A majority of India’s edtech unicorns reported widening losses for FY22 as they spent aggressively on advertising and promotions and handsomely on employees, a trend that is likely to reverse going forward amid a worsening slowdown for the sector.
The five edtech unicorns—Unacademy, PhysicsWallah, Vedantu, Eruditus, and upGrad—that have filed FY22 results cumulatively spent more than Rs 2,250 crore on advertising, marketing and promotions with Eruditus spending the most—about Rs 1,090 crore and PhysicsWallah spending the least—Rs 11 crore, according to regulatory filings. This was a sharp rise of about 74 percent from FY21 (2020-21) and more than 344 percent over FY20 (2019-20).
“Consumer companies will always look at sales and marketing spends as a percentage of bookings, that’s really the key metric. A lot of those (edtech) companies were led with sales and marketing campaigns and so the percentage (of sales and marketing spends to bookings) was very high,” said Mujtaba Wani, principal of GSV Ventures.
“When we look at companies that are consumer education companies, we want to see them have a path to, if not already, get their number of sales and marketing as a percentage of bookings under 40 percent,” he added.
During the period, these companies spent about Rs 5,465 crore on employees, including non-cash ESOP costs, a 47 percent rise from the previous year, when the five companies spent nearly Rs 3,724 crore, the filings showed. Unacademy spent the most on employees (including non-cash ESOP costs and educator payments), followed by Eruditus while PhysicsWallah spent the least. Unacademy reported non-cash ESOP costs in FY22 of Rs 1,235 crore while Eruditus spent Rs 1,118 crore for ESOP provisions. Consequently, all the unicorns, except PhysicsWallah, reported widening losses for the period.
Anirudh A Damani, managing partner of Artha Venture Fund, said startups began offering ESOPs when “substantial salary hikes, extravagant perks, and unsustainable bonuses” became insufficient to retain talent that might otherwise join competitors.
Cutting to size
“As growth rates have stabilised due to startup boards and new investors prioritising profitability over growth, these excesses are quickly becoming a thing of the past. I've always advocated for focusing on productivity over team size, as a fully engaged employee fosters the right habits and culture that ultimately drive the business toward its desired goals,” Damani added.
However, since the start of 2022, online learning companies were hit by a double whammy of the much-talked-about funding winter coupled with a slowdown for their services with the reopening of schools, colleges and physical tuition centres.
Consequently, many edtech firms laid off thousands of employees to conserve cash. The five edtech unicorns, put together, laid off more than 3,000 employees. Unacademy, in fact, brought its team size down to under 3,000 from more than 6,000 in April 2022. PhysicsWallah was the only company on the list to not have laid off any employees.
Along with thousands of layoffs, companies also cut down on marketing and promotional costs aggressively. Unacademy and Vedantu, which were among the sponsors for IPL in 2022, did not participate in this year’s edition. Gaurav Munjal, co-founder and CEO of Unacademy, had also tweeted last year that he will stop IPL sponsorship from next year.
The outlook
Moreover, apart from sponsorships, these companies this year are also advertising very conservatively on television, which typically is a hefty promotion spend. Sample this. The ad rates during IPL 2022 ranged between Rs 15-18 lakh for a 10-second slot and for digital, advertisers paid between Rs 199-277 per CPM (cost per mille/thousand impressions) for 10-second ads.
With conservative spending on advertisements and fewer employees on the rolls, these edtech unicorns are expected to cut down their burn rates significantly for FY23 (2022-23) and going forward. But with a slowdown in growth and no funding in sight, survival might become difficult for the high cash-guzzling entities, industry experts believe. Companies may thus take further cost-cutting initiatives to extend the runway.
To be sure, edtech companies saw hyper-growth in the two pandemic years. On a cumulative basis, the five edtech unicorns reported a 100 percent growth in FY22 over FY21. Over FY20, these companies’ revenue grew 340 percent in FY22, according to data compiled by Moneycontrol.
PhysicsWallah, India’s newest and also the only profitable edtech unicorn, which started operations in 2020, reported the maximum growth in FY22, which was its first full year of operations, while Tiger Global-backed Vedantu reported the least growth. Further, while PhysicsWallah is expecting a 6x growth in FY23, Vedantu and Unacademy, its direct competitors, are staring at slower growth.
With slower growth and an extended funding winter, edtech unicorns are bracing up for an important fiscal year. Watch this space to know how FY24 would pan out for India’s edtech unicorns.
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