Good morning! A big hello to readers who signed up this week. Welcome to The Intersection, The Signal's weekend edition. This weekend we talk about India’s edtech boom that is fading. Also in today’s edition: we have curated the best weekend reads for you.

Around this time last year, we were living through the heady days of dizzying valuations, acquisitions, and unicorn sprees in India’s education technology (edtech) ecosystem. A deadly second wave of Covid-19 had made things uncertain, and the promise and inevitability of edtech had seeped into the collective subconscious.

Amidst all this, there was a deal that got tongues wagging in VC, founder, and analyst circles. Each saw value in India’s oldest and largest edtech unicorn, Byju’s, doling out nearly $1 billion for a 33-year-old West Delhi-based test prep chain named Aakash Educational Services.

Fast forward to today—nearly a year to the day (June 8, 2021) when the Competition Commission of India cleared Byju’s mega purchase—India’s edtech ecosystem looks fragile, unsure of the next growth curve, and a long distance away from steady revenue streams and profitability. This was, after all, a $3-3.5 billion market that was pegged to grow to a $30 billion industry over the next ten years, according to oft-cited industry estimates.

A reductive take on the current state of edtech pinpoints the return of the “new new normal”, where schools have opened up and edtech solutions have now become complementary rather than fundamental to education.

But beyond that, the story of India’s edtech boom-bust cycle is companies prioritising growth over the initial promise of making education a more outcome-based learning experience. To quote a VC who spoke to The Intersection on condition of anonymity, companies were more focused on “market share capture and couldn’t deliver outcomes. To that extent, the value unlock potential still exists.”

“And since a lot of the customer acquisition cost has been funded through investor money, these companies have no choice except to get close to being profitable,” he adds.

Education is unparalleled in its assurance of social mobility and a total addressable market that spans age, purchasing power, class, and strata. But edtech funding became synonymous with reality distortion; investors ploughed around $4.7 billion into Indian edtech startups in 2021 alone. After all, they saw a perfect storm brewing in the form of growing internet and smartphone penetration, and external conditions such as Covid-19 shifting education online. 

But few considered the post-pandemic world.

“It was a lot like Coca-Cola re-entering India in the early ‘90s. They identified a middle-class market of 400 million to 500 million Indians, and yet, it took them more than two decades to crack it,” says an analyst who follows the edtech industry. He requests anonymity due to his nature of work.

“The market exists but doesn’t also exist. That’s because no one really knows what the market is about,” he adds.

Pull versus push

As India rebooted, edtech companies catering to the K-12 (i.e. classes kindergarten -12) space, such as Lido Learning and Udayy, shut down. Vedantu and Unacademy laid off a great number of their workforces, scrapped certain plans, and pivoted to offline and other sustainable models of distribution such as recorded learning (as opposed to live learning) due to rising costs. Reading the tea leaves, Unacademy shut down its K-12 business in March, The Morning Context reported.

The brunt of this reckoning will be borne by K-12 edtech startups. Not merely because schools are reopening, but because this is a “push” product, with heavy monthly burn, primarily on customer acquisition costs (marketing). K-12 products and services require hard selling to a customer (parent), who is not the end user (child).

This is also where edtech companies got a bad rep— for cutting corners with a sales-first and growth-at-all-cost mentality while deprioritising learning outcomes. To quote the edtech analyst: “It was a result of a founder who used aggressive sales to build a growth and valuation engine.”

The founder is Byju Raveendran, whose “DNA defines the sector. You can have multiple e-commerce winners in China, but it is Jack Ma who defines e-commerce there. It is the same with Byju’s here,” he adds.

The next phase of Indian edtech will be defined by “pull” sectors such as test prep and executive education. The demand, most VCs say, will continue to exist because of a need for learning outcomes. A chief example is people vying for administrative or government jobs. Ditto for upskilling, which in some professions is integral to career progress. Byjus’ acquisitions of Aakash and Great Learning become pivotal here, while Unacademy is doubling down on Relevel, a hiring test platform.

