Merger Or Acquisition? Unacademy, K-12 Techno Services And Edtech’s Trust Deficit

Till two years ago, India’s edtech startups had all the leverage. They also had the funding, unbridled optimism and amassed talent by the thousands to scale up. But as we all know this story has come undone since 2022.

The past two years have shown the weak foundations on which this optimism stood — the edtech sector has led in terms of notable shutdowns and layoffs in the startup ecosystem. It’s quite clear now that edtech has lost its shine and a lot of the leverage.

But what it has also lost is the trust that is inherent in education businesses, and that’s not just from the consumer standpoint but also from the point of view of other more traditional education businesses. Given BYJU’S high-profile corporate governance meltdown, questions about multi-year revenue recognition, buried costs and a severe cash crunch, there’s definitely a pall over the edtech market in India.

Which is why the report this week about edtech unicorn Unacademy looking at a merger with K-12 Techno Services Private Limited (K-12 Techno) piqued our interest. What caught our eye specifically was the reported 50:50 partnership between the two companies, because it would be the first such deal in edtech history in India.

While Unacademy did not respond to our queries seeking a clarification on the development, a K-12 spokesperson declined to comment on the speculation.

Inc42 has learnt from two separate sources that while talks between the two companies are ongoing, but we are quite a away from even entering advanced discussions. More importantly, both sources claimed that if a deal materialises, it would not be a merger, instead, K-12 Techno would acquire Unacademy. However, the deal is nowhere close to done, as currently the companies only met to initiate talks.

Founded in 2010 by Jai Decosta and Maguluri Srikanth, K-12 Techno operates the chain of Orchids International Schools across India. Besides, the company offers full-stack solutions to educational institutions from curriculum and academic design to technology services, solutions for administrators and teachers as well as for education marketing. Decosta is currently the CEO and managing director at the company.

K-12 Techno would potentially leverage Unacademy to add a B2C test prep to its chain of Orchids International Schools and other B2B edtech services.

The first source, close to Unacademy’s leadership, said that the companies have held talks for the past few weeks, but these discussions have cooled down to some extent in recent days. At the moment, things are moving slowly on this front.

The second source, privy to developments at K-12 Techno, corroborated this claim, and added that K-12 Techno is far from convinced about the value that a potential Unacademy acquisition would add to the business. The source close to K-12 Techno Services claimed the company is yet to identify the profitable verticals and products in Unacademy.

“The first thing you need to know about K-12 is that it is a very profit-driven company. So the first step for K-12 is to understand the economic engine of Unacademy, and the company is yet to arrive at a clear conclusion on this front,” the source close to K-12 Techno Services said.

As per both sources, K-12 Techno is a profitable company on an EBITDA level (INR 100 Cr as of FY24), whereas Unacademy is yet to solve the unit economic challenges that have kept it mired in losses. Despite having higher revenue than K-12 Techno (as of FY23), Gaurav Munjal-led Unacademy is far from profitable (more on this later).

Unacademy K-12 Services

Currently, K-12 Techno runs Orchids International Schools in 19 locations in India for day schooling and five boarding schools. Our source in the company told us that last year, nearly 3,000 students graduated from class X across Orchids’ 20+ facilities in India.

On the other hand, 2015-founded Unacademy is primarily a test prep platform, which has recently expanded to offline or hybrid learning and also operates verticals such as Relevel (job assessment tests), NextLevel (gamified job search), and Graphy (course creation and management).

In June 2022, Unacademy launched Cohesive as a developer-focussed SaaS product, which then pivoted to generative AI content creation in 2023. Most recently, it has launched Unacademy Stars, a 12-week course designed for those looking to become Unacademy teachers, and expanded its language learning app Unacademy Languages for more foreign and Indian languages. Incidentally, Unacademy Languages is operated by Unacademy, Inc, the company’s US-based entity.

Unacademy’s vast product universe is one of the challenges that K-12 is looking to solve, according to sources. There’s a lot that K-12 Techno is less than convinced about. One of the sources added, “Unacademy needs a turnaround because it has huge losses, though the test prep business is said to be making money. K-12 wants to know whether it is making money on online courses or in offline learning, and which courses or verticals in test prep is Unacademy getting the most money from.”

Other hurdles in the way are Unacademy’s negative gross margins, which would not be accretive to K-12 Techno’s EBITDA-positive business. Every company has different verticals and each of these verticals may have varying accounting cycles and revenue recognition processes. “There are other questions too, such as what is the revenue recognition process or how does the company recognise multi-year revenue or revenue collected for future courses where there could be refunds,” according to the first source.

Has Unacademy Fixed Losses?

Over the years, K-12 Techno has raised more than $175 Mn from investors such as Peak XV Partners, Sofina, Navneet Education and others. Incidentally, Unacademy is also backed by Peak XV, but it has raised more than $440 Mn since inception, at a valuation of $3.5 Bn (as of 2021).

From the financial performance (FY23) standpoint, K-12 Techno seems to have utilised the funding raised in a more efficient way.

In FY23, K12 Techno registered INR 382 Cr in revenue with a loss of INR 39 Cr. According to sources, the company almost touched the INR 500 Cr mark in FY24 and a positive EBITDA of INR 100 Cr.

In comparison, Unacademy reported revenue of INR 907 Cr in FY23, with a staggering INR 1,678.1 Cr in net loss. Sources claimed that Unacademy has nearly doubled its revenue in FY24 which is now close to INR 2,000 Cr.

