No credible competition in school edtech space: LEAD’s Sumeet Mehta

In the edtech sector, India has minted seven unicorns thus far. Among them, Byju's, Unacademy, Vedantu, and PhysicsWallah are primarily consumer-facing K-12 and test preparation startups.

Since the beginning of 2022, a majority of such B2C (business-to-consumer) edtech startups have given investors a run for their money. The spotlight is now on LEAD - the only school edtech unicorn - and how it has dealt with the impending winter in the startup ecosystem.

To say the least, B2B (business-to-business) school edtech companies have not had it easy. Dealing with troubled balance sheets post-Covid, schools have increasingly put innovation on hold, which has had a negative impact on growth targets for this segment.

Sumeet Mehta, co-founder and co-chief executive officer (co-CEO) of LEAD, told Moneycontrol that the company has been growing unaffected as there is no credible competition in the sector.

Mehta also believes the company will continue to grow because the new education policy (NEP) released prior to the pandemic and the National Curriculum Framework for Foundational Stage (NCF-FS) released in October this year are pushing schools to innovate as they renew their curriculum for the next academic year.

In a 40-minute interview with Moneycontrol, Mehta discussed the regulatory tailwinds for school edtech, the competition in the space, and LEAD’s outlook for FY23.

Edited excerpts:

How are startups like LEAD helping in the implementation of the NEP? 

This is a significant shift because it affects teacher habits, teaching-learning materials, school organisation in terms of timetables, and annual plans.

NEP says you have to become multimodal. If a publisher claims that I make my books NEP-compliant, this is a misnomer because books cannot become multimodal. It doesn’t work.

Companies that view schools as an ecosystem and try to transform it to run in accordance with NEP, only such solutions will work for those who. More school transformation systems and integrated systems will be required to ensure NEP compliance. This is where startups can assist.

Within school edtech, how do traditional schools and new-age startups work together?

My sense is that transitioning to technology in schools is more difficult because they are used to registers, textbooks, and mark lists. Individual users, such as a teacher, a student, or a parent, use technology every day. It is easier for them to use a teacher app, a student app, or a parent app.

That conversion has accelerated since Covid-19. For two years, when schools were closed, parents and students realised they were dinosaurs without technology. Now, the discussion isn't so much about why you should do it, rather how we can do it and how we can make it affordable.

How has the past year been for school edtech, considering consumer-facing K-12 edtech companies have been struggling?

Schools are recovering from two years of covid-effect, which has put a strain on their balance sheets. Parents did not pay fees for those two years, but schools still had to pay for their building and teacher salaries, among other things. Many of them prioritise survival and stability over innovation.

However, this is a short-sighted decision because NEP and NCF encourage innovation. After Covid-19, parents are also exposed to newer possibilities. There will be dissonance if they return to schools that use traditional methods.

This is the window of opportunity for schools to prioritise innovation and make the leap in order to emerge from Covid-19 stronger. Otherwise, they will spend the next two years stabilising their balance sheets before returning to students. That's not going to be a fun journey.

How are schools adapting post-pandemic with stressed balance sheets and a demanding regulatory environment?

There will be a ricochet effect as we move out of November and December. Schools would have stabilised and would then begin planning for next year in terms of innovation. That's really the big hope.

From a regulatory perspective, schools appear to be wondering, "What will be different in NCF 2022 from NCF 2005?" Because NCF 2005 was mostly a plan on paper. They are overlooking the fact that this government is far better at operationalising, and that in 2005, technology was not as pervasive as it is today.

Schools must embrace innovation rather than burying their heads in the sand and hoping that the storm will pass and they can return to business as usual.

What trends are new startups in the segment innovating for? 

After Covid-19, there are two types of trends: copycat and piecemeal.

The copycat strategy involves startups replicating what is successful and selling it at a lower price. That is always a self-defeating strategy because you are attempting to replicate a two-year-old product. You'll end up playing catch-up by the time you get to market.

There are other startups that are technology oriented. They are working on new ways of teaching-learning, like developing new AI-based approaches to personalise learning and other aspects of schooling like messaging, transportation, and monitoring. These are individual pearls but without the necklace, implementation is difficult.

How is the competition in the school edtech space? 

During Covid-19, all the money went into B2C edtech, which now is seeing declining usage and revenues. Meanwhile, funding for the segment has dried up, and as inflation and interest rates rise, so does the cost of capital. As a result, every existing startup is experiencing difficulties. There is no room for competition.

The two trends I mentioned earlier also put us in a rock-solid position because we seem to be the only school edtech player at the moment. It is now a unicorn, but it took ten years and a lot of money to build. I believe that startups today lack capital and are also clearly behind in the race.

For the next couple of years at least, we will be the only ones who provide an integrated system to schools. Ultimately,  in any market, two or three players are needed. I'm hoping there's going to be a credible competition soon but at the moment, I don't see any.

What have the last few quarters been like for LEAD and how has the revenue grown over the last year?

The revenue growth in FY22 over FY21 was 2.5x, and the growth in FY23 over FY22 may be around 2x. We're doubling or more than doubling year on year. In terms of profitability, we are on track.

Currently, we are at the 3,500 school mark. By March, we should get to 5,000, and that will hold us in a good step.  By FY24, we should break even and can see a positive EBITDA, that's the goal.

The good thing is that the signup of new schools has actually been at a good cadence. We are signing close to 10 new schools every day, which basically means close to 300 a month. And currently, we are just beginning the peak signup cycle which is November, December, and January.

What are LEAD’s outlook and plans for FY23? 

We will aim to double our business in the next year. As our base multiplies, growth continues to become arduous. Inorganic is going to be a large part of delivering on expectations.

With NEP coming in, CUET (Central Universities Entrance Test) becoming mandatory for admission to colleges, and coding becoming a requirement, schools have new needs.

We have introduced new robotics programs, integrated entrance programs CUET, JEE, and NET, as well as LEAD transformation labs that can be installed to implement the coding and competition skills programs.

We are now planning to enter into high-fee and very low-fee schools.  If we’re talking in November next year, LEAD would have a presence in all three segments.

Are you earmarking any funds for the coming year for M&As?

We're very interested; we're looking for fundamentally strong companies with good content that may have capital or distribution needs that we can fulfill.

We have said in the past that 20-25 percent will go towards inorganic opportunities, but business is fluid, and you can't just park money. As and when the opportunities come, we can always raise more.

With uncertainty around funding winter and how long it will last, are you planning on cutting your burn?

No company should be running from one funding round to another. In the early part of our journey, it was important because our scale wasn't such that the unit contribution would have covered our fixed costs.

As the next academic year begins, we will determine the projection and, if there are any issues due to massive cost inflation or if schools' balance sheets are stressed, we will take appropriate action. If we stay on track, we don't have to take an action.