10 min read.Updated: 30 Jun 2020, 01:35 PM ISTMihir Dalal
The boom in online education might yield profitability, rare in the startup space. But for how long will this last?
The flood of new capital is leading to a spending binge. And while the pandemic has brought millions of news users online, it’s impossible to predict how many of them will stick over time
Until recently, salespeople at Lido Learning, a new education startup, would often be cut short by potential customers as soon as they heard “online tuitions." Of the parents who didn’t hang up, only one among three would end up buying a subscription. By March, Lido Learning, whose teachers give math, science and English lessons over the internet to students from grade IV-IX in real time, had sold just 2,000 such subscriptions in the first year of its launch.
Over the next three months, the company doubled subscription sales. Students now spend 90 minutes every day on the platform, up from an hour earlier. Selling has become easier for its 200-strong sales force. Instead of explaining the concept of online education to customers, all the company needs to do now is to convince them how “we’re better than others," Lido Learning CEO Sahil Sheth said.
Another startup, Vedantu, which is the market leader for live classes within K-12 (kindergarten to XII grade), was overwhelmed by the flood of new customers in early April, triggering an acute shortage of teaching assistants. Instead of 300-400 students in every class, the company’s teachers were now instructing 1,000 students. In May, 1 million students took live classes on Vedantu, up from 200,000 in normal times.
Only a small fraction of these were paid users, but monthly revenues still jumped by more than three times from January, CEO Vamsi Krishna said. “What was happening in a year’s time in terms of growth happened in three months’ time," he said.
The pandemic-driven expansion in online education has been so broad that it’s hard to find an education startup that hasn’t followed a similar trajectory. From market leaders to smaller startups, entrepreneurs are certain that this is the defining moment for the sector.
Education has always had a quasi-religious importance in India, as a degree is seen as the only means to prosperity. With schools and colleges shut, entrance exam schedules in disarray, offline classes inaccessible, parents and students are fretting about the future even more than usual, prompting them to try out online tuitions like never before.
“Usually, when a new category is being created, companies have to spend hundreds of millions of dollars on advertising over 8-10 years to get customers to shift from offline to online. In the case of edtech, this is happening super-fast because of the lockdown and because all the schools have gone online," Lido Learning’s Sheth said.
Entrepreneurs and investors tend to divide the online education market into two segments: K-12 and post K-12. Both segments, which in turn have many specialized verticals, were anyway growing rapidly. The pandemic has greatly accelerated this expansion. By 2022, the K-12 market will expand by six times to about $1.7 billion, while the post K-12 market will increase by about four times to $1.8 billion, according to estimates by RedSeer Consulting.
On cue, investors are lining up to pick up stakes in education startups. Byju’s, Unacademy and Vedantu, three prominent education startups, are all raising large quantities of capital at soaring valuations. More than a dozen smaller startups, including Lido Learning and WhiteHat Jr, are in talks to raise anywhere between $5-50 million.
The most exciting feature of this sectoral boom is the hope that apart from rapid growth it could yield something that has eluded other sunrise sectors: profitability. If education firms avoid destroying their fat margins in the race for users, they could leapfrog their bigger and older internet peers in generating shareholder returns.
However, it is far from certain if the education startups can continue unimpeded towards realizing their promise. The flood of new capital is already prompting companies to rush into new categories, binge on marketing and hire freely—behaviour that tends to lead to value destruction. And while the pandemic has brought millions of news users online, it’s impossible to predict how many of them will stick over time.
Online education is a far more varied sector compared with other internet businesses, but the biggest categories are naturally those linked to better job prospects. Hence, within K-12, the most popular categories are math, science and English. There are firms that teach coding to children, provide doubt-solving services, and have platforms for extracurricular activities.
The post K-12 category is even more diverse although it has two large segments: higher education and test-preparation, which includes tests for engineering colleges, Union Public Service Commission (UPSC), the Common Admission Test (CAT). Separately, there are B2B startups that sell software to coaching institutes and schools to enable their digital operations.
According to data with Tracxn, more than 500 education startups have received angel or institutional funding in the past decade in the K-12 and post K-12 categories. Dozens more are expected to crop up this year. To be sure, most education startups aren’t trying to replace schools and colleges; they are trying to shift the offline tuition market online.
Since India has an acute shortage of qualified teachers, especially in smaller cities and towns, a majority of online customers come from tier II cities and below. For instance, non-metro cities account for more than 70% of the paying subscribers at Vedantu. In metros, standardized content and the convenience of being able to learn from homes draw users.
Though customers are spread out geographically, a majority of them are upper or middle-income families, as subscriptions tend to be pricey, ranging typically between ₹12,000-30,000 annually in K-12; fees are even higher in post K-12.
Now, some startups are finally trying to sell to lower-income families. “(This segment) will require a completely different product, completely different pedagogy, and a very simplified UI (user interface) like WhatsApp and TikTok," said Aditya Singhal, co-founder of Instasolv, a new startup that plans to cater primarily to lower-income students in tier III cities and below. “And the product will have to be delivered in vernacular languages rather than English."
