Why India's education technology start-ups are in the deep freeze

They will continue to tread on thin ice amid a long funding winter unless they fundamentally revise their business models

The once-thriving Indian education technology (edtech) bore the brunt of blows among Indian unicorns from the funding winter in the start-up world. Investments have slowed, especially for large companies, and the edtech tides are not expected to turn anytime soon. In short, industry stakeholders expect layoffs to continue in the near term.

The year 2022 was a tumultuous period for the Indian start-up ecosystem. Budding companies across the board faced job cuts as the funding winter sent chills down the spines of capital-starved start-ups.

According to industry estimates, of the more than 22,000 layoffs that took place in 2022, over 8,000 came from the edtech space. Since inception, the edtech sector has cumulatively laid off more than 10,158 people, according to data from Layoffs.fyi, a tracking platform for layoffs.

The New Year has not been kind to edtech companies either. Since the start of 2023, edtech start-ups have laid off more than 2,000 employees amid a funding crunch that has hit early-stage firms and unicorns — companies valued over $1 billion — alike.

“Edtech companies over-hired in many ways. A lot of firms hired in anticipation of strong growth, demand and funding,” said Anirudh A Damani, managing partner, Artha Venture Fund, an early-stage micro VC that has taken bets in start-ups such as Leverage Edu, HobSpace and PiggyRide. “Funding has, however, dried up.”

Easing Covid-19 restrictions and a return to physical classes by students was another nail in the coffin. Furthermore, investors are shifting focus towards start-ups that are prioritising unit economics.

This pivot from a “growth at all cost mentality” towards profitability has led to rationalisation and restructuring among many firms. The most recent entrant into the layoff club was edtech major Unacademy, which fired 12 per cent of its workforce last week, as the company chases profitability. Including this round of job cuts, the total number of employees shown the door by Unacademy Group companies crossed the 1,900 mark.

Earlier in March, fellow unicorn UpGrad laid off 120 people at one of its subsidiary companies, Impartus Innovations. The layoffs affected 30 per cent of the company’s 300-strong workforce.

Before that, in February, India’s most highly valued edtech firm, Byju’s, let go of 1,500 employees citing cost optimisation. DUX Education, a K-12-focused start-up, also shut shop due to funding challenges in February.

Edtech companies were especially hit hard in January this year. The month saw job cuts across several firms. Edtech major Vedantu laid off around 100 employees. LEAD, another unicorn, also cut a similar number of employees at the time. During the same month, Unacademy-owned Relevel dropped 40 employees. Before that, upGrad-owned edtech start-up Harappa let go of 30 per cent of its workforce. CampK12 was another such start-up that cut 70 per cent of its workforce of around 433.

December 2022 saw another round of layoffs from Vedantu, which cut 385 employees.

A month before that, SoftBank-backed Unacademy said it was laying off 350 people or 10 per cent of its 3,500 workforce, joining the likes of Teachmint, a Series B-funded company valued at around $500 million, which laid off 45 employees. November also saw Practically, a K-12 STEM start-up, shut its doors.

In October, edtech leader Byju’s laid off nearly 2,500 people, or 5 per cent of its workforce of 50,000, as part of an “optimisation” plan amid steep losses. Lightspeed-backed FrontRow let go of 75 per cent of its workforce, around 130 employees, around the same period as well. Moreover, coding start-up Qin1 also ceased operations during the same month.

“Companies are okay with having flat growth in the interest of better margins, which is going to become the norm,” Damani said.

According to Vinay Bansal, founder and CEO, Inflection Point Ventures (IPV), edtech models are contingent upon building content. “Content, once created, can be reused multiple times. At the moment, companies are burning cash to build this content, after which the model might prove to be a cash cow,” he said.

IPV is an angel investing platform that has invested in edtech start-ups like Toppersnotes, ixamBee and Edvizo.

“Unless companies keep their prices and costs in control, edtech is a perennially losing game. When done right, these models should become 70-80 per cent gross margin businesses,” Bansal said.

Although many early-stage edtech firms have managed to become profitable, unicorns in the sector that have managed to build scale have not been able to showcase profitability.

One exception to this trend is Alakh Pandey-led PW, which has been profitable for the past two financial years consecutively and is on track to remain so this year as well owing to what investors call strong fundamentals.

PW is, however, an outlier among many firms that are struggling to stay afloat. Increasing customer acquisition costs are also proving to be a barrier for such firms.

“The model can be profitable at scale. However, many edtech models today are inherently cash-burning. Firms can make money but not the way edtech unicorns are currently doing it,” Damani said.

Edtech firms, he said, are making incremental changes and not fundamental ones. “Companies today have similar business models with not much differentiation. Edtech firms need to build a strong content-led strategy, with strong branding, referrals and repeat customers. They must aim to increase the average revenue per customer,” he added.

Going forward, funding among late-stage companies is expected to remain an impediment for edtech firms. “2023 has been a difficult year and will remain so. Late-stage companies that have over-hired and sold the wrong products or have not managed their costs will continue to face challenges,” Bansal said.

Despite headwinds, industry watchers say that there is investor interest for companies with provable business models and good unit economics. Since education is a huge market in India, the edtech sphere has a lot of market potential.

The next 6-12 months are expected to be difficult for the sector. Once the dust settles, however, profitable edtech models are predicted to emerge.