"As India's most valued startup Byju's faces a tough test from auditors, regulators and customers, EdTech is across the board is learning a harsh lesson in business realities. Has the dream run ended and do investors and founders need to upskill for new post-pandemic business realities. Host Dia Rekhi talks to Amit Ratanpal, founder and MD at BLinC investment management, Tarush Bhalla, Senior Assistant Editor at Et and Digbijay Mishra, Deputy Editor (Startups) at ET

Credits: Byju's, Unacademy, Upgrad"

This is an audio transcript of The Morning Brief podcast episode: Edtech: Funding to failing, its not adding up

BG 0:00

gainThis is the morning brief from the economic times.

Dia Rekhi 0:09
It was the buzzword throughout the pandemic. No, not dolo, but rather the sector that everyone believed would change the way India learns

BG 0:19
Haina mommies and daddies so let our children fall in love with learning.

BG 0:25
Top educators se sikneka UnAcademy detha hai live classes by India's top educators for over 30 exams, UnAcademy. Let's crack it.

BG 0:34
Upgrads se Apne career ke darwaze kholo,.

Dia Rekhi 0:42
schools were shut and overnight children were forced to transition to an online mode of learning. But it wasn't just children. Even people like me, who suddenly had more time on their hands and no Auto drivers to argue with took up different online courses. I for one, learn scriptwriting but with work from office resuming I've not had the time to sign up for another course, I'm sure you must be grappling with the same issues. Schools have also reopened, schedules have become packed and registrations for online classes have crumbled. This explains why Ed Tech Titans who were the darlings of the venture capitalists are reporting abysmal financial numbers. Some even declaring bankruptcy, sacking staff or even forcing teachers to double up as sales agents. From mis governance to audit lapses from failed mna's to unhappy parents Ed Tech is the sector in focus. But for all the wrong reasons. So we at Ed are also asking if the Ed tech bubble has burst. And more importantly, where do these companies go from here, we get you the buzz from the ground,

BG 1:56
whether by you can still raise at a higher valuation or at a lower valuation. And that will have a cascading effect for other Edtech companies.

BG 2:05
There will be more shutdowns and then there will be a lot of scaling down.

Dia Rekhi 2:09
And the view from an avid edtech investor.

Edtech Investor 2:12
at a fundamental level, as I mentioned that this was too much of capital. Everyone wanted to look at high growth. And remember, end of the day education is a very patient business.

Dia Rekhi 2:24
It's Thursday, September 22. I'm your host Dia Rekhi key and you are listening to EdTech funding to failing. It's not adding up on the morning brief. Let's start from chapter one, and then figure how a lot of these ad tech firms got to chapter 11. I'm joined by my colleagues at ET Digbijay Mishra and Tarush Bhalla, who in many ways are the go to people when it comes to all things startups and more specifically, at tech startups. They've been tracking the space with a hawk's eye. And I'm here to pick their brains a little and find out all that's happening. Thank you. Digbijay and, Tarush. I just want to start off by first asking you Digbijay, what's the industry buzz? Like? I mean, is there a fear? Is this whole the bubble is bursting sentiment looming large? Or do you just see that it's now a new reality of realistic business models kicking in?

Digbijay 3:27
Hi there. Thank you for having us. I think, globally, as well as in India, what's happening with startups, not just Ed tech startups, especially in the late stage startups, there are corrections happening in how business models are evaluated? What are the priorities for investors as well as companies, all of that has changed. And what you're seeing is the pressing demand, and the pressure Byju. faced over the last two, three months, especially is an outcome of that. So yeah, I would say it's a combination of things that kind of led to it.

Dia Rekhi 4:04
Right. But you know, the Digbijay when we're talking about the concerns at the moment, if I had to ask you what the three main concerns are, is it high valuations? Is it people going back to, you know, school or getting back to work? Or what are the big concerns at the moment when it comes to Ed tech?

Digbijay 4:21
I think still there is a lot of demand for online education. In terms of valuation. I think the jury's still out. But I think even if you compare FY 21 Are the unaudited FY 22 numbers Byjus valuation is still pretty high. Now, what will happen to byjus valuation, we will only know once it closes its next round of funding, which also has been in the works for some time, but I think this audited results was a major hurdle in that whole journey. Now how investors view the FY 21 results and the unaudited FY 22 results and the projections for FY 23. A mix of these factors will Give us a sense of what that new round could possibly be at. And I think that will be a major development on whether Byju can still raise at a higher valuation or at a lower valuation. And that will have a cascading effect for other Ed tech companies as well.

