Impact Investors Council (IIC) recently published its research report - '2023 In Retrospect: India Impact Investment Trends'. The report sheds light on the nuanced landscape of Impact Investing in India including investment trends, sectoral deep-dives and emerging themes catalysing impact.

Namita Dalmia, Partner at Enzia Ventures contributed to the report with her insights from the education sector. Here is her detailed interview:

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1. In line with global trends, the EdTech space in India has been witnessing a downtrend in funding since 2022, with deal volumes having plummeted in 2023. In your assessment, what other factors contributed to this downturn?

Between 2020 and 2022, the EdTech sector got large amounts of investments, almost unprecedented compared to the total investments made in the EdTech sector in the previous decade. Particularly during the COVID-19 pandemic, as students and teachers were forced to use technology to continue education, there was a surge in the number of startups and innovations in the space. Companies in the growth stage were fueled further with the mindset to grab a significant market share as online education delivery came to the rescue during the lockdown.

However, three things happened simultaneously. The capital influx led to adverse behaviours where the disproportionate focus went on growth with zero sights on unit economics. At the end of 2022, many companies faced unit economics challenges. Those that experienced rapid user growth needed to monetize effectively and achieve profitability. Second, with life returning to normal, there was a deceleration in user growth as customers started returning to the physical learning model while appreciating the value that online education provides or does not. Third, there was an overall downturn in the global startup industry, where investors decided to pause and reevaluate their portfolio and next set of investments. Since education was already over-invested during the pandemic, it was impacted the most.

In 2023, the EdTech companies were forced to focus on proving economics, which is essential. Most were required to scale down substantially and build grounds up fundamentally, including changing business models. Doing this requires time, so investments in existing companies slowed down. Since most of these EdTech companies had raised substantial capital, they had a runway (albeit with substantial cost-cutting) to improve their metrics and demonstrate sustainable growth. With funding secured for the next couple of years, these startups have used the opportunity to focus on optimising their business models, reducing customer acquisition costs, and enhancing user engagement to achieve profitability. However, the pressure is on these companies to deliver tangible results and justify the confidence placed in them by investors.

Moreover, some startups in the EdTech space received unjustified valuations based solely on their potential for scale rather than their current financial performance and market position. Unfortunately, as overvalued startups have struggled to meet the inflated expectations of investors, this has led to disappointment and a loss of confidence in the sector. This has had a trickle-down impact on investments in the early stages and investors waiting to watch the industry's performance. This, in turn, has impacted the number of new companies getting founded in this sector.

Nevertheless, the underlying problems in the education sector persist, and innovation remains essential. As existing companies stabilize, demonstrate scalability with sound economics, and prioritizes student outcomes, investor interest is expected to rebound. It's crucial to maintain optimism for the future of the EdTech industry and its potential to address critical educational needs.  

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2. How is investing in this sector different from others? How do you assess it regarding return expectations, gestation periods, challenges in establishing scale and other critical factors for an investment thesis? What should prospective investors be keeping in mind?

Investing in the education sector poses unique challenges and considerations for three primary reasons. Firstly, unlike industries such as e-commerce or ridesharing or food delivery, where technology facilitates most interactions, education relies heavily on human interaction for teaching and learning. In the other sectors, technology platforms enable discovery, fulfilment, and grievance redressal while the touch points with humans are limited. Customers do not require the same human to give them a ride or deliver their food. This fundamental reliance on human touchpoints sets the education sector apart. Secondly, the motivation of learners plays a crucial role in determining success. Learning is a complex process that demands discipline and effort, and only a tiny percentage of customers are inherently self-motivated to work hard to achieve their educational goals. Lastly, customers have a finite lifespan with an education solution provider. Companies must continuously acquire new customers to sustain and grow their business. This perpetual need for customer acquisition presents an ongoing challenge for scaling and driving profitability in educational ventures.

While the above differences make it hard for the companies to execute and grow, building in this sector has several advantages. Education yields a high average revenue per user (ARPU); the promise of upward social mobility and economic advancement drives such spending. Each population segment, whether divided by age, geography or language, presents a unique opportunity where entrepreneurs can build sizeable businesses with profitability. This introduces the chance for multiple winners to co-exist.

To capitalise on these opportunities, companies must align with their customers' paying capacity, motivations, and other demographic profiles to support them in achieving their educational objectives. Establishing a brand based on student outcomes is crucial for success in the education sector. By focusing on the right metrics, investors can assist entrepreneurs in building thriving businesses that benefit everyone in the ecosystem.

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3. The K12 segment is hit the most, with negligible funding in 2023. As access to affordable and quality education in the K12 segment, especially for underserved markets, remains an area of impact, what business models do you see inspiring confidence in investors?

When considering education, it's essential to understand its early years' significance. These formative years are critical to learning foundational skills like reading and math, exploring interests, building a love for learning and setting the foundation for the future.

26 crore children study in about 1.4 crore schools in India. One crore of these schools are government-run, and the rest are private. And this is a diverse segment. On the one hand, there's a growing number of international schools across all major cities. On the other hand, we still have many single-teacher schools. Though government regulations have improved access to education and student-teacher ratios, personalized learning or teaching at the right level is still challenging.

