Deep Dive into the Ed Tech Sector

The Ed Tech sector has had a roller coaster ride in the last few years. From being a poster boy of the start-up world till about a year back, it is now going through its worst of times with the much adored and talked about start-ups announcing mass layoffs every single day!

Some of the prominent Ed Tech start-ups, which have announced layoffs, are as below:

• Byju’s: +800
• Vedantu: +600
• White hat Jr: +800
• Unacademy: +1000
• Lido: 1200 (Shut down)

(Data source: EntrackR)

My two cents on the overall EdTech story…..

The overall Edtech industry can be broken down into 4 phases..

• Pre 2017
• 2017 – 2019
• 2017 – 2019
• 2022 onwards

In the pre 2017 era

It was a conventional industry. Online education did not exist the way it does so today. From a coaching institute perspective (professional courses like IAS, MBBS, Engineering etc), there were these physical institutes which dominated the scene.

Marketing here was quite expensive. For example, if one were to look at the broad marketing expenses, the picture was as below:

• Billboards: Rs.50k (for a single installation)
• Seminars: Rs.30 – 40k (per session)
• Newspaper Advt: Rs.5 -7 lakh (for a front page advt)

Avg marketing cost for a typical professional course teaching was anywhere between Rs 20 – 30 Lakh Per Year. It was a capital-intensive industry with an avg budget of Rs 75 – 100 L for a mid sized coaching centre. This included the marketing cost, salaries of teachers, rentals for coaching centre and other overheads.

Around 2016/17

started the wave of online education. The launch of Jio revolutionized the overall industry. Thanks to cheap and affordable internet, things started shifting online. Lectures started getting recorded and being sold online. The so-called “service” became a “product” in the form of pre-recorded lectures. Costs came down because there was no need for physical classrooms, there was huge saving in terms of rentals, there was no initial security deposit, admin staff wasn’t required, electricity costs and other overheads no longer became an issue. Overall cost of doing business came down.

Besides the positive unit economics, another big advantage of online education was the wider marketing reach of institutes at a minimal cost. Marketing, which had the heaviest weightage in the P&L account became more cost effective. There were no more restrictions of 10 to 15 kms radius as in for a physical institute. Thanks to internet, the whole country became the TAM (Total addressable Market).

The biggest advantage of online coaching was that courses could now be customized. Typically, following were the options available:

• Individual subject – option of taking up coaching for an individual subject rather than the full-fledged course
• Packaged course – real time coaching for all subjects (eg. Physics, Chemistry, Maths for an Engineering course)
• Pre Recorded Course – one could just buy the package and listen / watch at one’s convenience
• An exclusive session for clarifying doubts – a real time session by experts just to clarify doubts.

A customer (student) had the option of picking up a course basis his paying capacity, willingness to spend time , confidence level with respect to each subject, etc.

The overall cost of running online education programs went down. Margins started going up. Thanks to effective digital marketing, leads started pouring in. A sales team had to be in place for effective closure of these leads. Overall CAC (Customer Acquisition Cost) went down.

Eg an erstwhile engineering course at a physical institute, which was selling at Rs 1.5 to 1.75 lakhs ( for the full course) was now being sold in the range of Rs 50 – 75 K. Even through this, the institute was able to make a comfortable margin of 40% plus.

The Edtech industry became a low hanging fruit (from a money making perspective).

The broad reasons were as below:

• Low working capital requirement
• High profit margin
• Huge potential to scale
• Low entry barriers to start an online coaching institute

This led to a mad rush. Start-ups in large numbers, funded by overseas investors, started mushrooming all over the place. With a business model like this, getting sizeable funding was not at all difficult. It was a booming market.

2019 – 2021

The pandemic was a blessing in disguise for these coaching institutes. It was a shot in the arm. The whole country was closed but education, being a sensitive and emotional matter (specially for the parents) had to continue. No doubt about that. The industry boomed. The whole sector shifted from physical to online. The institutes saw huge enrolments. It was a win win scenario for everyone. Students started getting coaching at home. Institutes created a huge inventory of free-lancing teachers. It was an additional income for the teachers. Parents (main decision makers) were happy that the kids were not wasting time and were getting coached even on newer aspects like coding etc. So they did not mind shelling out money as fees. The grass was green on all the sides. No doubt about it!

Cut to 2021/22

The pandemic is over. Normalcy has set in. Schools have opened and have started functioning as if nothing happened in the last 2 years. Online education is no longer a priority except for specialized topics like coding etc.

With students dropping out of these courses with every passing month, excess staff had to be fired. This included sales team and teachers.

The whole business model has become a big question mark in terms of sustainability. Unit economics no longer makes sense. Losses seem to be the norm with profitability seeming to be a distant dream.

Hence today’s scenario. Mass Layoffs. Companies closing down. Founders scouting for inorganic ways to show growth to the investors (eg acquisitions etc)

Lessons

• Low entry barrier leads to excessive competition: The biggest lesson emanating from the Edtech story is that any business which has a low entry barrier will see excessive competition. It becomes a typical “ Red Ocean” market with players eyeing for every single student. The business becomes commoditized.
• Easy access to foreign capital leads to aggressive digital marketing campaigns eyeing for student share. Congestion on social media leads to advertisements getting expensive. Lead conversion gets more expensive. CAC ( Customer Acquisition Cost) goes up. Profit Margins come down. Profitability gets effected. The business model becomes a question mark.
• Content is the key: A business model wherein content is low but the entire focus is on an aggressive lead generation and conversion through freebies and campaigns is a dangerous proposition. Cases where a strong content is available ( eg Physics walla) are still safe and have a life ahead. Companies, low on content but depending largely on lead conversion through online advertisements are the main sufferers. A typical sales centric organization is the first to fall. The ones heavy on content survive.

A deep dive into the Edtech industry…

A deep dive into the Edtech industry…

Factors which led to the boom…

What prompted the downfall…

Lessons emanating from the overall story….