance of Indian edtech companies by investors too over-the-top, a premature celebration of the edtech model? As the world gets back to its old routine with the pandemic retreating, the online model appears to be faltering. With the physical classes resuming, the allure of the online model has started dimming. None of these edtech superheroes are listed yet, making it difficult to predict the extent of a business slowdown and its impact on P&L and balance sheets, but the initial round of layoffs seems a bad omen.

The problem for edtech ventures simply is that the customer acquisition cost (CAC) is rising sharply as the pandemic recedes and offline coaching centres make an aggressive pitch for clients. To stay in the game, edtech start-ups are being forced to invest heavily in marketing and sales to become visible in the tier 2 and tier 3 cities, which has almost doubled the CAC for them now—from about 40% of revenues during the pandemic to about 80% now, according to some estimates. As costs keep soaring, online companies are being forced now to become leaner to survive.

While the online model has its advantages—little infrastructure or staffing constraints—it is difficult to match the advantages of personalised attention and group studies that the offline model offers. Not surprisingly, edtech companies are queuing up now to build a physical presence as well and offer hybrid courses. Byju’s was the first off the block. It bought Delhi-based Aakash Educational Services last year for $950 million. Aakash has a pan-India network of 200 centres, and Byju’s hopes this would help it build a formidable offline presence. Unacademy is offering physical classes as well through Unacademy World and Unacademy Centre for its civil services, JEE and NEET aspirants. Physics Wallah and Vedantu too have plans to build offline presence.

Can Indian start-ups tap the global edtech market?

To keep private-equity investors interested, some of the Indian edtech companies are eyeing the developed countries for growth. The US is a market a few Indian ventures are exploring. It's a promising prospect—online education is already an accepted model in many developed countries, and the start-ups would be earning in dollars.

Bjyju’s Future School will expand in the US, UK, Australia and beyond. Byju's-owned Great Learning too is expanding in foreign shores, such as the US and Singapore, through acquisitions. Bengaluru-based math and coding tutoring startup Cuemath wants a presence across 100 countries including the US, the UK, Canada, Singapore, Dubai, Qatar, Australia and New Zealand. Many others too are exploring the global market.