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Online edtech startups negotiate the learning curve

The online education space in India is at an ebb. Has the market reached a saturation point?

Dec 6, 2018 by Avanish Tiwary
Online edtech startups negotiate the learning curve

Graphics by Sujith Sukumar/ The Passage

In June 2015, the tech-based education startup EduKart received USD 1 million in Series A funding from investors including 500 startups, United Finsec, YouWeCan, Sasha Mirchandani of Kae Capital and Paytm founder Vijay Sekhar Sharma. Edukart couldn’t have asked for a better start.

Yet, a year later, Paytm acqui-hired the startup in September 2016. Ishan Gupta, co-founder of EduKart, joined Paytm along with his 50-member team. “EduKart, launched in 2011, was ahead of its time. We couldn’t scale up once the honeymoon period was over,” he added.

Cut to present, Ishan Gupta is the Managing Director, India of US-based edtech company Udacity.

“I am still an entrepreneur. The only difference is, at EduKart I built the company from ground up, while here I have the opportunity to run a global brand in India with access to the best training programs in online education,” said Gupta.

Gupta has learnt his ropes in the school of hard knocks. It’s a tough industry and patience is critical, he said.

Bengaluru-based Vedantu provides online tutoring to students from grade 6 to 12 (K-12). It took three years before the startup finally secured USD 11 million in Series B from Omidyar Network and Accel Partners in November 2018.

Vedantu plans to use the proceeds to expand to tier 2 and 3 cities and launch crash courses for GMAT and GRE.

“Raising funds was a tiring process. We talked to a host of investors before Michael & Susan Foundation saw merit in what we were doing. Our investor focuses on social impact startups and education is one sector which interests them. We are lucky to have their backing,” said Arshan Vakil, co-founder and CEO of Kings Learning.

Kings Learning raised USD 2.5 million in August last year from Michael & Susan Dell Foundation and other US-basedtech investors.

Graphics by Sujith Sukumar/ The Passage
Graphics by Sujith Sukumar/ The Passage

The state of play

According to a joint study by Google and KPMG, the online education sector in India is estimated to grow at a compounded annual growth rate (CAGR) of 52% to USD 1.96 billion by 2021.

However, such optimistic projections warrant a reality check.

In 2018 (as of 3 December), the number of investments in the edtech space plunged to 47 compared to 64 and 79 deals in 2017 and 2016 respectively, the data from research platform Tracxn shows.

However, regarding the total amount of money that came in, the difference is marginal—USD 173 million in 2018 as opposed to USD 184 million in 2016. Byju’s, Unacademy and Vedantu accounted for 76% of the total funds.

This year, half of the startups failed to even raise USD 2 million.

“The online education space won’t see one market leader. The fact that it’s a fragmented market makes it a difficult sector to be in. One model does not fit all. You have to build a scalable company that can deliver to different student demographics,” said Gupta.

“At an investment level, we are not looking for incremental innovation over existing Edtech companies,” said Rahul Chowdhri, investment professional, Stellaris Venture Partners. “We keep looking for founders who can come up with new ideas.”

Revenue model

The startups have a hard time to scale up their businesses. A solid revenue model and lack of breakthrough innovations are dragging down the industry.

In April, Reliance bought 72.69% stakes in Bengaluru-based Embibe for USD 180 million. Online tutoring platform Embibe, backed by Kalaari Capital and Lightbox - claims to use Artificial Intelligence to develop teaching modules for K-12 category, vocation courses, languages, etc.

Will AI make a difference?

“Both yes and no. AI is not a magic wand. It may be useful in areas like language training and translation. But the real question is, where will you apply it?” asked Sajith Pai, Director at Blume Ventures (an investor in Unacademy).

“I think there are a lot of edtech companies offering free products to get users. In online education, it is little difficult to come up with the right pricing, especially for live classes as we have to pay teachers as well. We have to make sure the customers don’t flinch at the price tag,” Vakil from Kings Learning said.

Kings Learning’s app Enguru, which enables users learn English, was free until October. It managed to get 2,000 paying customers out of two million monthly users.

Edtech startups also tie up with companies to help upskill their staff.

“We are in partnership with 35 enterprises currently in industries such as retail, hotel industry, banks, etc. We made separate tutorials for 7,000 employees of Westside stores across India,” said Vakil.

He claimed 25,000 employees of different companies had benefitted so far from Kings Learning. Similarly, Udacity has partnered with Infosys, Flipkart, Myntra, Wipro, etc. to the same end.

Gupta said it would take some time before edtech companies can come up with an air-tight revenue model. “This is a journey that every company has to go through,” he added.

Sajith Pai said edtech is a tricky sector for investors. “It’s a great sector for the consumers but not investors. That said, we cannot completely write off edtech. Making big bucks is hard. Also, the investors do not have the patience to wait for the revenue models to click. The (trend) is not apparent outside.”

He further said, though India looks like a big market for online education, it really isn’t.

“For Indian students, offline tuition centres work. The large market share physical tuition centres such as Aakash Institute, FIIT-JEE, etc. have here is proof,” Pai said.

And Vakil conceded the point. “Tech has not reached the place where it can replace the teacher yet, but it’s getting pretty close,” he said.

Pai’s observation is grounded in statistics: India’s per capita income is USD 2,000 with only 100 million consumers willing to pay for online services. The number of students who take online classes is around 14 million of which only 10% take JEE. Of 1.4 million, only 50% are committed, and offline coaching eats big into the market share. “The market isn’t as large as we think it is,” he says.

All is not well in China too.

A total of 30 online edtech firms are listed in China and three in NASDAQ. Of all the players in edtech space, only 5% has turned a profit. While 10% managed to break even, 70% is still in the red and the remaining 15% is staring at bankruptcy (according to a 2016 report by CCTV).

Moreover, the Chinese revenue model is nothing to write home about. The first NASDAQ listed K12 English online education startup 51Talk recorded a net loss of RMB106.1 million (USD16.9 million) in 2018 Q1. The stock price dropped by over 40% this year.

It’s a classic case of diminishing returns for K12 startup Yuanfudao. Just 1% of Yuanfudao’s users were paid subscribers. The product line is failing, said CEO Li Yong.

Against the run of play

The poster boy of Indian edtech, Byju’s, started its life as a tuition centre in 2011. Byju’s pivoted to online education in 2015. Currently, the startup has locked into a model where the offline and online complement each other.

The Tencent-backed company is said to be in talks to raise USD 200-300 million at a valuation of USD 3.5 billion. If the deal goes through, Byju’s will become India’s fourth most valuable startup.

“The segment that Byju’s has gone after is big and they have been able to do well. Cuemath and Unacademy are also doing well,” Chowdhri from Stellaris said.

Byju’s provides K-12 coaching classes and runs two separate apps. Byju’s flagship app is for classes 6-12 while the other app is for students in grade 4 and 5. A Byju spokesperson claimed the company has 1.7 million paid users.

Gupta believes, entrepreneurs will keep betting on education space. “The sector offers a huge opportunity to build billion dollar companies,” he said.

(Ruiyao Luo contributed to this story)

Avanish Tiwary

Avanish Tiwary is a Bangalore-based tech journalist. He focuses on emerging Indian startups and unicorns. He can be reached at avanish.tiwary@thepassage.cc.

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