Inc42 could not verify the FY24 numbers as neither company has disclosed its performance.

Late last year, Munjal took to Twitter to announce that Unacademy had slashed its cash burn by 60% in the calendar year 2023. While the online business saw a degrowth of 30%, EBITDA was claimed to have improved by 87%. Munjal also claimed that the Unacademy Centres offline business had 32,000 students in 2023 from 6,000 in 2022.

He also said that the startup’s Graphy vertical was on the verge of achieving profitability, but did not reveal more details about this. But the improved EBITDA performance is certainly linked to the layoffs of over 2,000 employees since the beginning of 2022.

Besides, Unacademy also cut pay for higher management, and many senior-level employees have walked out of the company since late 2023, including:

• Arnab Dutta – Senior Vice President Strategy
• Vivek Sinha – Chief Operating Officer
• Abhyudaya Singh Rana – Chief of Staff, Chief Compliance Officer
• Subramanian Ramachandran – Chief Financial Officer
• Siddharth Manchanda – General Counsel
• Tina Balachandran – Senior Vice President, Talent and Culture
• Sachin Aggarwal – Head Franchisee Business (Offline Centres)
• Karan Shroff – Partner & Chief Operating Officer
• Ashish Arora – Senior Vice President & National Head Academics

Most recently, cofounder Hemesh Singh stepped away from the CTO role and day to day operations to take on an advisory capacity position.

The departures of these key leaders has undoubtedly stymied some of the momentum that Unacademy had achieved during the Covid years, and left the company bereft of the talent that had the institutional knowledge to turn things around.

Edtech’s Trust Deficit

Even so, the work put in over the past decade has created ‘Brand Unacademy’, which still has quite a pull in the market. In the case of Unacademy and K-12 Techno, the strategic match is plain to see.

As our second source added, “Synergistically, Unacademy is a great fit for K-12 Techno. Gaurav Munjal has built a massive brand for test prep, and from it would be a good way for K-12 to extend the revenue pipeline, as the next big step after the tenth or 12th grade is test prep.”

Given the lack of diverse employment opportunities in India, the test prep market continues to be in demand. The recent controversy around NEET results has also shown that there are a lot more problems to be solved in this space.

But then, there are deeper trust issues related to the high-profile meltdown of BYJU’S. And the erosion of trust is very real for those looking to raise funds or find exits. This is now perceived to be an industry-wide problem, especially in matters of revenue recognition.

According to a Bengaluru-based entrepreneur in the test prep space, “Investors want to plug all corporate governance holes after what happened at BYJU’S, which is why everything is delayed from fundraising to other strategic deals. Every disclosure and claim is being minutely examined.”

Besides revenue recognition, cost recognition is another aspect where founders are being pressed for answers. The founder quoted above added, “Two years ago, investors had little reason to suspect that companies are not removing the refund costs from revenue, or whether they are accounting for financing costs properly when offering courses on EMI through lending partners. But now these have become hygiene.”

In many cases, these problems are not just limited to edtech startups. It has become increasingly common to see corporate governance trouble stemming from revenue inflation or GMV inflation, so the trust erosion is pan industry.

Traditional educational institutions and schools — even those offering tech-first solutions — know that trust is paramount and have invested in building that for the long term. Orchids and K-12 have a track record of running schools for nearly 15 years, and while K-12 also relied on VC funding to grow and scale up to some extent, the profit-driven approach has paid off results.

Past M&As in the edtech space such as the $1 Bn BYJU’S-Aakash deal or Vedantu’s $40 Mn acquisition of Deeksha have shown mixed results for acquisitive edtech startups.

A long-drawn ownership battle in Aakash after the acquisition and the fact that loss-making BYJU’S depended heavily on its profits have had a negative impact on the offline coaching giant. Aakash was supposed to be margin accretive for BYJU’S, but the company’s situation has gone from bad to worse and BYJU’S has been accused of mismanaging the business to save its ship.

It’s less clear how Vedantu has leveraged Deeksha, since the edtech startup has remained under the radar relatively speaking, but like others in its space, Vedantu had a massive task of clawing back its way after reporting losses of INR 358 Cr in FY23.

The success — or lack thereof — of such deals often comes down to the entrepreneurial mindset and how it varies between new-age companies and so-called traditional businesses. Bringing these forces together is not an easy task and several acquisitions have failed to have the right impact as a result.

In Unacademy’s case too, we have written about how its acquisitions have not yielded the right outcomes and many of these were culled from the company in the past.

With ten years of operations, investors have shown patience with Unacademy too, now close to its 10th anniversary, but given the improving market for IPOs, this patience is wearing thin. If not in the case of Unacademy then certainly in the case of Swiggy, Ola, OYO and other startups that are of a similar age as the edtech unicorn.

An exit through an acquisition may not have been the vision that Gaurav Munjal harboured when starting the Unacademy journey, but it could well come to that.

From what we were told, it’s not even clear whether a potential deal will cover Unacademy’s entire business or whether it would just be the test prep vertical that would change hands. Sources claimed Unacademy has close to INR 1,600 Cr or $200 Mn in the bank, which offers it a long runway, but having nearly 30 shareholders on the cap table complicates the structuring and the contours of the deal.

After arriving at a decision on the viability of the acquisition deal, there is still the matter of ironing out these final nuances, which could take a few more months. All said, any potential deal is only likely to materialise towards the end of the year.