As they say, ‘never say never’. After more than half a decade of tepidness, education technology or edtech sector is finally coming out of its closet to claim its share of investors’ money. Its total deal value saw an acute rise from around $130 million in 2015 to more than $170 million so far this year, says Nasscom-Zinnov start-up report 2016. But what held it back?
Despite being out of investors’ radar for so many years, Indian edtech start-ups ranked second after the US with six per cent share of the total edtech deals globally between 2011 and April 2016, as per start-up deal tracker CB Insights. The US accounted for 67 per cent of the total deals while China came third with five per cent.
Cracking the Code
This makes one fact clear that edtech is inherently a tough sector to crack globally and hence has kept investors at bay. One reason for that is unlike e-retail, foodtech, cab hailing service, etc., where purchase decision happens instantly, edtech sees a long period, from days to months, to buy a product or service. This stretches revenue cycles with very less volume.
“The sector is tough but large nonetheless. For middle and uppermiddle- class Indians, the biggest spend is rent and EMIs, followed by education. Since Indians are highly value-driven, it takes a long time to close the sale,” says Zishaan Hayath, Co-founder, Toppr – an online test preparation platform, founded in 2013, in Mumbai.
More importantly, edtech start-ups have to develop trust among customers and educate them about its benefits, unlike other sectors which had latent demand and hence saw hyper growth once they came into existence. On the other hand, edtech entrepreneurs for so long have focused on hyper growth by getting more and more users instead of a paying user, which fizzle out very quickly.
“The hyper-growth mindset doesn’t work in edtech because unlike e-retail or cab business, edtech is about habit creation and developing trust instead of having latent demand. So, it is not that people were waiting for services that Toppr offer. Also, you have to trust that the product before spending on education, unlike food and cab which are deadline driven,” adds Hayath.
That’s probably the reason why much of the deal volume in edtech falls under $1 million bracket with a scanty Series B and C deals. The pockets of opportunities that have gained ground include test preparations, tutorials and professional training where we have seen few large ticket deals. Moreover, education is a long-haul business, at least six-seven years to have a good number of volume, unlike e-commerce, something that wasn’t exciting for investors to bet on.
“Education hasn’t seen as much investor interest as in retail, food, logistics, etc., because any education business is a long term business. It takes time to become a brand and get paid customers. The sales cycle is long too. Hence, investors haven’t been bullish on edtech,” asserts Krishna Kumar, CEO, Simplilearn. San Francisco and Bengaluru-based Simplilearn offers online professional certification courses.
“Education has always been the core segment but technology and data is yet to make the real intervention in the sector. Even though online learning is slowly warming up but focus has to be on ‘education first and technology as an enabler’, only then will be the real impact of tech-enabled learning,” says Byju Raveendran, Founder and CEO, BYJU’s – Bengaluru-based learning app for K-12 and competitive exams launched in 2015.
Edtech – 2011 of E-commerce
Apparently, there is a lack of understanding among the entrepreneurs to get the business model right in education. After all, education in itself is quite an all encompassing sector wherein retailing school uniforms and accessories, used books, teaching foreign languages etc., also comes under the common umbrella of education. In between comes the question of value proposition, which if not visible to customers, makes your efforts futile.
“The business model is where edtech start-ups go wrong. They pitch education institutes in a business-to-business way to adopt their products or services. They are not able to show the impact they will create on, let’s say, schools or colleges in terms of increasing revenue or recognition of the institute,” says Rishi Kapal, CEO, EduGild – start-up accelerator for edtech start-ups, launched last year. EduGild currently has 11 start-ups. Another problem area is in product testing. “There is no ready-made ecosystem where you can tests the product and refine it for the right product market fit,” adds Kapal.
In a way, the sector will still take at least three-four years to leapfrog. Edtech of today is where e-commerce was in around 2011, when large cheques were written few and far between among few players like Flipkart, Snapdeal, Zomato, and Ola. Those players in edtech today seem to be BYJU’s, Simplilearn, Toppr, and CultureAlley.
“There are challenges around infrastructure including how students can consume content online because that’s still in an early stage if you see beyond metro cities,” believes Raveendran.
However, the good thing is that edtech companies will be profitable with much lesser capital unlike e-commerce where though volumes are there early on but the challenge is of margins. In contrast, edtech doesn’t have margin problem but lacks in volume. Once the volume is there, revenues will start flowing in. So, capital efficiency of edtech start-ups will also be higher than other start-ups. In addition, the sector doesn’t have a global player like Uber and Amazon to eat away edtech start-ups’ share.
(This article was first published in the December issue of Entrepreneur Magazine. To subscribe, click here)