Several companies have been built catering to education, inside or outside the schools. These companies offer improved curriculum and/or better education delivery. New models, such as the use of generative AI for personalized learning or integrated whole-school models for improved college or career pathways, are emerging and interesting models. Some inherent challenges faced by businesses include (i) building a scalable solution keeping in mind the variation in curriculum, textbooks, and teaching styles of students’ school teachers, (ii) a long B2B sales cycle when selling to schools or the high digital cost of acquisition of a B2C customer (iii) multiple stakeholders in the schools - teachers, principals, owners and similarly at home - parents as customers and students as users. Entrepreneurs managing distribution costs efficiently while providing quality, affordable education will likely build large, sustainable businesses.

What will inspire confidence in investors is when EdTech entrepreneurs are able to demonstrate a significant delta in the student outcomes they deliver versus the status quo. Only with such differentiated outcomes can a flywheel be created that relies on word of mouth and lower customer acquisition costs. The importance of a brand built on outcomes must be considered when building in the education sector.

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4. While most segments within the education space have been adversely impacted, we see ‘Edu-Finance’ holding a steady momentum. As Avanse Financial Services attracts close to $ 100 million of investments in 2023, do you see an emerging pipeline of more such enterprises going ahead?

The demand for education finance is rising as it helps overcome individuals' access barriers without undue burden. Two key factors drive this trend:

- Escalating Cost of Education: Education expenses are consistently increasing, whether the tuition charged by institutions over time or the increasing number of resources students access to achieve their outcomes, thus increasing their overall spending.

- Elevating Aspirations: The number of people enrolling in various educational programs, particularly among first-generation learners or those reaching higher education levels for the first time in their families, is growing and will continue to grow. The drive to pursue education persists despite potential financial constraints due to personal growth and socio-economic advancement aspirations. NEP 2020 has also set ambitious GER targets for the country, requiring removing all access barriers.

While several companies are growing well, the Edu-Finance sector will continue to grow along with the education sector for the above reasons. While the opportunity is immense, accessing lower-cost capital will be the key differentiating factor that is, in turn, dependent on low NPAs. Building and scaling in a newer space, whether for a new education segment or a new demographic population, requires a few loan disbursements and collection cycles that usually begin at the end of the education program; hence, patience.  Companies are underwriting the future earning potential of their loan customers (students or schools). The quality of outcomes delivered by education programs will also become an essential factor in determining how large the Edu-Finance industry will become. An interesting opportunity lies in business models where Edu-Finance companies can enable students to achieve their educational goals.  

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5. What are some of the critical areas within Education that you believe should be the focus areas for achieving on-ground impact and building a scalable and commercially viable model? What could be some of the macroeconomic factors that would be critical towards driving investments towards these solutions?

National Education Policy 2020 has provided a robust framework for quality education. The government is putting the plan into action by creating favourable policies. The priorities outlined there, from universalising early childhood education to bringing new age focus in K12 curriculum and pedagogy to increasing the gross enrolment ratio in Higher Education to 50%, are critical to creating impact.

The main themes for entrepreneurship in education should be around (i) skills mapping and orientation in learning across age groups, (ii) deeper focus on individual student success and (iii) the evolving aspirations of the growing population juxtaposed with the future of work. New businesses can be built by building new capacity or improving the existing infrastructure. However, the commercial viability of the model will depend on the segment of the population we are catering to. Some models will need to be funded by government and philanthropic investments. At the same time, some models lend themselves to becoming small-scale profitable and yet thriving businesses, and then many areas lend themselves to more significant financial outcomes. These three types of models will attract different capital providers.

What is important to understand is that as we look to improve education opportunities and expand access, we must recognize that the new phase of expansion needs to be quality-first. This is also critical to building viable business models that sustain long-term growth. The current factors that seem to have impacted education also point to the same conclusion. The key macroeconomic factors that impact the education industry are (i) GDP growth and per capita income, the spending on education will continue to increase, and parents will continue to seek the best services for their children. (ii) growth of industries and the emergence of new sectors that have a direct impact on the demand for the new workforce. The education sector needs to respond faster to the changing demands of talent and reap the benefits as economies improve. The impact of an economic downturn plays out in two ways. On the one hand, during a downturn, skilling and higher education businesses need to work harder to ensure student success. On the other hand, recession is also a time when people opt to invest in themselves through relevant upskilling and focus on future potential.

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6. Given your past investments and learning in the education sector, what are the key risks for potential investors in this space - and how should one mitigate them?

Investing in the education sector presents lucrative opportunities, yet navigating certain risks effectively is crucial. As an EdTech investor, here's a breakdown of key risks we are conscious of.

- Prioritizing Student Success and Brand Building: Central to success in education investment is prioritizing student outcomes and cultivating a strong brand reputation. Entrepreneurs should focus on delivering high-quality education and support services that empower students to succeed.

- Implementing Efficient Distribution Strategies: A cost-effective distribution strategy is essential for minimizing customer acquisition costs without resorting to mis-selling tactics.

- Ensuring High-Quality Delivery and Consistency: Education is a high-touch services business. Consistency in delivering high quality is paramount for building trust and credibility.

- Exercising Patience and Frugality in Building: Building a successful educational venture requires patience and frugality. Entrepreneurs should optimize resources and prioritize long-term value to ensure sustainable growth.

By aligning investment strategies with these principles, investors can navigate the complexities of the education sector effectively, drive student success, and help build reputable brands, all while maintaining financial discipline and sustainability.

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Access the complete report here: https://iiic.in/research-publication/#2023-in-Retrospect-India-Impact-Investment-Trends