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Edtech VCs And Funds On What They Look For In Startups Before Investing

Edtech VCs And Funds On What They Look For In Startups Before Investing

Active VCs in the edtech segment including Blume Ventures, Artha Venture Fund, Unitus Ventures, Gray Matters and Bertelsmann talk about what makes an edtech startup tick

The size of the overall education sector in India was approximately $101 Bn as of March 2019. Whereas the market size of online education market during the same period was $563 Mn — this just shows the massive bridge that online education and edtech have to cross in India. Naturally, for startups, this gap is the market opportunity and a key role in unlocking this opportunity is played by VCs, taking high risks and investing in early-stage edtech business models. Even at the late stage of edtech startups in India, the lack of quality and frequent exit strategies make investments a risky affair for edtech investors in the market.

Although education technology or edtech took a long time to take off in India as compared to other tech sectors, education being a primary expenditure for the majority of households in India, there’s a higher likelihood of consumers spending on edtech. Secondly, the bias of parents towards traditional means of education and adoption of big edtech brands have made life difficult for edtech startups.

At this point, it becomes crucial to understand what made VCs put their trust and money into edtech startups in India and what exactly they look for while investing in edtech ideas. Inc42 reached out a few active VCs in the edtech sector such as Blume Ventures, Artha Venture Fund, Unitus Ventures, Gray Matters Capital, and Bertelsmann to gain a few insights. Particularly, we wanted to understand how investors examine the business model of edtech startups in India.

The State Of Investments In Edtech

According to Datalabs by Inc42, the year 2016 recorded the highest unique investor participation during the interval of 2014 to Q3 2019. Since then the investor participation had been on a downward trend, compared to 2016, the unique investor participation in 2018 was 54% lower—70.

The fact that by Q3 2019 investor participation into edtech startup has surged 14% compared to the total of 2018 indicates that the investor confidence towards this sector is picking up in the year 2019.

How VCs In India Are Investing In Edtech Startups

The VCs Inc42 spoke to started investing in edtech startups from the early stage. While some still prefer to invest in the seed stage, others have moved on to late-stage startups with Series B/C rounds.

What VCs Look For

Most of the venture capitalists that Inc42 spoke to agreed that the two key factors for selecting the edtech startups for investments:

  • Problem being solved
  • The team leading the startup

Sajith Pai, director, Blume Ventures believes that with the edtech sector growing rapidly and arguably seeing higher investor activity, one key consideration for VCs is the problem being addressed and the impact of the solution i.e. how many people it affects. Blume has been one of the most active investors in India and in June 2019, it invested in Unacademy’s $50 Mn funding round, along with other investors.

Unitus Ventures senior associate Sunitha Viswanathan further emphasises that while there are enough problems within the education sector to be solved, given the industry has been the slowest in the adoption of tech, not all of them are worth solving at least as far as the stakeholders are concerned — they may not see them as inherent problems.

“Hence the questions to ask is whether a problem is “must-solve” or “nice-to-solve”. This will determine the size of the market and ability of the startup to grow big,” she added.

When it comes to the team, Blume’s Pai and Pranjal Kumar, CFO & head of Education Fund at Bertelsmann look for founders that can

  • lead both small ideation level teams to massively large organisations
  • can attract and retain talent
  • have a deep understanding of the market and the customer
  • can execute exceedingly well and can hustle through tough times

“The entrepreneur and team profiles along with their passion, ability to execute and grow the company. The quality of leadership determines the future course of an enterprise. We look for entrepreneurs who are hands-on and focus on getting their hands dirty and solving pain points which exist in the education and skilling ecosystem,” Srinita Mitra, portfolio manager, edLABS, Gray Matters Capital, told Inc42.

Sound Unit Economics Is Crucial

Bertelsmann’s Kumar and Unitus Ventures’ Viswanathan highlighted another important factor — unit economics. “It’s important to see the product-market fit proved by good traction on top-line with positive unit economics,” Kumar added.

Anirudh Damani, the managing partner at Artha Venture Fund, added that a robust cash flow management system is another necessity. Most edtech startups in India have models that sell directly to educational institutions and then fail because of working capital issues. Many of the founders do not have experience in institutional or B2B sales and therefore they underestimate their sales cycle, he told us.

He further said that since most haven’t worked inside educational institutions, they overestimate the financial strength of 95% of the education institutions. “They find out much later and much to their chagrin that it takes a long time to convert the invoiced amount to cash into their bank accounts. To tide over this long cycle, founders must keep a tight leash on their expenditures,” Damani added.

Other Key Factors For Edtech VCs 

Competitive Landscape: Once it’s clear what problem a startup is attempting to solve, VCs examine if there are others trying to solve this problem, and if yes then how the startup in consideration is different? Because if a customer will not choose the startup over its competitors, then investors can’t either.

Scalability: VC investments have often been likened to rocket fuel or running on a treadmill. “When we come in and invest we want to see you grow 5x over the next 15-18 months and keep that momentum going after each round of financing,” said Blume’s Pai. This requires inherent scalability in the model, which comes, among other things, from an online focus, pan India and global relevance, customer acquisition techniques that are easy to replicate over and over again and more.

Business Model: The startup’s core idea has to have a large addressable market with defensibility so that it can generate a big outcome for investors.

Alignment To VC Mission: As edLABS’ Mitra highlighted, alignment to the VC mission is important as the startup can be in sync with the opportunities and support which the VC can provide in the form of access to business network and other investors.

Experience: Finally, nearly all VCs agreed that nothing can beat a startup’s founding team that comes with substantial experience in the edtech space, particularly for the Indian market.