But what also awaits these companies in the “pull” sector, is the rise of hyper-local, traditional offline test prep institutes with a strong peer-to-peer name ID and market reputation. These companies were long biding their time, oftentimes rebuffed approaches from the Byjus and the Unacademy of the world, while becoming profitable.

Now, these institutes are going online, and inevitably, they’ll end up chipping away at the big boys. In fact, some Kota-based institutes, sources say, are actively hiring engineers laid off from some of these edtech unicorns. Even cracking offline with customer behaviour shifting there, won’t be easy.

This is why Byjus’ purchase of Aakash was pivotal and strategic. It was the missing piece in the edtech giant’s puzzle. It is also why Unacademy has launched experience centers and is planning to take the offline route too, starting where else, but Kota. This is also why Uday Shankar and James Murdoch-backed Bodhi Tree Systems invested a whopping $600 million in Kota-based Allen Career Institute last month.

Valuation conundrum

Gaurav Munjal, the co-founder, and CEO of Byju’s rival Unacademy couldn't have spelt it out in clearer, if not starker terms. “Winter is here. We must change our ways. We will focus on organic growth channels instead,” Munjal wrote in an email to his employees, warning that “funding will dry up for at least 12-18 months.”

This also means the days of frothy valuations may, at least momentarily, be a thing of the past. Many of those befuddling valuations—Byju’s at $22 billion, Unacademy at $3.4 billion, and so on—came on the back of pandemic-spurred growth. Valuation multiples in edtech went as far as 10x, which in layman’s terms means that if you show a revenue growth of 10x, you get valued at 10x.

Was this an anomaly? Not for Akshay Chaturvedi. Chaturvedi is the founder and CEO of LeverageEDU, a New Delhi and London-based edtech company.

“If you look at Chinese edtech companies, they always raised at high single-digit multiples,” he tells The Intersection. “So this wasn’t out of the ordinary at all.”

But the VC quoted above says the froth is long gone; not just in edtech, but even beyond. “You are now looking at de-growth because things have been slowly trickling back offline over the last 6-7 months. It’s also harder to raise [funding] at this time.”

“Unless it's a hand-to-mouth situation, you swallow your pride and end up raising a down round [smaller valuation than the previous round]. Indian founders tend to avoid this unless it’s a distress situation,” he points out.

Alternatively, models such as that of PhysicsWallah may offer a new playbook. The recently-minted edtech unicorn has low user acquisition costs and a high conversion rate, which industry estimates peg it at over 60%). Its YouTube channel today has accrued 6.9 million subscribers, with a growing fan base for founder Alakh Pandey’s teaching style, besides earning ad revenue through views on his channel from users that can be described as high-intent.

But what is equally disruptive, is the pricing, something Pandey has consciously deviated from as compared to the Byjus and the Unacademys. With sachet pricing (approximately Rs 3500-4000 for course-based modules, and a robust distribution channel in tow. PhysicsWallah seems to have disrupted the market. Pandey is the rare edtech founder who’s managed to build a profitable business while turning down a Rs 75 crore salary from…Unacademy.

In a down market cycle, investors look at a company’s ability to survive winters. You are a safe bet if you’re already profitable.

Creative destruction

With the pandemic nearly wearing off and a funding crunch in place, Indian edtech companies will be forced to enter what economists call a “creative destruction” phase. Creative destruction catalyses the “dismantling of long-standing practices in order to make way for innovation.”

In the chaotic short-term, founders will have to pick between survival or growth. Whether they will rise from the ashes or succumb to it depends on the stark choice they make. A lot of this will hinge on considering tech-led hybrid models, or one where outcomes are prioritised over growth.

“I think there is a bull case for edtech, but it will have to be a more long-term view, a ten-year horizon. I can see an export market coming out of India, where there is a global market for educators,” says another VC on condition of anonymity. “Education, on the other hand, is a slow process. You can’t solve it by compressing two years. But I am confident that something good will come out of this.”

Education is a difficult challenge to solve. As LeverageEDU’s Akshay Chaturvedi says, “It’s a trust business after all.”

ICYMI

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