Will Edtech Seed Funding Flourish In 2020 After Showing Promise In 2019?

The capital inflow at the seed stage is a crucial factor in determining the future health of any sector in the economy. This is primarily due to the fact that the seed-stage ecosystem acts as the foundation stone for the future development of a sector in any startup ecosystem. One major downside of seed-stage investments from the investor perspective is the high risk associated with them, as the businesses are new to the market and often the founders don’t have the right track record to allay any fears.

The higher degree of capital risk at the seed stage has had a toll on most startup sectors in India. The recorded compounded annual growth rate (CAGR) for the number of unique startups funded in the seed stage from 2015 to 2019 was -15%. The story in the edtech landscape is no different; a slowdown in the seed investment activity is quite evident, as the CAGR for unique edtech startups funded from 2015 to 2019 was -8%.

Among the other edtech subsectors, investor confidence towards seed-stage skill development startups is relatively higher than others. The share of skill development startups in the total seed-stage capital inflow ($61 Mn from 2014-2019) in edtech startups was 24% or around $14.4 Mn. Apart from the funding amount, the market for skill development startups is relatively less saturated compared to other sub-sectors such as test prep, K-12 and online certification. Favourable market conditions combined with the growing demand makes skill development sub-sector a lucrative opportunity for high-value returns for Indian startup investors.

Skill Development Startups In Demand

Compared to the previous year, 2019 turned out to be relatively better for early-stage startups in terms of venture capital investments. Approximately $18 Mn was poured across 23 unique startups, which was 68% higher than the $11 Mn worth investments in 2018. Skill development remained the top edtech subsectors in terms of capital inflow both the years.

The demand for skill enhancement solutions is set to skyrocket as more and more unskilled young workers join the workforce. Widespread adoption of internet across the country has benefitted all sectors equally and reduced barriers by giving easier access to learning, personalised courses and a wider variety of vocations from professional courses to hobby classes. The growing popularity of self-learning can be ascertained from a study published by Google, which concluded that the watch time of users on hobby and cooking videos surged 3x and 2x in 2018 compared to 2017. In another report published by KPMG on the online education landscape of India, self-learning use cases such as reskilling, hobbies and language learning remain a popular option among Indian users.

Overall between 2014 and 2019, skill development, test preparation, online discovery, STEAM kit and enterprise solution remain the top five edtech sub-sectors at seed stage in terms of funding amount. More details in this context can be found in the latest report released by DataLabs — The Future Of India’s $2 Bn Edtech Opportunity Report 2020.

Who Funds Seed-Stage Edtech Startups?

Between 2014 and 2019, the seed-stage ecosystem in India saw around 301 unique investors, which includes venture capital firms, angel investors, social welfare foundations and corporates. Out of these, 64% or 194 are angel investors, followed by venture capital firms at 17% and corporations at 9.3%.

Omidyar Network emerged as the top investor at the seed stage for edtech startup in India. The firm participated in early-stage investment rounds of some notable startups such as WhiteHat Jr and Doubtnut. On the angel side, Binny Bansal, Rajan Anandan and Sujeet Kumar emerged as the top individual investors for edtech startups at the seed stage.

Although the total capital inflow at the seed stage is growing at a CAGR of 15% (2015-2019), the number of unique startups getting seed funding is diminishing at a rate of -8%. Indicating a possible slowdown in the early-stage investment activity in the near future. As per DataLabs by Inc42’s analysis, the seed funding capital inflow is expected to take a toll by the end of 2020. Total funding amount is estimated to be worth $15 Mn a decrease of approximately 16% compared to the previous year.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.