Funding in edtech startups declined by nearly 45% to $2.2 billion in the nine months to September, data shared by private investment tracker Tracxn showed. Analysts attributed the drop to falling investor confidence as unicorns struggle with profitability.
Experts point to a larger slowdown next year, especially across early-stage funding, which could lead to subsequent M&A cycles. Smaller startups below Series B are likely to become targets for acquisition. Moreover, the test preparation segment, which has mopped up most of the capital in the last two years, is expected to see testing times ahead.
In Q1 2022, Edtech startups raised $1.4 billion from private equity and venture capital firms but this dropped considerably by 59% to $574 million in Q2 2022. In Q3FY23, the funding crashed 75% to just $142 million Tracxn data showed.
Vikram Gupta, founding and managing partner at IvyCap Ventures, said M&As are inevitable with investors losing confidence in the test-prep and K-12 segments even as most VCs are sitting on large amounts of un-invested funds. “Most M&A deals in Edtech will definitely include a combination of stock and cash structured as stock swap deals. I don’t see a large potential for all cash deals,” added Gupta.
Edtech funding in CY2021 hit a record high of $4.2 billion across 310 rounds. This was higher than the $2.3 billion raised across 220 rounds in CY2019 during the height of the pandemic. Since most Indian schools and educational institutions remained shut during 2019, edtechs saw a tremendous uptick in registrations and subscriptions. However, by 2022 growth lost momentum, shaking up the segment. This resulted in massive layoffs in firms such as Byjus, Vedantu, and Unacademy, while multiple smaller start-ups shuttered operations.
The layoffs came about because edtech companies tried to avoid down-rounds and conserve cash to meet financial targets. Questions are now being raised about the substantial revenue-to-valuation multiples at which most of the large edtechs closed their deals in 2019 and 2021. For example, the most valued edtech start-up Byju’s posted a $295 million revenue for the financial year ended March 2021 but was still able to raise capital at a whopping 40x multiple of around $13 billion in March 2021. In addition, Unacademy which posted a revenue of around $41 million in FY21, registered a revenue multiple of around 30x compared to its valuation of over $2 billion in the same timeline.
“Some of the revenue multiples in edtech were unreasonable during the height of the funding activity last year. But this has declined considerably and we feel that the right multiple shouldn’t exceed beyond 10-12x depending on dominance, the profitability of the company and the lifetime value of the registered user base,” said Anup Jain, managing partner, Orios Venture Partners.
Globally, edtech valuations have been declining across publicly traded companies such as 2U, Kahoot, Coursera, Udemy and others, indicating an impeding valuation correction for Indian peers looking to list. According to a report by a private investment tracker Dealroom, global edtech valuations have been slashed in public markets this year, down by almost 50% compared to the end of 2021. But publicly traded value is still only a small fraction of the overall edtech sector, hence the value of private companies is still growing, up by 13% since the end of 2021, Dealroom said.
However Indian edtech companies have posted a large increase in valuation in CY2022, despite the turmoil in the sector. Dealroom further estimated that the combined value of Indian edtech firms stood at around $45 billion as of 2022, only behind the United States and China at the third position globally. But Indian edtech firms have still posted a 26% increase in total enterprise valuation in CY2022 (year-to-date). In comparison, European edtech posted a 26% YoY jump while the US and China only posted a 13% and 0.3% y-o-y jump in valuation growth in CY2022 (YTD).
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