Can edtech unicorn Vedantu pull an Aakash with Deeksha buy?

K-12 (Kindergarten through 12) and test prep edtech unicorn Vedantu, last month, picked up a majority stake in offline test preparation platform Deeksha for $40 million, in an attempt to strengthen its hybrid play.

This acquisition comes at a time when consumer-facing K-12 edtech startups, including Vedantu, are struggling with falling demand as offline classes have opened up after the pandemic.

With its core vertical, online K-12, witnessing a fall, Vedantu decided to hedge its bet with hybrid learning by acquiring Deeksha, a brick-and-mortar education company.

Co-founder and chief executive officer Vamsi Krishna told Moneycontrol acquiring Deeksha is an “aggressive” move by the unicorn, which has been less aggressive in terms of acquisitions, compared to larger rivals such as Byju's and Unacademy.

"On one hand we are looking at where all we can consolidate and rationalise, given the situation externally but that does not mean that we are not aggressive on growth. This (acquisition of Deeksha) again is a very aggressive growth strategy for us to double down on where we believe growth will come," said Krishna, in an interview with Moneycontrol at the time of its acquisition of Deeksha.

Vedantu’s competitors including SoftBank-backed Unacademy and India’s newest and the only profitable edtech unicorn Physicswallah have set up their offline centres in coaching hubs of India this year in a bid to diversify revenue streams amid falling demand for online learning. Vedantu, too, opened a ‘hybrid’ coaching centre, in July this year in Muzaffarpur.

Also Read: How offline became the new online for India’s ed tech unicorns

But with Deeksha’s acquisition, Vedantu is expecting to do what Byju’s did with Aakash Educational Services, albeit on a smaller scale.

Byju’s, arguably Vedantu’s closest competitor, acquired Aakash, an offline test prep platform, in April last year, during the peak of Covid-19. Aakash was a profitable entity before the pandemic, with an annual revenue of over Rs 1,200 crore. So its acquisition was not going to add much to Byju’s expenses but was going to help the edtech unicorn in adding an annual revenue of over Rs 1,000 crore.

Vedantu and Deeksha are not different when it comes to strategies. However, the scale of businesses varies.

Deeksha’s operating revenue for FY21 (2020-21) was Rs 75.6 crore, and it recorded an adjusted EBITDA of Rs 16.29 crore. More recently, in FY22 the company claims to have recorded Rs 73.91 crore in operating revenue with an adjusted EBITDA of Rs 20.11 crore, according to data shared by the company with Moneycontrol.

Also read: Why adjusted EBITDA needs a closer look

This shows that Deeksha has an EBITDA margin of about 25 percent, similar to Aakash’s EBITDA margin of 20 percent. The company, thus, will be adding very little to Vedantu’s burn, while adding at least Rs 70 crore to its revenue starting this year, expecting the company to report revenue growth for FY23 (2022-23), albeit marginal.

“We are not on that scale, but we are profitable. We have a small contribution to make to Vedantu’s bigger picture,” Sridhar G, the founder of Deeksha told Moneycontrol.

Vedantu’s chief Krishna also believes Deeksha is a ‘healthy’ company, and the acquisition will add positively to Vedantu’s goals for profitability and IPO, he told Moneycontrol in an earlier interview.

For FY21, Vedantu’s net loss had swelled to Rs 604.3 crore from Rs 150 crore a year earlier, even as the company reported a 4x jump in its consolidated revenue to Rs 135 crore. Krishna had told Moneycontrol earlier this year that the company’s revenue grew 9x in the two years of the pandemic. However, Vedantu is yet to file its FY22 earnings.

More on their deal

In 2012, Kaizen Private Equity LLC, an education-focused PE fund, led Rs 24 crore or $4.6 million round in Ace Creative Learning Private Ltd, the parent company of Deeksha. Ace Creative had earlier raised Series A investment from Accel Partners and N R Narayana Murthy's Catamaran Ventures.

