From Disruptor To Just Another Edtech Unicorn: Alakh Pandey’s PhysicsWallah At A Crossroad

“Don’t fix what’s working. The competition is trying all kinds of things, but we have a method that has delivered results. The funding will not change us.”

That was PhysicsWallah (PW) cofounder Alakh Pandey telling us in June 2022 about why he was bullish about the future of his startup.

But PhysicsWallah has undoubtedly changed — after a tumultuous year for edtech, PhysicsWallah has not only become a major target for unicorn rivals such as BYJU’S, Unacademy and co, but it’s fast turning into the very companies it wanted to position itself against.

With its $100 Mn unicorn funding round last year and back-to-back profitable years in FY21 and FY22, Alakh Pandey-led PW said it would buck the trend of cashburning edtech giants. But edtech is not an easy nut to crack even for star teachers such as Pandey who have built their audience over a period of years.

Indeed, despite being profitable, PW is now reportedly in the market for another fundraise and it’s facing headwinds such as attrition of star teachers, some reputational damage in the market and of course, massive competition online and offline, that is not going to slow down any time soon. It has also seen a spate of refunds from students after initial success, according to several edtech players that we spoke to.

PhysicsWallah’s Rise Amid The Edtech Churn

Till early 2022, few in the startup ecosystem knew about PhysicsWallah or PW. One year later, it’s not only grabbing the headlines for its expansion plans and acquisitions, but in many ways turning into the very startups, it wanted to beat.

Incidentally, Pandey is as big a brand today as BYJU’S cofounder Byju Raveendran was in the initial days of the edtech giant when he was filling up auditoriums as a teacher.

The company was formally founded in 2020 by Pandey after he teamed up with cofounder Prateek Maheshwari, and Maheshwari is largely responsible for the technology powering PW’s app today.

Before this, Pandey was largely flying solo, relying on his personal brand and reach to bring in students to his YouTube channel. His channel’s growth on YouTube also attracted acquisition offers worth several crores from edtech giants which he claimed to have rebuffed to launch the company in 2020. By 2022, the channel had over 7 Mn subscribers, when it raised its first round.

Going from PhysicsWallah to a modern edtech brand under the name PW, the startup jumped straight into a highly-competitive test prep arena and one where unit economics continues to be a major bugbear.

Despite its bullishness, now PW is pretty much in the same boat as its loss-making rivals in terms of future outlook, and growth is largely dependent on funding.

Last week, the company was reported to be in talks to raise at least $250 Mn at a valuation of $3.3 Bn, three times higher than its unicorn valuation of $1.1 Bn. That would put it in the same league as Unacademy.

The round could even be larger than $250 Mn as per the sources quoted by the report. If it happens, the fundraise would be one of the largest for a test prep startup not named BYJU’S or Unacademy.

And it would also come after a year of churn for edtech startups. Most are struggling to find any traction and are in pivot mode either from the point of view of the business model or the operations.

Like Unacademy with its foray into offline learning or BYJU’S with its move to inside sales which it hopes will solve the unit economics puzzle, or Vedantu, which spent $40 Mn to acquire Deeksha Learning.

Where PhysicsWallah Lost Its Edge

“PhysicsWallah got off to a great start in Kota. They got something like 30,000 students for its first major offline centre. But what we are seeing today in Kota is due to the failure quality of education or learning,” says the chief business officer of a rival edtech giant that’s also ramped up its offline play in the past 14-16 months.

The CBO claims that after the initial batch of star teachers, which naturally attracted a lot of students, PW brought in teachers that did not have the right skills or even past experience. “This resulted in a lot of refunds. If you check on the ground with agencies that work with centres, you will find that refunds for PW are in the range of 30% to 40%,” they added.

PhysicsWallah declined to speak to Inc42 about its expansion in the past year as well as the current issues plaguing the company. But other players in the industry believe it has a tough road ahead as far as sustaining the profits is concerned.

Typically speaking, any offline centre only breaks even after the second year. For IIT JEE test prep, a typical student is enrolled for 2 to 2.5 years and if the quality of education is consistent, they typically do not change the learning centre they have chosen. This makes it easier for the startup to use word-of-mouth marketing for the next batch of students.

So the marketing and infrastructure costs which are high in the first year typically go down in the second year and then that particular centre or city starts to break even for the edtech startup.

But consistency of teachers and quality of learning are paramount. “When students start to complain about low quality coaching at any institute, that institute has to spend significantly more on marketing activities and may even have to let go of some teachers, which impacts how many students it can cater to,” the CBO added.

