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Indian edtech startups open up path for consolidation

In the first half of 2020, Indian edtech startups have raised USD 795 million, as compared to USD 108 million it attracted in the same period last year.

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Indian edtech sector, which started the year 2020 with multiple high ticket investments and despite slow economic activity added thousands of new users during the lockdown, is now inching towards consolidation.

Bengaluru-based Byju’s, the USD 10.5 billion decacorn company and the world’s most valuable edtech startup, is reportedly looking to acquire app-based doubt solving app Doubtnut for USD 125-150 million. Four-year-old Doubtnut targets students from middle school all the way up to competitive exams. The Gurugram-based firm had raised USD 15 million in a round led by Chinese internet giant Tencent in January and counts Sequoia Capital, Omidyar Network, and AET as its backers.

Byju’s is also making a move on WhiteHat Jr, a Mumbai based startup that helps kids learn coding to create games, animations, and apps. The offer on the table is worth USD 300 million, according to local media Economic Times (ET), which might be a little hard to resist for Whitehat Jr as it has been in the market to raise USD 50 million in a fresh round. The two-year-old firm had raised USD 10 million in September last year from Omidyar Network and Nexus Venture Partners.

Byju’s biggest rival in the competitive examination prep category, Unacademy, acquired CodeChef in mid-June, for an undisclosed amount. Founded in 2009 by Indian billionaire and serial entrepreneur Bhavin Turakhia, who has been a board member at Unacedemy since 2017, CodeChef is a not-for-profit platform that teaches coding. Prior to that, Unacademy had bought Kreatryx, an online platform for preparing GATE (Graduate Aptitude Test in Engineering) and ESE (Engineering Services Examination), in a cash and stock deal, just in time when the healthcare pandemic spread prevalently in India, in late March.

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Meanwhile, Vedantu, an online tutoring platform, funded by Tiger Global, Accel, GGV Capital, and KB Capital, among others, invested USD 2 million in Instasolv, a doubt-solving app for high school students and for those preparing for engineering college entrance exams. The investment gives the edtech firm full rights to acquire the app.

Similarly, in April, UpGrad, promoted by entrepreneur and philanthropist Ronnie Screwvala, said it has earmarked around INR 50 crore (USD 6.6 million) to acquire three education companies across online degrees, post-graduation, and higher education segments at large. Earlier in February, Reliance-owned edtech company Embibe, acqui-hired test preparation platform, OnlineTyari, for an undisclosed amount.

On an uphill path

Edtech startups in India have had a streak of good luck since late last year, at a time when most investors became skeptical after WeWork’s IPO was delayed and economic activity had slowed down in the country. Some of the notable edtech investments in 2020 include Byju’s USD 200 million funding, Unacademy’s USD 110 million deal, and Vedantu raising USD 24 million.

The pandemic that saw severe lockdown in the country causing all educational establishments to shut down, also helped B2B edtech companies find new backers as well as interest from their clients.

No surprise then, it’s not just the consumer-facing edtech companies that are raising money, even B2B companies in the education space are equally in demand. In January this year, New Delhi-based Eupheus which offers digital exclusive content and courses for schools, raised USD 4.3 million in its Series A round led by Yuj Ventures.

Overall, in the first half of 2020, Indian edtech startups have raised a total of USD 795 million, as compared to USD 108 million it attracted in the same period last year, representing a whopping 636% year-on-year increase, according to data by Venture Intelligence.

Flushed with money from global and domestic venture capital (VC), edtech firms have been eyeing acquisitions and merger opportunities in the country.

According to the business intelligence platform Tracxn, there were 51 Indian companies that were acquired in the first half of 2020. Of these 51 firms, seven were edtech companies, which made the upcoming segment the third most active sector in terms of M&A activity, after consumer and enterprise application.

There is a three-pronged strategy that is at play for these edtech companies. First, acquisitions would help remove competition and increase their user base. Second, it would help them strengthen their portfolio services to cater to the increasing number of users. Lastly, it would let them expand into new offerings and markets.

For instance, Doubtnut claims to have 90% users from tier 2 and tier 3 cities because of its multilingual offering. That is something Byju’s is very interested in, so as to expand its reach beyond metros and tier 1 cities. Similarly, Instasolv is a ticket for Vedantu to tap into tier 3 and tier 4 markets.

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“Our investment in Instasolv is a strategic step to strengthen our play in doubt-solving, which is one of the key aspects of learning online. We are excited to partner with Instasolv and leverage the category as more students join this new learning wave in tier III and tier IV markets,” Vamsi Krishna, co-founder and CEO of Vedantu, said in a statement.

Investors believe education is the only sector that would see sustained user spending despite the slowdown as Indian parents usually don’t compromise on their kids’ education. Ever since the pandemic has made it difficult for most schools to function normally, the traction on digital education platforms has been on a rise.

According to Tejeshwi Sharma, Principal at Sequoia Capital, the edtech market for grade 1 to 12 standard (K-12) is estimated to be about USD 500 million, while overall K-12 tuition segment is about USD 13 billion. This essentially means there is only 4% digital penetration in the segment, which leaves out a huge market that can be tapped.

Similarly, the overall test preparation market in the country is projected to be USD 8 billion, Sharma, in a recent tweet said, while the test prep edtech market is expected to be about USD 200 million, which translates into 2.5% penetration.

In seven years, he said, edtech market in India would reach USD 5 billion, with the combined market capitalization of USD 30-40 billion.