According to Sridhar G, Kaizen, Accel, and Catamaran were looking for an exit from the company after staying invested for 9-10 years.
“So that is what prompted our full search. I've been in conversation with many others. But the alignment between Vedantu and Deeksha was far stronger than any other edtech giant,” he said.

Strategy and synergies

Putting the exits, revenue, and profit numbers aside, both companies believe they have a lot more to offer.

Founded in 1998 by Sridhar G, Karnataka-based Deeksha is a test prep platform for the board and competitive exam coaching for students of grades 11 and 12. Deeksha said it currently has about 39 centres across the southern states of Karnataka, Telangana, and Andhra Pradesh.

In 2017, Deeksha made an attempt to move to lower-tier towns and rural Karnataka. However, the founder said he faced several setbacks in the journey - teachers from Bangalore did not want to settle in rural Karnataka, and those who did, asked for higher remuneration.

At the same time, parents in the rural part of the state did not wish to pay as much as their urban counterparts, according to Sridhar G. Hence, Deeksha discontinued its services in rural areas and lower-tier towns in 2017, he said.

After the acquisition, both companies plan to open hybrid centres in rural and lower-tier towns where the same master teacher teaches remotely, from Bangalore, in the presence of a local class co-ordinator.

Deeksha believes this model will effectively lower their costs helping them offer services at a lower price point in rural Karnataka.

“Rural India is a place where no other tech companies go. Being able to do that at scale at affordable price points is a very pristine market right now,” added Sridhar G. Starting from Karnataka, the two companies want to take hybrid centres to rural areas of other states.

Sridhar G said the companies aim to reach about 10,000 students in the hybrid vertical in the next two to three years. They also plan to double the number of virtual or hybrid centres to about 60 in the same period, he added.

From students to schools

As a B2B (business-to-business) company Deeksha also has a network with schools and offline institutes which will allow Vedantu to scale its hybrid operations going forward.

“We are enabling them to take their wave platform and digital classes, and get to a large scale at a profitable point. Rather than going to acquire every child by spending money, they can now go through a B2B channel wherein the acquisition costs are much lesser,” said Sridhar G.

Vedantu and Deeksha go back a long way

Sridhar G told Moneycontrol, he started Deeksha on a small scale tutoring and teaching 40 students in Bangalore as Ace Creative Learning Private Ltd. What paved the way for Deeksha, he believes, was a learning management system (LMS) platform which they purchased from Vedantu in 2012.

Sridhar G said the founders met him back then and pitched the platform which Deeksha started using in its institutes.

“After trying it for a couple of years, they felt that the market is not yet ready. And so they pivoted and moved from an LMS platform into a tutorial platform and online tutoring platform,” he added.

At the time, the founders offered Deeksha to take over the LMS platform completely.

“So we actually purchased the source code for the first product, and we took it. When I had multiple institutions, I didn't have continuity in how they were teaching the various institutions, I needed something to standardise it. So this LMS platform became my backbone.”

The road ahead

With the startup ecosystem also undergoing a funding winter, consumer-facing edtech startups, including Vedantu, have started to take measures to save up for the rainy days. Since the beginning of 2022, Vedantu has laid off over 600 employees in an attempt to cut costs. The company recently also said it cut its monthly burn to Rs 15-18 crore from over Rs 65 crore last year, Moneycontrol had reported earlier.

Sridhar G is bullish on Vedantu’s efforts of turning profitable and believes the next few years will be crucial for the edtech startup space. “People will survive, and people will die, It'll all come to head in the next two, or three years, a very important time in this industry. And fundamentally, any company which is able to deliver a good academic learning experience, at an operationally profitable level, those companies will survive,” he added.

With edtech in the eye of the storm and profitability becoming a prerequisite for raising funds in a bleak funding environment, many edtech startups, especially unicorns, are targeting inorganic strategies - acquiring brick-and-mortar companies to scale revenues and add profits. It is only to see how these acquisitions pan out and if hybrid indeed is the solution to consumer edtech's troubles.