As it looks to expand, PW will have to spend a lot on ensuring consistency of teachers across India as well as marketing its courses, especially after the recent kerfuffle in Kota — more on this towards the end of the article.

PW’s Product Push: Beyond IIT-JEE

There’s another factor that has caused some consternation among teachers as per our conversations with other players in the industry.

PhysicsWallah’s product itself has changed and also moved closer and closer to BYJU’S, Unacademy, Vedantu and a host of other test prep platforms. The company has added a host of new courses since raising funding last year. To do so, it has also acquired several companies and bought stakes in others. Indeed, that was the plan last year when the company raised $100 Mn, and allocated $40 Mn of this for acquisitions.

The iNeuron deal alone cost the company over $31 Mn, and with this deal, PW is eyeing the skill development courses in AI, machine learning and data science.

Further, it paid over INR 13.5 CR (roughly $1.7 Mn) to buy out cofounder Prateek Maheshwari’s Penpencil Edu Services Private Limited, which is now a subsidiary of PW, as per regulatory filings.

Besides its app for online learning, PhysicsWallah operates offline centres through two brands and models. PW Vidyapeeth is a completely offline play where classrooms are equipped with smartboards, while PW Pathshala is a hybrid model where offline and online learning are blended.

The company is now eyeing a pan-India expansion for Vidyapeeth, which will require plenty of capital not just for the infrastructure but also for teachers, which is the next big thing for PW to worry about. It’s already operational in 21 cities as per its website, but whether it will continue the two-pronged strategy remains to be seen, as some details around Pathshala are missing from the company’s website.

In the months following its maiden funding round in June last year, PW’s core focus has changed from just IIT-JEE and National Eligibility cum Entrance Test (NEET) test prep to other courses such as Union Public Service Commission (UPSC), MBA prep, GATE prep, defence exams, and even K-12.

Indeed, now the company is more than just a ‘Physics’-Wallah, so the name switch to PW makes a whole lot of sense. Last year, Pandey had told Inc42 that the startup helped 10,000+ students crack the NEET and JEE in 2020 and 2021 each, and these students gravitated towards the platform for its affordability and Pandey’s track record as a star teacher.

But PW has lost both in the process of the course expansion — affordability and the bankability of Pandey’s name.

After its initial success, PW pushed other companies to lower their prices and sacrifice margins to make customer acquisition slightly easier. When it started, the PW app offered paid courses between INR 500 and INR 4,500 for certain courses. A glimpse at its website today shows that while PW has free courses, the prices for the most lucrative courses have increased.

For instance, the MBA courses are priced at INR 5,999 and INR 6,999; offline UPSC courses are offered at INR 10K and these are said to be discounted prices. The IIT JEE courses still top out at INR 4,500 for students, so the startup is looking to drive margins with these new verticals.

Even though PW reported a profit of INR 97.8 Cr in FY22 much higher than INR 6.9 Cr in FY21, its total expenses jumped 570% to INR 103.2 Cr from INR 15.4 Cr in FY21, with employee benefit expenses accounting for over 40% of this.

In FY22, the startup spent INR 42.2 Cr on employees, and this is likely to have become a bigger burden for PW in FY23, as it has expanded the offline play and added more courses.

Plus, in our conversation with Pandey last year, the cofounder told us that PW will continue to have a lean approach to marketing. But this has to change in the near future if it is competing against the likes of Allen, Unacademy, BYJU’S-owned Aakash and others across India.

“The best practice in edtech today is to use digital marketing to acquire users for offline centres, but on-ground marketing cannot be ignored, as this is the most efficient, especially if you look at the demographic being targeted i.e the parents of students across segments,” says the cofounder of a Bengaluru-based edtech unicorn

As far as outdoor marketing is concerned, costs have gone up in metros where outdoor ads are back in full swing. “If PW goes for a pan-India approach, it has to carefully balance the higher costs of advertising and marketing in major metros with the relatively cheaper cities such as Kota. Despite a lot of competition in the city, Kota outdoor ads cost roughly 1/10th what one might pay in Delhi or Mumbai,” the CBO quoted earlier added.

Of course, we won’t know how well the company has managed to balance the costs and revenue in FY23 for a few months at least. But we have several clues in terms of reported developments and the company’s operational expansion to get some idea of PW’s financial health.

Whether this has improved profitability or costs will be seen in the FY23 results. Which now brings us to the question of Alakh Pandey’s celebrity and whether it will have a drag effect on the company as it scales up new courses and expands in the offline space.

The Alakh Pandey Brand Dominates PW

There’s little doubt that Pandey’s personal brand is almost as large as PhysicsWallah itself.

