Edtech startups defy funding blues

Education-focused startups are on a tear across Asia, bucking the broader investment decline in the startup industry.

Funding for tech startups in the region fell by more than 50% in January, with companies in China and Southeast Asia seeing a massive drop in investments. The trend will likely persist as Covid-19, the disease caused by the novel coronavirus, continues to spread like wildfire.

Beating the funding blues, however, are a multitude of education-focused startups that rely heavily on technology to scale up. Edtech firms managed to raise fresh capital in a tepid market that has prevented many unicorns from pursuing initial public offerings, as venture capital firms have turned their focus to profitability following the fiasco at SoftBank-backed WeWork last year.

Byju’s, India’s only profitable unicorn, has had the biggest funding round among edtech companies so far this year, raising US$200 million in a deal that valued it at about US$8.2 billion. Another Indian company, Unacademy, raised US$110 million in a series E funding round earlier this month. Snapask, a Hong Kong-based online learning platform, on the other hand, has become the latest edtech company to raise funding as it seeks to expand across Southeast Asia.

Tiger parents pay up

Among the most active investors in the edtech space is Sequoia Capital, with investments in India-based firms Byju’s, Eruditus, Cuemath, InterviewBit, and Doubtnut.

“In highly competitive markets like India and Southeast Asia, parents are even more keen for their children to perform well in exams and find better employment opportunities,” says GV Ravishankar, a managing director at Sequoia Capital India. “This results in them investing significantly in their children’s education, creating a large and vibrant market for K-12 supplementary, test prep, and continuous education – which in turn has created a rich market for startups to succeed.”

GV Ravishankar, MD, Sequoia India. Photo Credit: Sequoia India

There are numbers to back this up. Asian edtech firms raised more capital than their global peers in 2020, according to Pitchbook data.

VC deals in edtech (US$ billions)20202019201820172016
United States0.091.281.441.321.11

*As of February 2, 2020. Source: PitchBook

India in the lead

This year, Indian edtech companies led the region in terms of funds raised.

With more than 250 million school-going kids, India has one of the largest markets for the industry globally, says Ravishankar.

Demand for online education in the country is also expected to rise to about US$2 billion in 2021 from US$247 million in 2016, according to a 2017 report by KPMG and Google.

Since 2017, close to US$2 billion have been invested into Indian edtech startups, according to Chennai-based researcher Venture Intelligence.

VC investments in Indian edtechs2020 (YTD)201920182017
Amount (US$ millions)688399667176
No. of deals13344229

Source: Venture Intelligence

An untapped opportunity

India’s huge population means that the student-to-teacher ratio lags behind developing countries, and the problem is even more severe in government-funded schools due to apathy from officials. The situation has led parents to invest in after-school tutorials.

With the funds they’ve raised, startups in the edtech space are transitioning the country from conventional tutoring methods to technology-based platforms, using video streaming, AI, and machine learning to scale up their services. One such example is Doubnut, which raised US$15 million from Tencent and other investors in January to build more content for its video-based learning solutions and widen its market reach.

Doubtnut co-founders Tanushree Nagori and Aditya Shankar, alumni of the famed Indian Institute of Technology in Delhi, used to run a private coaching center until they realized that they were spending more time answering student queries than actually teaching them. This prompted the duo to launch Doubtnut, a free app that lets students ask questions across many subjects.

Doubtnut co-founders Aditya Shankar and Tanushree Nagori. Photo Credit: Doubtnut

While the platform had teachers fielding questions, the flurry of queries from students became overwhelming, says Nagori.

“The problem was much bigger than we thought,” she says. “A power user at Doubtnut ends up asking about 45 questions a month – that, too, from only two subjects.” As students typically send in a number of queries, paying even 100 to 200 rupees (US$1.40 to US$2.79) per question was unaffordable, Nagori explains.

To solve the problem, the app now uses AI and machine learning to scan the picture of a problem and give answers via video tutorials and other means.

Such innovative solutions, which allow the business to scale up, make edtech startups attractive.

“Given the spend in the industry and the reasonably average ticket sizes, many parts of the edtech market have the ability to be attractively profitable,” says Sequoia’s Ravishankar.

“Companies that build a strong brand with low-cost, high-reach distribution channels have a higher chance of success and the ability to build profitable models at scale,” he says.