The likely winners
In the crowded field, some clear market leaders have emerged: Byju’s and Vedantu in the K-12 category and Unacademy in the exam preparation market for older students. Already, there are clear signs that the three companies are seeing a sharp acceleration in growth, further pulling away from the rest of the market in K-12 and test-preparation.
In March, Byju’s saw a dip in revenues, as many of the company’s salespeople were unable to meet potential customers in person. But after an advertising blitz, monthly revenues jumped to ₹375 crore in May and will be close to ₹500 crore in June, more than double the pre-covid levels, chief strategy officer Anita Kishore said. “From introducing courses in vernacular languages to launching more subjects, we will continue to strengthen our offerings and penetrate further into India to address learning needs of all students. Given the current demand, we plan on accelerating several launches this year," Kishore said.
Last week, Byju’s, the only edtech unicorn at present, raised capital at a valuation of $10.5 billion, up from $8 billion just four months ago. If the company, which is also expanding in the US and other international markets, keeps up its momentum, it will surpass Paytm, valued at $16 billion, as India’s most valuable internet startup. Unacademy and Vedantu, valued at $500 million and $300 million, respectively, are expected to join Byju’s in the unicorn club soon. “All the top players are getting enormous inbound interest from investors," Vedantu’s Krishna said.
In addition to raising large amounts of capital, Byju’s, Unacademy and Vedantu are buying up smaller edtech firms. And though the edtech market has two distinct categories, Byju’s and Unacademy are trying to straddle both. New capital will not only intensify competition between the top players but also see a bunch of smaller verticals create niches.
What helps the cause of the verticals is that edtech is unlike e-commerce or transportation or food delivery where duopolies have emerged on the back of disproportionate capital, leaving very little room for others to build even mid-size businesses. That ed tech already has a proliferation of mid-size companies is proof of this. Under-the-radar companies like Great Learning, a technology learning platform that hasn’t raised venture funding, can boast of annual revenues of hundreds of crore of rupees.
Students learn in different ways—apart from learning categories, even learning formats vary. For instance, some startups offer live classes, some recorded, and some both. Live learning can be one teacher per student or one teacher for many students, and so on. This inherent variety in the way lessons are imparted and learnt means that one or two platforms cannot build dominant positions to the extent that their peers in other internet niches have, entrepreneurs and investors said.
There are two distinct student profiles based on the seriousness of students, according to Lido Learning’s Sheth. One, from classes I-IX, where students are not dead serious about education. The other category comprises students in XI-XII and beyond, a phase in which they get increasingly serious about their careers. These two categories necessarily require different treatment.
It’s “just not possible" for any single firm to take up more than 15-20% of the market in edtech, unless they keep buying companies, said Akshay Chaturvedi, CEO of Leverage Edu, a higher education startup. “Within a single category like K-12 or post K-12, a single student tends to use multiple platforms at the same time. The variety is too much for one company to offer everything," he said.
Karthik Reddy, managing partner at Blume Ventures, an early-stage investment firm, added that over the next two years, there could be as many as 15 mid-sized and large education platforms backed by venture capital. “Beyond the next two years, it’s impossible to predict how the sector will evolve because it’ll depend on whether all these companies are able to show real profits," Reddy said.
While India’s consumer internet startups have raised tens of billions of dollars over the past six years, most of them are nowhere near profitability—apart from Byju’s. In the year ended 31 March 2019, the company reported a standalone net profit of ₹20 crore on revenues of ₹1,341 crore (it still reported a net loss on a consolidated basis). The next year, Byju’s revenues doubled to ₹2,800 crore (its latest bottom-line figure is not yet available).
That Byju’s achieved profitability just four years after becoming an online platform (it had started out as an offline tuition centre) shows that edtech is potentially a profit mine. Gross margins in education range between 50-70%, many times higher than spaces like e-commerce or food delivery, where logistics operations and spending on discounts eat up cash.
“Education is not a discounting play. Despite the increase in competition, there’s been no need to lower price points as people are more than willing to pay for quality," Lido Learning’s Sheth said. The entrepreneur profile in the sector is different too. Many founders have spent close to a decade or more in the space, establishing a collective expertise that few of their internet peers can boast of.
To be sure, edtech startups won’t have it so easy forever.
Once the pandemic passes, many users may simply go back to offline coaching, preferring the in-person interactions that are thought to be crucial for holistic learning. Plus, offline coaching classes are scrambling to go digital, and a few of them are bound to find success.
Startups may also soon face competition from international firms like ByteDance’s TikTok as well as Reliance Jio, which has been expanding in the sector in both K-12 and post K-12, mostly through its acquisition of Embibe. Jio has also bought two other edtech startups, OnlineTyari and Funtoot, and plans to continue buying more companies in the space.
For now, investors remain confident that edtech will buck the trend of other internet booms and produce profitable companies, provided that most entrepreneurs limit their ambitions.
“Big companies like Byju’s and Unacademy can afford to take risks and splurge cash because they have unlimited capital, but the others will need to show more discipline," an edtech investor said, on condition of anonymity.
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