No Relief Yet: Funding Winter Continues to Shake Indian Edtech Industry

After being hit hard by the funding winter in 2022, the country’s edtech sector, which fosters as many as seven unicorns, is awaiting to breathe a sigh of relief, but to no avail.

This is because edtech funding in the first three months of 2023 tanked a further 93% year-on-year (YoY) to $100 Mn, with the number of deals falling 41% YoY to 17 deals in the first quarter (Q1) of 2023.

However, it is pertinent to note that the edtech funding landscape is seen returning to pre-pandemic levels (as shown in the graph below).

According to the Inc42 Edtech Report 2022, the Indian edtech startups raised a total of $2.4 Bn across 95 deals in 2022, enduring a YoY decline of 49% and 42%, respectively.

The fall in funding and the number of deals in 2022 mirrored the impact of a slowdown in online education after a prodigious pandemic-induced 2021, which gave edtech startups a windfall boost, thereby bloating investments in the space.

Unfortunately, what threw a monkey spanner in the unprecedented growth of these startups was the reopening of schools, colleges, coaching centres and even offices, in many cases, as the economy returned to business as usual.

The fall in funding and the number of deals is just the tip of the iceberg, considering the challenges the sector is currently bogged down in.

Apart from giving the world’s third-largest startup ecosystem the highest number of layoffs — accounting for more than 35% job cuts of the total 25K+ job losses across sectors — the space is also infamous for startup shutdowns.

For now, as we witness, week by week, the flow of funds, deals and deal sizes for the second quarter of 2023, here is a quick sneak peek into major funding trends for edtech that Inc42 observed in Q1 2023:

1. Average Ticket Size Declined 86%: The average ticket size in Q1 2023 tanked 86% to $7 Mn from $52 Mn in the year-ago quarter. This decline mirrored a significant drop in late-stage funding.
2. Late-stage Funding Plummeted 99%: Across all the stages of funding, the late stage was hit the most, falling to $19.5 Mn from $1.3 Bn in Q1 2023, down 99% YoY. However, bridge-stage funding saw a 14% YoY rise in average ticket size in Q1 2023. This suggests that investors are increasingly looking for opportunities to invest in early-stage startups that have the potential to grow and scale.
3. No mega deals in Q1 2023: Compared to three mega-deals in Q1 2022, the first three months of 2023 did not host even a single mega-deal. This indicates that investors have become more cautious and selective in their bets, possibly due to market uncertainty, economic fluctuations, and profitability concerns.
4. Funding Highly Skewed In Edtech Sector: The edtech sector is experiencing a highly concentrated funding scenario, with the top five startups bagging a whopping 77% of the total investments infused in the sector. Among the top startups, BYJU’S stood out with a significant 46.6% of the total funding in the sector, followed by Eruditus with 11.4% resources and Unacdemy at 8.3%.

Edtech SaaS Emerges As The Most Funded Sub-Sector

Interestingly, with 42.8% of the total edtech funding, amounting to $42.7 Mn across four deals, Edtech SaaS emerged as the top-funded sub-segment in Q1 2023. This is due to investors’ bullish sentiment on the potential of SaaS-based edtech solutions to deliver strong returns.

Meanwhile, the skill development sector bagged the most number of deals — 33.3% of the total number of deals secured in Q1 2023. This reflects the growing demand for online training and upskilling.

Overall, in 2022, K12 emerged as the top sub-sector in terms of funding amount, garnering $1.2 Bn across 18 deals. However, barring Physicswallah, most K12 unicorns and soonicorns generated a negative profit before tax (PBT) for FY22, according to Inc42’s Edtech Report 2022.

While BYJU’S is yet to file its FY22 financials, the company has been quite consistent in its layoff exercises. Further, it has recently received a 50% valuation cut from Blackrock. The edtech startup is also taking extreme measures to cut down its other operational and marketing costs.

In the test preparation domain, Unacademy is rumoured to be on the edge of getting acquired, owing to its falling revenues and inability to showcase profitability. Not to forget the tussle with Kota-based Allen Career Institute over poaching its star teachers, which ultimately proved to be quite heavy on Unacademy’s pockets.

Can Edtech Bounce Back?

After gaining the spotlight during the pandemic year, recording a massive jump in adoption, user, and funding, the post-pandemic era has brought its own set of troubles for Indian edtechs.

For one, the concentration of investor funds in the hands of just a few edtechs has made the sector highly competitive for smaller players.

However, despite this, the continued funding in the Indian edtech sector demonstrates the strong total addressable market (TAM), which the investors continued to be bullish on.

According to Inc42’s Edtech Report 2022, the Indian edtech market will be a $29 Bn opportunity by 2030.

Despite the ongoing funding winter, the Indian edtech sector has shown resilience and adaptability. Many startups have pivoted their strategies and offerings to keep up with the changing market demands.But the game lies in hybrid.

As Eruditus’ CEO and cofounder Ashwin Damera said, if we talk about acquiring students, it will be largely driven via offline and hybrid models, which combines online and offline modes of education and has gained significant traction in recent times.

However, implementing hybrid learning can be a capital-intensive process as it involves physical infrastructure and investment in technology to facilitate online learning. Even so, many edtech companies are willing to invest to meet the growing demand for hybrid learning and stay competitive in the market.

Additionally, emerging segments such as cohort-based courses, teacher tools,  21st-century skills as well as edtech SaaS for schools are expected to drive growth in the coming years. We have a bandwagon of startups in this space including Growth School, Seekho, Pesto Tech, Newton School, Bright Champs, Leverage Edu, Homi Lab, ClassPlus, Toddle, among others.

Also, test preparation, skill building and higher education will continue to grow, while K12 might incur more trouble in subsequent months owing to the current scenario.

There is a note of caution as well. In his recent conversation with Inc42,Damera warned that it is the time for edtechs to be wary of new initiatives, capital expenditure, and reckless cash burns. In short, edtechs will have to be more conservative.

Further, as far as the broader funding environment is concerned, the industry veteran cautions that the space will continue to face challenges for the next 12 to 18 months before some level of normalcy returns.

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