Dia Rekhi 5:18
But What about that800 million funding round that was announced in March? Has that finally closed for Byjus?

Digbijay 5:24
In a way? Yes, the round has closed, but at least it's 300 million less than what was announced, as two of the investors money was due for a while and based on our understanding that money is not going to come. And the conversations that Byjus is currently has had with multiple investors is for a new round. Now, whether that closes or at what price it closes, I think that will be more interesting to see. Because after all this, I mean, byju raveendran, the founder told us in an interview that investors do not care about FY 21 numbers, and they are only keen to know about FY 22 And fy 23 numbers. But yeah, I think I think it's still will be very crucial to see that if this round at all happens at what price is it happening. And that have an effect, not only on a tech startup, but other late stage startups as well.

Dia Rekhi 6:17
Tarush, you've been covering these companies very closely. And I remember reading all the stories that you had written about layoffs and so on, could you give our listeners a sense of whether you believe that this is just a matter of, you know, survival of the fittest, in a sense?

Tarush Bhalla 6:33
Sure, thanks for having me here. So I think that clearly that the Carnage is on for Indian Ed tech in a big way. One is that this is a period of slowdown for the Indian startup ecosystem. So it's not just Ed Tech that's laying off. But there are a lot of other companies including, you know, large unicorns, which are, you know, looking at layoffs to kind of correct costs, or, you know, to kind of increase their runway. This is a bearish market and not the correct market to kind of raise funds. Having said that, coming to Ed Tech, obviously, FY 20, and FY 21, was a dream run for most of the objects in the country, right. But now, I think the reality is far, far different. For instance, k 12, is not showing any growth by an industry, especially on the online education side, when we compare it, why and why the good growth that pandemic draught has completely been wiped away, we can see that in a lot of numbers, we can see that in company like Unacademy taking the move to step away from that category completely and shut down that side of the business. I think more than layoffs, I would see a lot of companies now, scaling down their ambitions. Some of the investors I was talking to were saying that this is not the bottom, there's going to be a lot more look at organic growth, especially when you know there is a fire to douse in your own house. So I think that that's something that will play out, there will be more shutdowns and then tail downs and moving out. So different categories playing out in the industry until the cavers back towards Edtech.

Dia Rekhi 8:17
Right? You briefly mentioned about different categories, right? You have K 12, you have test prep, you have higher education, you have competitive exams, and a lot of these companies were kind of venturing into various categories. Right? And do you think that kind of came in the way? And how do you see things going forward?

Tarush Bhalla 8:38
Yes, there is there has been different companies which have parade into different categories. And now I think everybody's stepping on each other's shoes a certain way, right. But as I said before, this will particularly be a test of how good are you in your core category, the writing is out on the wall, that it's going to be very difficult to scale. Another category while you're dabbling with profitability with increases in economics. Also, while there is an entire wave of, you know, growth of de growth, rather, I would say, you know, in the industry towards online education, it's going to be tough, and it's going to be very difficult for companies to dabble multiple categories all at once.

Dia Rekhi 9:27
So you actually brought me to my next question, which is for both of you, actually. And that's about acquisitions. We've seen so many companies in this space go on this acquisition spree almost. So have they managed to integrate them? Well, Digbijay ou want to go first.

BG 9:45
So Dia the answer will be be around the financial aspects of it in terms of integration. We haven't seen major issues apart from one issue that I know that just like what Unacademy was facing about teachers, I think Akash has also seen that a bit. But that is, again something outcome of what the market has seen, because there's a lot of demand for good teachers. But there is a payment issue and all that stuff, but there is no integration issue as such, because great learning has been okay. Their biggest problem has been whiteHat Jr, which continues to be so. But that is, again, quite a old acquisition. Again, it's not an integration issue more of what the brand did about its product. So there are no integration issues as such for Byjus,

Dia Rekhi 10:33
right.

Tarush Bhalla 10:34
I think generally acquisitions are tough. And I think it would go would go down the room to a group of founders, they would all say that acquisitions have been very difficult. Generally, I think it's the writing is still to be on the wall in terms of, you know, what acquisition has worked and what acquisition has not worked for a particular group? We are still just assessing the Byju results, right, in terms of the load of acquisitions that they've done, right? How will that contribute in the future? But I think as the Digbijay said, the white hat Junior acquisition helps them to go international, right, helps them to kind of bring in newer things to Latin America, and some of the other markets through coding music math that they were looking at. So yeah, so it's still to be seen as to whether you have the funding to scale it. And, you know, how serious are you about that category?

