What Edtech Startups Learnt In 2022 This was a year of massive layoffs, funding crunch and the rise of phygital models in edtech

What goes up, must come down. This phrase aptly defines the state of India's edtech sector today.

Up until 2019, startups in the space struggled to create a steady revenue stream. Out of 4000+ edtech startups, only one startup had turned into a unicorn till then, that is, BYJUs. Come global pandemic, edtech became a household name. Funding poured in and many new business models cropped up.

But, as normalcy returned in 2022, schools reopened and it impacted these businesses drastically. In addition, a liquidity crunch due to the global economic slowdown added to the woes, leading to significant losses and shutdowns. As per 'Tracxn Geo Annual Report: India Tech 2022', funding in edtech fell by 39 per cent in the January-November period of 2022 as compared to the same period last year. Many companies including leading players such as BYJU's, Unacademy, Vedantu had to resort to layoffs to stay afloat.

Another significant shift this year is the move from online-only to hybrid or phygital models.

Why Phygital

The edtech startups are moving to a hybrid retail model by opening physical centers to create a long-term and sustainable business mode. They believe that an omnichannel strategy is the future of education.

"Online edtech players needed help to drive stickiness through their online platforms. The deep discounting models employed by the edtech players have made it lucrative for customers to switch platforms for better savings. Now those models have come back to haunt them, therefore the switch to hybrid or physical models. The switching costs are much higher in offline models and are beyond financial motivation. ," said Anirudh A Damani, managing partner, Artha Venture Fund.

For segments like test-prep, pure-play online methods were always appropriate as an individual's drive and motivation are sufficient to compensate for the lack of a teacher/fellow learner-driven motivation. "The pandemic made many believe that even the other segments will quickly transition to such online models. Post-pandemic recovery showed the attractiveness of a hybrid model that can help provide the best of both worlds – online/tech models to allow at-your-pace learning with the right interventions in the offline world to help in group motivation, networking, motivation etc. In some cases, while offline was essential to make it a complete program for the learner and keep the learner on the platform (i.e. an existential issue), in other cases offline allowed companies to even increase their fees for such "phygital" offerings and therefore the move to 'phygital'," said Ruchir Lahoty, managing partner, MegaDelta Capital

Will it be viable in the long term?

"Returning to a hybrid learning approach will allow students to move toward a more sustainable education format." believes Nishant Chandra, co-founder, Newton School.

"The advantages of using cutting-edge technology for learning and assessment, such as virtual reality, augmented reality, artificial intelligence, and online collaboration tools, are enormous. However, face-to-face instruction, personalized learning feedback with the help of AI, teamwork, brainstorming, lab experimentation, and many other similar methods continue to be essential tools which is most feasible in school," he added.

While we are still in the earlier stages of such hybrid or phygital models, experts believe that the right mix and timely interventions will yield the best results and the best economic outcomes. "This will be iterative till best practices are discovered for each course type and for a specific target audience. In our view, most ed-techs targeting K-12 will need to go phygital. Similarly, a lot of the test prep (entrance exams specifically) will have to be phygital as well," said Lahoty.

"The hybrid model will work in the long run; it makes intuitive sense, especially if you can get the best out of both online and offline models. Coaching classes, whether for exams or extra-curricular activities like chess, etc., should do very well on hybrid models," said Damani.

Shifting focus of investors

Profitability and sustainability have been the keywords for investors in the space this year. "First the pandemic and then the post-pandemic re-set has changed a lot of assumptions for business models and therefore for investors. The investors are also trying to identify what is potentially the 'right' model in each of the ed-tech segments and build their investment thesis. In some spaces, where large money has already been invested, the fear of their new investments being crowded out by well-funded startups remains a threat. Investors were thus cautious in 2022," said Lahoty.

The approach towards funding has taken a complete 360 degree this year. "A business can only run on a path to future profits for so long. Eventually, every venture-funded company must prove that it can make money on every transaction (positive unit economics) and can do that at scale for a large addressable market. For most edtech players, at least one of these 3 elements is usually missing, making investors cautious of backing them," said Damani.

Caution towards acquisitions

2021 was a record year for edtech players and many unicorns in the space took the acquisition route for growth. For instance, BYJU's acquired Whodat, Aakahs and Great Learning, Imarticus Learning acquired Eckovation, Unacademy acquired TapChief, among others, in 2021.

However, 2022 saw a slowdown in acquisitions. "In ed-tech, in case of most of the acquisitions, the acquirer wanted to 'buy' access to a market with a ready product/offering and relatively well-established monetization models. While on paper, these transactions make a lot of sense, extracting value from any acquisition requires a humongous amount of effort and energy in integration (including aspects not to integrate). Given that the primary focus now is to move towards 'profitable growth', startups are likely to prioritise focusing internally to make sure they deliver on the promised path and unless an acquisition can take them closer to the goal, they are likely to avoid the 'distraction'," said Lahoty.

Various studies put the failure rates of M&A between 70-90%, i.e., on most occasions, M&As are value destroyers. Therefore, any M&A should get done cautiously, regardless of market conditions, said Damani. "When factors other than pure business factors drive the need to acquire, the result will be sub-optimal 70-90% of the time. Therefore, adopting a cautious approach to acquisitions is normal – not what founders should practice just for 2022 or 2023," he said.