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To summarize

• The Indian edtech sector is extremely promising on paper, given the country’s growing middle-class and cultural emphasis on educational excellence.

• The pandemic shone a light on the real-world use case of these edtech startups, which led to a VC funding bonanza.

• As VC winter set in, edtech startups reliant on VC funding rather than a reliable business model came crashing down.

• The sector has also been at the center of criticism, some arguing it cares more about its sales targets than providing actual educational value to its students.

A golden goose…

The potential of edtech in India would make any VC salivate. A massive market size (over 250 million students), a rapidly digitizing population, and the strong cultural importance of education all make the country rife with edtech innovation opportunities. India’s growing middle-class and overall richening population makes the target market more and more inclined to pay more and more for their kids’ education. Moreover, edtech startups are selling a product many parents consider a necessity. This enables them to play around with pricing, and as we’ll see later, has led to ethically questionable marketing tactics.

“The income inelasticity of education in India is estimated at 0.93 vis-à-vis other expenditure, implying that at any income level, Indians are more inclined to spend on education. Additionally, a National Sample Survey (NSS) on Household Social Consumption stated that there has been a 26 percent surge in out-of-pocket expenditure on education between 2014 to 2018.” - India Briefing

Edtech products also benefit from multiple attractive selling points. They can offer students bespoke learning experiences, compared to the one-size-fits-all model implemented in traditional schools. They can provide students in rural areas with top-notch education, directly on their mobile devices. Lastly, they can offer all of these services at a price far lower than top private schools, using the magic of technological ubiquity and scalability.

In India, edtech companies have positioned themselves on all parts of the education value chain, from kindergarten to professional upskilling. These categories can be described as follows:

• K-12: Supplemental education for kindergarten to grade 12 children

• Test preparation: Prep for the country’s national exams

• Online certification: Enables working professionals to add skills from reputable institutions to their resume

• Skill development: Helps professionals stay relevant in the fast-moving digital age

• Entreprise solutions: Supports companies upskill their employees

…. On steroids

The Indian edtech ecosystem has been flourishing for almost a decade now, riding on the opportunities and market size described above. Indian edtech startups are the descendants of so-called “coaching centers”, which have been part of the Indian education system for a long time. These coaching centers are supposed to give students an extra boost to perform well on competitive state exams. The need for these coaching centers was mostly born out of some parents’ dissatisfaction with the level of “traditional schools”, a sentiment edtech startups have also leveraged.

“The Indian edtech journey started in 2004 with the emergence of satellite-based education and smart classrooms. 2008 saw the start of e-learning with players like Extramarks, Khan Academy venturing into providing online education. 2015 was a game-changing year for edtech which saw the emergence of over 1,000 start-ups raising funding of over $125 million. Increasing awareness and disposable income led to the rise of the edtech market and attracted large investments. In 2018 Indian edtech firm Byju’s turned unicorn and now tops the list of 19 edtech unicorns in the world.” - Source

One event would flip the industry on its head, however. In 2020, Covid-19 would become the black swan that gave the golden goose steroids.

The pandemic led to the closure of schools across India and a subsequent need for supplemental online education, as parents worried their kids might fall behind. Indian edtech startups rushed to fill the void, their model now legitimized by the fact even top national universities had effectively become online schools.

What followed was an explosion in national and international VC funding. Combined with the overall euphoria of the 2021 VC market, Indian edtech startups more than tripled the amount they raised in 2021. Leading edtechs such as Byju’s and Unacademy went on an acquisition spree, in an effort to buy out competitors and expand to new markets.

Intoxicated with funding, founders in the space would commit mistakes, some of them forgivable some of them unethical, which would come back to haunt them as the funding winter set in.

Hubris

Edtech startups in India operate in one of the most impactful sectors there is. Indeed, their products are changing the paradigm for many students whose education path was pre-determined at birth. Through technology, these startups are democratizing access to education across the board, with an especially grand potential in rural India.

“Internet usage is another key driver that is likely to contribute to the rise of the edtech industry in the next few years. India is expected to have 900 million internet users by the end of 2025 with smaller towns accounting for 40% of active internet users in the country. With such vast penetration and growing partnerships between private and governmental agencies, rural India will become a hub for edtech in the near future.” - Source

This preeminent role and potential for impact gave Indian edtech startups what I call an “emotional monopoly” or in other words, an easy way to justify their mistakes by declaring that it was all for the greater good of Indian students. In the past couple of years, this feeling of impunity combined with their newfound VC war chest has led to problematic situations.

The first criticism directed at the sector has been the aggressiveness of their sales tactics, aimed at capturing an increasingly precious market share, buoyed by ever more impressive rounds of funding. This has led to unethical practices, such as sales reps playing on the emotional monopoly described above to sell unnecessary courses to well-intentioned parents.

This has led many observers to consider that edtech startups’ KPIs revolved more around sales targets rather than actual educational outcomes for the students they taught. These over-aggressive sales tactics, reported in some of the country’s top edtech startups such as Byju’s, severely damaged the reputation of the sector. Furthermore, the fight for market share led to cases of misleading advertising, culminating in the Advertising Standards Council of India (ASCI) even forcing controversial startup WhiteHatJr to take down some of its ads.