He’s easily the highest paid employee at the company, with a remuneration of INR 9.6 Cr in FY22, as per regulatory filings by PW

That’s more than the combined FY21 salaries of the founders of BYJU’S, Unacademy, Vedantu.

Besides this, there’s a web series on his life and story on Amazon Prime Video, which has also brought some prominence to the startup.

He has built a cult following among teachers and students alike. The former want to be like him and the latter want to be taught by him. But Pandey’s legend is also the reason why the company named itself PhysicsWallah. Everything else that PW has added since last year — MBA, UPSC, K-12 and other courses — are led by other teachers.

But head to the course list on PW’s website and each course has Pandey’s image in the call-to-action button.

Of course, clicking through we find out that the real teachers are someone else. But the marketing pull of Pandey is such that his image is also being used for MBA courses, even though the cofounder does not have the credentials for this particular course.

PhysicsWallah also runs the risk of relying too heavily on Pandey’s brand power for newer courses such as K-12, UPSC or MBA test prep where he has little involvement as an educator

The relationship between the teachers and the startup have seen some strains in recent months. Earlier this year, a tussle between a PW employee and a student at the Kota offline centre became viral leading to the dismissal of the employee.

But that is nothing compared to the exodus of star teachers in recent weeks. On March 23, a PhysicsWallah teacher Pankaj Sijairya alleged that the three former teachers — Tarun Kumar, Manish Dubey, and Sarvesh Dixit – were offered INR 5 Cr each by test prep rival Adda247 to resign from PhysicsWallah.

In his video Sijairya further alleged that many other edtech startups were trying to poach teachers from the unicorn.

However, the trio refuted the allegations, stating that they resigned after ample notice to the management as they wanted to launch a separate YouTube channel called ‘Sankalp’. In the days since this online feud broke out, Sankalp had roped in two other teachers, including Siddhartha Mishra, who earned criticism on social media last year for allegedly making homophobic comments during an online class.

“Like any other employee, teacher retention is about the culture. This is more relevant for teachers who are passionate about their work than the bottomline. They don’t pay much attention to profitability or acquisitions,” added the edtech founder quoted earlier.

Chaotic 2023 For PW

In short, the past few months have been quite chaotic for PW and its many teachers. The story of the exodus is similar to the fracas between Unacademy and Allen Career Institute last year. As many as 40 ‘star teachers’ from Kota coaching giant Allen joined Unacademy when the Gaurav Munjal-led company moved into the offline learning space.

Edtech unicorns like BYJU’S and Unacademy have forayed into offline learning, offering teachers 2x-3x pay hikes with annual income in the range of INR 1 Cr–INR 10 Cr.

So is it any wonder that PW has tried to batten down the hatches when it comes to teacher attrition. And that’s why PW is in talks with investors to raise more funds even as it runs a profitable company.

Running operations with generated cash is one of the main tenets of sustainable business building. There’s also a line of thought that diluting equity just to have a huge amount of cash reserves will not drive PW to innovation.

“There’s a reason people talk about startups that raised too much too soon. Sometimes it’s good to be hungry for cash to think of innovative ways to beat large competition. And cash makes you comfortable in a bad way,” according to the founder of a Delhi NCR-based travel tech company.

Of course, amid all this focus on offline operations, one wonders what happens to the technology that is a critical part of edtech. Will VCs continue to back a startup that is a purely offline play?

“Offline coaching works, and we have examples like Aakash and Allen to prove it, but that’s not why we as VCs invest in edtech, right? If startups go after an offline-first model, instead of leveraging tech they have moved away from the original promise,” Omidyar Network India partner Siddharth Nautiyal told Inc42.

Omidyar has invested in edtech startups such as Vedantu and Entri in the test prep space, besides WhiteHat Jr, which it exited when BYJU’S acquired the startup. Omidyar also has skill development startup Masai School in its portfolio.

Nautiyal added that edtech startups still need to figure out how to make a true hybrid model that blends the best of offline learning with technology.

“Edtech’s strength is that it offers better access to quality teachers, flexibility for learners, better personalisation and allows students to learn at their own pace. Now the question is how can these supplement the experience of offline learning centres in a stronger way,” he added.

In many ways, PW has fallen to the curse of mega rounds and the express route to the unicorn club. It cannot have its next round be a down round immediately after the unicorn round.

If the company is giving up huge equity in its latest fundraise, PhysicsWallah’s founders risk coming under more pressure to deliver exits, and being pushed into the blitzscaling trap that has brought many unicorns to their knees. PhysicsWallah said funding won’t change it, but it’s now very much indistinguishable from BYJU’S, Unacademy, Vedantu and co.