Dia Rekhi 11:28
Another aspect that I wanted to get your opinion on is this whole FL Digi is matter, which is first last default guarantees, right? They're very popular in this space. But we've seen that the RBI is not really comfortable with this FL Digi concept. So if the regulator comes down heavily on FL Digis, how could this impact these players,

Tarush Bhalla 11:51
while the last final wordings are still to be out? The sense is that, you know, even if sad exists, what is the form shape and form that it will be? The biggest question here is if byjus is giving FL Digi is it an attack? Or is it a fintech? Which does it come on to the regulator? Or is it going to be the financial partners which will be you know, somewhere being accountable for even accepting the FDG there. So this is a very gray area for Byju's, which it has to address. And I think that loans is a way to grow the business because it allows customers to buy more in the commerce world and also maybe a bit more in the EDtech world as what byjus belief is rather,

BG 12:38
yeah, I think there is one really interesting figure, I think it's more than 1100 Crore or close to 1200 crore, which has not been added to FY 20 ones financials in revenue, because they were given on credit. And also, the sense I got after talking to people also about what that auditors note meant. While it means that there is still a possibility that a lot of these payments might be made in FY 22. But the note did mentioned that Byjus and its parent company wasn't sure if these collections were actually possible to be made. I think it's an important factor that almost 1200 crores of products and services were sold through these loans. And Byju is the FL Digi provider on this. So it will be interesting to see what happens to

Dia Rekhi 13:32
do you think players will have to move to a per month subscription model and provide easier opt outs now with the current environment, you know, with everything Tarush said about children going back to school professionals getting back to office and so on, is that the way forward for edtech.

BG 13:50
We haven't seen that yet from from the from some of the largest companies because these are also sold on a at least quarterly or half yearly basis minimum. See, I think the issue is not about yearly or bi annual. The problem here was that companies were the Byju was recording, three years revenue goes as in that one year. So that is what led to this whole audit trauma, right? That is something which was number one problems. The second problem from a consumer perspective was that even if you know parents were sort of doing it on a trial basis or doing it for a month or two. They didn't realize and they ended up signing up for two years. So and that is where the whole mis selling part comes which I still feel that it's a bigger concern. The government has been talking about it, even if they get their accounts in order. I think that is still something byjus as well as other companies need to sort out. I think that remains a very big concern for for a broader range of audience in our country. Because how these questions are sold. Parents are obviously you know, they want the best for their kids. And I think that Do something by juice as well as other companies need to work on.

Dia Rekhi 15:05
These were our in house experts. But we wanted to give you an idea of how investors are feeling from an Ed tech investor himself. We have with us Amit Ratanpal, Founder and Managing Director of Blink invest, which is an India based venture capital fund, committed to funding edtech and fintech startups. He tells us why he is optimistic about the India Ed Tech story. Do you think whatever's happening in the EdTech space now is sort of like a rough lesson that investors are having to deal with?

Amit Ratanpal 15:40
Well, it's, I would say, education, we are going through an interesting time. And as you would see, the last two years, there was almost a seven plus billion dollars have been raised across multiple companies. And there were some large companies, which have raised billions of dollars. And obviously, you know, everyone's we're expecting the valuation will go down, up. And there are some differences in what we're seeing as we speak. But at the same time, if you really look at the education sector, has always has been focused on specific on outcomes. Right. And that is, I think, the biggest learning of last two years or three years have been, as we see different companies going through different challenges as well.

Dia Rekhi 16:21
Right. But would you say that this is this classic case of, you know, too much money being pumped into the system? And there's no real viable business model? Or do you attribute the fault is something else?

Amit Ratanpal 16:34
Well, there are many things which one has to look at, you know, during this last two to three years, one, obviously, if you rightly mentioned, there's too much of money that was chasing a few selected companies, as the money getting pumped in the following companies, the valuations went up, and when you do valuations are high, what you need to do is justify the revenue, you know, behind it. And that was the virality, or the challenges which one through went through it, then, during this time, people thought that just by spending money on digital marketing or merely acquiring revenue, we can really grow the business. But that's not really true, because end of the day, one has to look at outcome. And lastly, I think during this two, three years, if you see during this pandemic, everything was online, so everyone thought that world is connected now, because you know, you can switch on Zoom or any of your devices, and you can talk to anyone, and you can connect everyone in every part of the world. And that's where I think a lot of players thought that it's now going to be a global business. And that's where, again, you know, the challenges started coming in, because when you enter two different markets, there are different requirements, different nuances, different education, learning curve. And I think there was less of a research and justifying the valuations is what happened in the last few years. And that's what we're seeing is the result of current situation.