“Education is viewed as an aspirational tool that offers communities a path to social mobility. Therefore, even discerning parents are often under pressure to accept the ‘best solutions’ on offer for their children’s benefit. This pressure and information asymmetry lends itself to exploitation through unfair practices and marketing.” - Source

The piling level of complaints from parents all over the country has bubbled up into something the sector can’t ignore anymore, with the Indian government also adopting a more scrutinizing position. The Indian Ministry of Education even released an “Advisory to citizens regarding use of caution against Ed-tech Companies” at the end of last year, marking the end of edtech companies’ carte blanche.

Government advisory is often a precursor for tighter regulation. The main actors of the Indian edtech sector have thus banded together through the newly minted India Edtech Consortium (IEC), with the stated goal of self-regulating to show good faith and maintain the government’s support. The initiative has been met with skepticism by some observers.

“Will an IEC, for instance, stop an edtech from selling an overpriced and utterly useless course to an unsuspecting daily-wage labourer? The spiel, as we’ve all heard, is usually about how government schools suck, how children get left behind, and how this one product is a guaranteed hack. “Can you stop sales agents from showing up unannounced and tone down the aggressiveness of the sales tactic? Or from fooling unsuspecting consumers into taking loans they can’t afford?” asks an industry expert I spoke with. Edtechs can promise the world, but they answer ultimately to their investors.” - Olina Banerji, senior writer at the Ken

Funding frostbite kicks in

The reputational damage suffered by some edtech startups following the tactics described above was only the visible part of the iceberg. Inside many of these companies, the funding bonanza of 2021 led to an increase in competition, increasing the average cost of acquisition (CAC) in the space, enticing many startups to use less and less economically-viable ways to acquire users.

The latter created disastrous business models, solely dependent on continuous funding for survival. When the 2022 VC funding winter set in, it took down the worst-performing startups with it.

“When founders could no longer afford to increase their CAC, they began tinkering with revenues. The startups offered free trials, money-back guarantees, and, in some cases, even interest-free buy now pay later schemes. If nothing else worked, they began accepting payments as a percentage of future income! However, in a rush to land grab, the soil got destroyed. While they were willing to pay, customers started getting bombarded with freebies; they felt stupid to pay. - Source

As we say in French, “bad news never comes alone”. Indeed, 2022 has also been the year in which in-person education has returned to near-normal status, with schools opening up permanently. Since many edtech startups offer “add-ons” to a student’s education (and very rarely constitute their main source of education), canceling a subscription doesn’t necessarily represent a large opportunity cost for many parents.

In the K-12 sector especially, children’s longing for social interaction after 2 years spent alone in their rooms makes spending an extra hour in front of a computer after school less alluring.

Layoffs, shutdowns, and market stabilization

The confluence of these factors has led the Indian edtech ecosystem to embark on a brutal, yet necessary, stabilization course. The funding winter implies company consolidations, cost-cutting, and the search for a long-delayed path to profitability. Unsurprisingly, this has led to a dizzying wave of layoffs and shutdowns over the past couple of months, exemplified by cases such as poster child Byju’s laying off 5% of its workforce.

According to Inc42, 45% of the layoffs attributed to the Indian startup ecosystem this year came from edtech startups. To make matters worse, the funding winter is well underway and shows little signs of abating.

“Amidst all these, the sector is struggling to raise fresh funds. The funding raised by Indian edtech startups in 2022, so far, is hovering very close to the 2020-levels. While the sector had raised $3 Bn in the entirety of 2020, it has barely managed to pick up around $2.2 Bn in funding from investors in nine months of this year so far.” - Source 

The surviving startups are now foraying into offline education in an effort to counter the damaging (for them) return to in-person schooling. By opening up branded “coaching centers”, edtech startups are betting on providing the best of both worlds, namely the flexibility of online classes and the need for offline interactions felt by many students, especially younger ones.

If successful, this trend will usher in another aspect of the current market stabilization: the consolidation of the Indian edtech into an oligopoly. Indeed, if opening up offline is required to win the game from now on, only startups with sufficient cash in the bank will be able to survive. This will strongly favor major players such as Byju’s and Unacademy.

“Last year, Bengaluru-based Byju’s acquired Aakash Educational Services , a trusted 34-year-old brand that has over 70 physical coaching centers across India and specializes in training for competitive exams. The deal was reportedly valued at around $1 billion. On May 18, Unacademy announced its foray into the offline learning space by launching its first coaching center in Kota, a small city in Rajasthan, that is a hub for competitive exam preparation. The company also has plans to set up physical coaching centers in other Indian cities.” - Source

Conclusion

The edtech sector in India holds incredible socio-economic potential, equalizing the paradigm for many students who previously couldn’t get access to quality education simply because of where they were born. In a classic case of a bubble however, the sector’s extraordinary potential led to an overdose of funding, resulting in weak business models that would come crashing down as funding slowed. The continuous growth of the Indian middle-class and its continuous emphasis on education should keep the sector lucrative for the years to come however, on the condition it finds reliable business models.

Scandals ranging from unethical selling tactics to toxic internal cultures, all support the need for increased regulation. Still, the government is walking a tight-rope. It needs to regulate, understandably, to mitigate the excesses of these companies but needs to give them enough leeway to continue innovating and improve the lives of Indian students.

Lastly, a lot has been said about how these startups’ VC-backed model led them to focus on growth rather than actual educational outcomes for their students. In my opinion, this begs the question for a new definition of VC accountability. Just as startups are regulated by the government, the VCs investing in them should also be barred from pushing objectives that clearly go against the interest of India’s population.

The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories in our now-globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with your colleagues :)