SUMMARY
The most-valued edtech startups, including unicorns and soonicorns, ended up bloating their expenses as much as 91% YoY to $870 Mn in FY22
The financial outlook for edtech unicorns and soonicorns looks concerning, especially when their cumulative losses rose 90% to $585 Mn in FY22 from $310 in FY21
The industry experts that Inc42 spoke with believe that the funding scenario will continue to remain gloomy during the year, until there are visible green shoots of revival in the industry
After lapping up investment worth $4.7 Bn in the financial year 2020-21 (FY21), the country’s edtech startups decided to put the investor money to work, unaware of the crises that were to come next.
Hungry for expansion, the taste of which they got during the peak pandemic time, and optimistic about disrupting the country’s education sector, these startups splurged a fortune on hiring top talent, giving salaries and benefits to their employees and proclaiming to the world (via advertising, marketing and promotional activities) as to how great an abbot they were in making.
The optimism to grow unabated and capture a large market share was such that some of the most-valued edtech startups, including unicorns and soonicorns, ended up bloating their expenses as much as 91% year-over-year (YoY) to $870 Mn in FY22 from $456 Mn a year ago, according to Inc42’s edtech report 2023.
Before these startups could take a U-turn or figure out sustainable strategies to increase their cash flows and revenues, the impact of the hefty cash burns got captured in their balance sheets.
Take edtech startup Emeritus for instance. Its parent company Eruditus’ consolidated net loss rose 46% year-on-year (YoY) to $386.8 Mn in the year that ended June 30, 2022 (FY22) on the back of a sharp rise in its marketing expenses during the period under review.
In an interview with Inc42, the CEO and cofounder Ashwin Damera shared that in 2020-21, they opened up an office in Brazil and expanded their footprint to markets like Japan and Australia, which incurred huge costs. Interestingly, they have now pulled back from these markets after burning substantial amounts of cash. Eruditus spent $262 Mn in employee benefits in FY22, up 5% YoY from $264 Mn in FY21.
Nevertheless, Damera is optimistic that Emeritus would become profitable this quarter (April-June) as the unicorn’s enterprise business has grown 3X between 2020 and 2022.
Another example is Unacademy, which spent $202 Mn on employee benefit, that exceeds its operating revenue of $75 Mn in FY22 by 2.7X.
Here it is pertinent to mention that the startup’s strategy to poach star teachers from Kota-based Allen Career Institute, too, pinned holes in Unacademy’s pockets.
Overall, except for Physics Wallah, most unicorns and soonicorns in the edtech sector reported a negative profit before tax (PAT) for FY22.
While Phyicswallah reported a net profit of $16 Mn in FY22, its employee benefit expenses increased more than 44X to $5 Mn from $119 K in FY21.
Further, its marketing expenses rose to $1 Mn in FY22, up 79X YoY. It is to be noted that the edtech’s expenses were the lowest among all edtech unicorns.
Will FY23 Depict A New Picture For Indian Edtechs?
At a time when edtech startups are trying to recover from the shivers of horrendous FY22 experiences, the financial outlook for edtech unicorns and soonicorns looks concerning, especially when their cumulative losses rose 90% to $585 Mn in FY22 from $310 in FY21.
The edtech landscape gets particularly worrying given the decline in demand for pure online education and the increasing popularity of hybrid models in the edtech space.
Notably, transitioning to hybrid models can be both cost-heavy and time-consuming and only a handful of players in the industry have been able to embrace this transition.
Meanwhile, on an aggregate basis, the marketing expenses of these players alone account for 64% of their operational revenue, while employment benefits take up 132% of the same metric.
Not only this, high customer acquisition costs and continued losses could force them to look for funding, amid the ongoing funding drought.
After raising a record $4.7 Bn across 164 deals in 2021, the sector could only lap up $2.4 Bn in 95 deals. And the investor sentiment only seems to be falling for now.
In the first quarter of 2023 (January to March), the country’s edtech startups could get their hands on only $137 Mn in funding across 19 deals versus $1.4 Bn in 29 deals in the first three months of 2022 and $625 Mn in 34 deals in the first quarter of 2021.
Late-stage funding declined by 96% YoY in Q1 2023, indicating investors’ caution towards investing huge sums of money in the edtech sector. Their concerns seem valid as Physics Wallah was the only edtech to remain PAT positive in FY22, compared to the ones analysed in this article.
Further, several industry experts that Inc42 spoke with believe that the funding scenario will continue to remain tight during the year until there are visible green shoots of revival in the industry.
So, if this is the case, these startups are expected to stay committed to cost-cutting exercises to extend their runway.
According to Inc42’s Layoff Tracker, nearly 10K edtech employees have already been sacked amid the ongoing funding winter. The sectoral layoffs account for 38.4% of the 26,000-plus employees laid off in the world’s third-largest startup ecosystem.
Further, with 2,500 layoffs, BYJU’S is at the helm of the total employee retrenchments that have happened in the edtech space since the beginning of the funding winter in 2022.
How Are Indian Edtechs Stuck In A Funding Loop?
As of now, it seems that Indian edtechs have an abyss to climb out of. This is because in a bid to meet their short-term financial goals they may have to curtail their marketing expenses.
However, pursuing this could have a visible impact on their revenue streams as they could find it difficult to attract, acquire and retain customers in the absence of a significant marketing budget.
Ironically, to back their marketing efforts, they will again need funds, which these startups may find difficult to raise amid the bleak funding outlook for the year.
Given that edtechs seem to be stuck in a never-ending loop, which starts from raising funds to scale operations and spending on marketing and promotions to boost revenues, what other options do they have to fix their creaking boats?
Well, the demand for highly skilled and experienced teachers continues to rise, and startups must be willing to pay a premium to secure their services. Further, the shift towards hybrid learning presents many opportunities, and edtechs must make calculated investments in this area.
Finally, achieving success in the edtech industry requires a delicate balance between cost-cutting measures and strategic investments in growth and innovation. Therefore, it will be critical for startups to remain mindful of their expenses while focusing on developing new products and services that could lap up revenues to support their growth story in the years to come.
Edited by Shishir Parasher
