By Hilary Schmidt, International Banker
In mid-September, Byju’s, India’s most valuable education-technology (edtech) startup, reported substantial losses for the financial (fiscal) year 2020-21 (FY21) after its parent company, Think and Learn Pvt, finally released its financial statements following an 18-month delay. Byju’s reported an official loss of INR 4,588 crore (around $570 million), which was a massive 1,880-percent jump from the INR 231.69-crore loss reported in the previous year. Such underwhelming results have illuminated the severe problems the edtech sector has experienced over the last year, as the country moves into a post-pandemic phase and pupils return to school.
With the pandemic forcing school shutdowns across India, demand for online tuition in the world’s second-most populous country skyrocketed from early 2020 onward. Education thus made a seismic shift away from the classroom during this period and into the digital realm, prompting the rise of a multitude of edtech startups such as Byju’s, Unacademy, Vedantu and upGrad that ended up commanding some of the most valuable funding rounds within India’s burgeoning tech industry. Since the pandemic began, six Indian edtech firms reached unicorn status—that is, a valuation of at least $1 billion—while a $22-billion price tag for Byju’s following its March funding round made it the world’s most valuable edtech startup.
With the phenomenal growth in the country’s edtech sector coupled with more than 250 million school-going Indians, therefore, the South Asian nation has been widely crowned the edtech capital of the world. Indeed, the decision by the Indian government to shut schools nationwide shortly after the outbreak of the COVID-19 virus in March 2020 made opting for the in-depth online educational services offered by the growing edtech ecosystem an easy choice for these students. Byju’s added a whopping 45 million new free users to its platform during the second and third quarters of 2020 and expanded its offerings by acquiring several companies providing ancillary services, such as test-preparation provider Aakash Educational Services and American online reading platform Epic!
With borrowing costs at rock bottom throughout much of the two-year period since March 2020, moreover, it should come as no surprise that funds flooded into India’s edtech sector, with PitchBook recording nearly $5 billion entering the space to fund startups during this time. What’s more, projections put the sector’s compound annual growth rate (CAGR) at just shy of 40 percent, and it was expected to hit a valuation of $4 billion by 2025 from $750 million in 2020 as students across the country were expected to become increasingly accustomed to digital learning. “Edtech offers customised classes and access to content at a pace that students are comfortable with,” according to the chief executive officer of Gurusiksha, Dipak Kumar Jha, writing recently for the Times of India. “Students receive personalised suggestions based on their performance and learning patterns. Students who excel will not have to stay at a lower level of the class, while those needing extra support and a slower pace will get attention accordingly.”
But as the pandemic has subsided in recent months and in-person teaching has come to the fore once again, it has become a matter of survival for many of these online learning platforms. And to compound matters, this resurgence has coincided with interest rates being sharply hiked across much of the world—India included. Early May saw the Reserve Bank of India (RBI) raise its benchmark repo rate for the first time in two years by 40 basis points to 4.4 percent. Three months later, the central bank announced its third hike of the year of 50 basis points to 5.40 percent. With borrowing costs soaring, in turn, access to cheap capital has greatly diminished global venture capital (VC) funding across the entire technology sector.
But market forces and demographic trends represent only half the story; the other half concerns the structural problems that have been inherent in India’s edtech space for quite some time. “Edtech companies are engaging in predatory marketing practices, where they prey upon aspirational poor people who want to give their children a better education and supplement their education which they are not getting in a government school,” Indian National Congress Member of Parliament Karti Chidambaram observed in a speech given to the Lok Sabha in December. Chidambaram also wrote to the Serious Fraud Investigation Office (SFIO) in July to demand an investigation into Byju’s finances due to irregularities concerning funding rounds and its delay in producing financials. Indeed, Byju’s struggled to close its $800-million funding round launched in March as investors Sumeru Ventures and Oxshott Capital Partners held off transferring around $250 million of funds due to “macroeconomic reasons”, the company stated.
By the end of June, Byju’s had laid off 500 employees. Some blame financial mismanagement on the part of the firm, particularly with respect to the seemingly excessive acquisitions it has made over the last couple of years, while venture capital firms (VCs) furnished the startup with more than $2 billion in funding. “VCs are supposed to help companies be built the right way and not just help them in pushing valuations up. I still do not understand why startups need to spend so much money. Unfortunately, this will not just impact Byju’s but the entire sector,” Sathya Pramod, chief executive officer of Kayess Square Consulting Private Limited, told Indian news publication The Week. “When the poster boy acts so irresponsibly, everyone starts wondering if everything is right. There is no smoke without fire. Their auditors would not have refused to sign the accounts of 2021 if everything was hunky dory.”
The quality of service being provided to students by edtechs has also come under the microscope. Some reports detailed that parents were advised to make advance payments for tuition for the academic year, but class schedules were then changed abruptly, and customers did not receive dues owed to them upon cancelling their subscriptions. A survey published in June by social-media platform LocalCircles found that a majority of respondents who partook in online classes offered by edtechs faced key issues pertaining to the service. “69 percent of those who have taken online coaching-learning classes have faced issues,” according to the survey results. “The question in the survey asked citizens about the kind of issues they or their family members have faced with online coaching-learning classes via ed-tech platforms. In response, 9 percent of citizens said they have faced infrastructure issues, 19 per cent said they have issues with the ‘teaching staff effectiveness issues’, and 10 percent had ‘refund issues’.”
What’s more, the quality of teaching at Byju’s and others has been frequently called into question. “Unfortunately, they [Byju’s] are at the wrong side of everything. Their product is not great (parents are complaining), their marketing strategy (Indian team) is under fire, their finance seems to be in shambles (investors not investing), their accounts seem cooked up (auditors not signing),” Sathya Pramod added. “Being a poster boy comes with its own responsibilities, and when that is not adhered to and understood well enough, it is the beginning of the end.”
Or rather than “being the beginning of the end”, perhaps it is now simply the end of the beginning? All the troubles that edtech has faced in the last year should inspire a good deal of evolution from startups willing to commit to the space for the long run. Whilst students may ultimately still prefer the reassurance of being in a classroom with an actual teacher in the same space, the nature of the post-pandemic world means that there will be plenty of opportunities to expand online learning opportunities permanently. As such, edtech firms still have many opportunities to thrive.
Indeed, with the test-preparation startup Physics Wallah raising $100 million in a series A funding round in June and earning a valuation in excess of $1 billion, the appetite for the edtech sector has not been entirely extinguished. Rather, investors have become more cautious given the issues that have plagued the sector as well as the deteriorating environment for VC funding. It also means that edtech companies now have an opportunity to rectify these issues and continue to adapt, evolve and grow. Many discussions now focus on companies taking a more hybrid approach to edtech, involving not only online learning but offline-capacity expansion for in-class teaching, more specialist courses and greater flexibility in what can be offered.
“Edtech startups were enjoying a honeymoon phase for the past couple of years. Now, companies that can generate enough cash with good business models will survive—online, offline or hybrid,” Dipak Jha concluded in his Times of India article. “So, top EdTech companies with funding will stay in business. A few among these had already made the right moves by anticipating future conditions. As in any other sector in a stiff competitive environment, success belongs to those who can innovate on the go.”