Dia Rekhi 17:54
China banned profit for education models in 2021. And suddenly, all of these funds, which had so much cash to deploy, had no companies to put their money in. And would it be right to say that many of them ended up, you know, chasing Indian companies as a result of no choices in China?

Amit Ratanpal 18:14
Yes, to an extent, I would definitely say yes to that, because that's why, you know, we saw a lot of a large amount of capital, you know, came into India, specifically in the education sector. So, to that extent, yes, I would definitely agree that this is a capital, which they couldn't invest into China, and then already your money for the education sector, it came to India at the same time. I think it's a combination when sort of Indian company not thought that they can be global and the overall of Indian companies able to reach out to billions and people across the globe. You know, that's the dream, but everyone thought would be a reality as well. So it's a combination of both, I would say,

Dia Rekhi 18:52
sure, when we're speaking about business models, and companies looking at a global audience and so on. Do you feel like somewhere along the line, they lost track of what it probably was initially meant for? Which is the Indian audience, right?

Amit Ratanpal 19:07
Absolutely. Yes, yeah. And you're absolutely spot on on this. So, this is where I was going to challenge the same that once when you make a content for which is for India, and that you start and you find that content is working great or your particular product is working great. They just thought that audiences the US or Europe or even Asia will use the same content, but as we know that different countries will have different language, different education system, different way of learning and different approaches as well. And that I think, fundamentally was been missed. So, what happened during this two years, three years is that you know, you entered in a market and what traditionally want to do is do a pilot test, do a beta testing that hey, is this for the audience bond is this for the expectation is fierce if meeting the requirements, and because most of the companies were flush with funds, they thought that you know, let us do this two, three, basic process of going into a different market and just jump in and can be, you know, quickly garnered the audience and revenue and all this. Unfortunately, that is something which didn't happen.

Dia Rekhi 20:08
Right? And you know, you're someone who's so involved in this space, do you see this coming?

Amit Ratanpal 20:14
Well, it's been very, very interesting days and early days, as you know, we bring it best we invest into education, and financial services. And in 2020, when we were looking at the deals at that point of time, you know, we thought that a company, which is doing about few crows of revenue, should be ideally valued between, you know, let's say, five to $10 million, and maybe $15 billion. And suddenly, in a few months time, that things completely changed a company, which is at stage seed stage for raising five to $10 billion nips, we have got some traction, they were raising between 15 to $20 million. And we really, you know, a little surprise at that point of time. But we also thought, yes, you know, some of the businesses are fundamental businesses, and hopefully the valuation would be justified. But as we went along, and we were the right in the middle of a pandemic, that's the time we said, you know, what, this is not what the reality is, because no one spoke about outcome. No one spoke spoke about customer first, no one spoke about why a customer is going to buy this, what is the need of it? Is it only going to be online? And some of the basic question beyond that part is going to be offline, what would happen if we go offline, a lot of things were unanswered, and that's where we become jittery. And then we were very clear that this is not the future is or it's not sustainable. And if you really see from our fund perspective, we have not made any investment in the education sector in the last, I would say, 18 months. And but this is a good time for us to look at some real good companies with real outcomes as well.

Dia Rekhi 21:40
Right? More specifically, when we're speaking about byjus, their way of calculating accounts has come under scrutiny, right? So when we speak about these companies, what do you think went wrong with say, byjus?

Amit Ratanpal 21:55
Well, I think it's going to the basics, that a when you raise too much of money, and you have already been valued very high. And and you know what, I would say that even the investors are equally to be part of this. Because when someone comes with a larger check, and a higher valuation as a promoter, I would definitely say yes to it. Right. And that's what happened. Now, obviously, when you are raising money, and your valuations are, you know, high, then you need to justify the revenue.

Dia Rekhi 22:21
Would you say it's the same for Lido? Or would those differences come in? I mean, was there a difference between the two,

Amit Ratanpal 22:28
I think they're different business models, I think, end of the day at all working is that most of the companies during this particular phase, just focused on growth, by just spending on digital spending. And they just thought that by acquiring a customer in higher spending, and going online, is the only way about at some point of time, they thought they will get the tack down. But there was no clear direction on how to reduce the cost, or there was no clear direction on the profitability of the company, or how to, is this particular business sustainable or not. So I think each company's went through their own challenges. But at a fundamental level, as I mentioned, that this was too much of capital, everyone wanted to look at high growth. And remember, end of the day, education is a very patience business, the gratification takes a while, right, it takes about 12 months for our daughter or my son to move to a next class. So that's the patience which we have to you know, look at it from that lens. It's not a daily outcome where we like we have some food and we say, Okay, this is good or bad, right?

Dia Rekhi 23:28
When you talk about the players and what they will have to move towards as a model. Do you think this whole per month subscription model is going to come into play and maybe easier opt outs as an option, as well?

Amit Ratanpal 23:40
Again, I'm differentiating between the finance and outcome right? In general, Indians were ready to pay everything for good quality education, because they wanted the child to move to the next level. So I believe that ultimately, it is not about the financing model. But ultimately, what you will have to focus on is that frame providing the quality are you providing the promises? Are you providing the outcome, which is required? And that, in my view is important?

Amit Ratanpal 23:40
Sure. If you had to talk about whether Indian Ed Tech can recover from everything that it's going through right now, what would your answer be?

Amit Ratanpal 24:13
They focus on the fundamentals of business, which we have been always looking at. And that means that education is a patience business. For example, if this is Phil education, what is the outcome, the outcome is very simple. I should get a job. And I should be able to sustain myself in a job You may get an entry in the job just because you've passed from an institute. But even sustainability in that institution is important. And that's where the quality of outcome is important. If we talk about it, K12 you know, it is not only about scoring high marks in your grade 1012 or continue to be the competition examination. But are you ready with your future skills? Are you ready with your other skills? Where are the life skills where you are ready to face the outside world so that again, you know what you should focus on? Third out here is that don't go over? Both on just chasing revenue, think about revenue, cash flow and profit. Think about that. Can you create something which is sustainable?

Dia Rekhi 25:08
Right now, as a VC? Do you see yourself pumping in money into the space right now? How do you see the larger landscape also reacting to everything that's happening? I mean, you mentioned that you haven't put your money in an Ed tech firm for the last 18 months, if I'm not mistaken. So is that going to change now for you? But what about the broader landscape?

Amit Ratanpal 25:29
A lot of people within the VC world or even the P world are sort of watching, you know, the tide, and then sort of unsure. At the same time, they started a good time where we've seen a lot of these larger funds were bought long term assets, and also looking at consolidation this market, or even, you know, they seem that if good quality businesses are available at a relatively reasonable valuation, and people are entering into it as well. But yes, in general, people are taking a slightly cautious sort of approach while we're talking about investing in education system.

Dia Rekhi 26:03
Lastly, if I were to ask you to summarize, would you say you're optimistic about the future of edtech in India? And if yes, then why?

Amit Ratanpal 26:12
Well I think the answer is very simple. For me, I'm a product of education I am today is because I've done my education. So this is definitely fundamental and thinking no one can change it. large population, high disposable income, skilling requirement, new education policy, all of this together, clearly shows away that education is still a very, very large opportunity. It's a patience business, you can't create it overnight. It takes ages and needs a little bit of patience and do the basics, right? And I'm sure that some of the learnings which we had, most of it will get utilized to the not to do list will become more clear and more prominent, anything that is the focus business you're creating, are you creating a business which is so diversified, that you have moved away from the poor? Are you creating a revenue cash for profit? Are you just buying revenue or you know, only focusing on paying money on digital marketing and also, I think there will be a lot of learning which I'm sure people will learn from the past experiences. And I do believe that the future is going to be very, very interesting and positive for all of us.

Dia Rekhi 27:24
I guess I did feel that some semblance of reality was setting into the ed tech sector, much like other startups that had a dream run through the pandemic. What is clear, though, is that with the ones shining star of the space Byju's reporting, lackluster numbers, some of the sheen of the ad tech sector has worn off. And while the larger ad tech story in India is one of tremendous promise, in order to tap that potential, companies will have to do a lot more than just advertise. They will have to walk the talk when it comes to providing quality education, and learning resources. Outcomes are crucial. And we'll have to see if Indian ed tech passes the test. Till then, maybe I can find a creative writing course that suits my current schedule. And you can keep tuning in to the morning brief to learn all that's happening in the world of business and more. Thank you, Amit Digbihay and Tarush. I'm your host Dia Rekhi and you were listening to ad tech funding to failing. It's not adding up on the morning brief credits. 

This episode was produced by Vinay Joshi sound designer Indranil Bhattacharjee, executive producers Anupriya, Bahadur and Ariji Berman. Do like and share this episode on your social media. Tune in to Ed play.com. Our latest platform for all audio content, including the morning brief, the morning brief is also available on Amazon Prime music, Apple podcasts, Spotify and Jio Sawan. The morning brief drops every Tuesday, Thursday and Friday. All external sound clips used in this episode belong to their respective owners. Credits are mentioned in the description.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: themorningbrief@timesgroup.com We will do our best to make the amendment as soon as possible. 


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