Right people also make mistakes despite alignment with investors: GSV's Deborah Quazzo on Byju's crisis

GSV’ Ventures Managing Partner Deborah Quazzo.

US-based venture capital firm GSV Ventures has a front row seat to the Indian startup ecosystem and education technology companies.

With edtech unicorns like PhysicsWallah and Lead in its portfolio, along with at least nine other Indian edtech companies, GSV has emerged as one of the most active global edtech investors in India.

In a detailed conversation with Moneycontrol, GSV’s Managing Partner, Deborah Quazzo, spoke about the Byju’s saga and its implications for investors, outlined plans for follow-on investments, and why the edtech market in India continues to show promise.

When asked about Byju’s, Quazzo said that while it is very much about aligning with the right people, investors will still make mistakes because even the right people make mistakes.

“I wish I could tell you that we are perfect. We are not and we have companies that did unwind recently in the US and that will happen again in the future. No one has a perfect formula for knowing what's going to happen with any company,” Quazzo said ahead of the second edition of the ASU+GSV & Emeritus Summit in Gurugram.

Edited Excerpts: 

You expressed a strong interest in India's edtech market despite a decline in overall investments in the sector. What is making you optimistic?

India tends to focus too hard; it doesn't take a wide enough view. The slowdown and issues are because education is a hard category. It's one of the most important categories, in my view, in the world, but it is also a hard category, because there’s a lot of friction in the education sector, be it regulation, or the ability of consumers to pay.

We have slowed our investments, much like many others worldwide. However, we continue to look actively at companies globally. Our two biggest markets are the US and India, for sure.

Education is a long game, and investing is a long game. All the fundamentals - the growing demographics, wealth, demand, and, frankly, government support of transformation in education, which started with the NEP (National Education Policy) and continues in other forms, are intact.

The fundamentals of the education and skills market in India are very much intact. Markets may fluctuate, but the long-term trajectory for India is unabated, continuing strongly. In the US, we are obviously dealing with declining demographics and other factors, creating a different dynamic.

GSV is one of the most significant edtech investors in the Indian market. What influenced your decision not to invest in Byju’s, and was this decision fortunate in hindsight?

I wish I could tell you that we are perfect. We are not and we have recently had to unwind companies, not in India but in the US, and that may happen again in the future. So, no one has a perfect formula for knowing what's going to happen with any company. But we have a framework. We call it our five P's - People, Predictability, Potential, Product and Purpose.

We look at our portfolio in India, whether a small investment in Emeritus through an SPV, we think the world of Ashwin (Damera) and PhysicsWallah’s sensible business model - and Alakh (Pandey) and Prateek (Maheshwari) running it - we couldn't feel more blessed.

It is very much about aligning with the right people and again, we're going to make mistakes. And even when we have the right people, we're going to make mistakes because the right people make mistakes.

We certainly haven't seen an overall suppression in the fundamental demand for learning and skilling.

But how do you view your judgement on passing Byju’s?

Honestly, I can't say that we made a good decision or a bad decision, we really didn't. We certainly know Divya (Gokulnath) and Byju (Raveendran) and I was on the Board of Aakash personally, when I was working with Blackstone. Byju's also acquired a small company in which we had an investment, Tynker. However, we never made an investment decision on Byju's.

Is there an amount earmarked for this year’s investments for GSV in India? Sectors you are looking at within Indian edtech? 

We have one investment that we are committed to as of now and I would expect us to make in the next three to six months - just depends on how the paperwork comes through. We're just trying to meet as many companies as we can.

The main action for companies globally has been to take costs down, get to breakeven. If you’re in the breakeven, you've got a lot more control over your destiny, you can figure out when you can resume growth.

When growth tapers, that slows investments if you're a venture investor, because, of course, it's all about growth. So, like others, we've been in a wait-and-see mode, waiting for everyone to re-establish their footing.

In the fiscal year 2023, several startups focused on reducing losses, even at the expense of slower revenue growth. But that was in FY23, we are almost moving to FY25 now? So now do you see startups going back to prioritising growth after having course corrected?

JEE and NEET enrollments are way up. There is a little bit of consumer behaviour recovery. We certainly know within our own portfolio that a number of companies are seeing very good growth and expecting good growth.

The other thing that is going to waft through here is the generative AI revolution putting pressure on companies, every employee is going to need to be retooled. That is going to put pressure on upskilling and reskilling. We're hopeful that the workforce side of the learning and skilling equation begins to drive more consistent demand and we think generative AI activity is going to help precipitate that.

Does that also mean that you will be focusing on investments in this area, upskilling and reskilling?

We look across, we call it Pre-K to Gray and so, we've already got several upskilling investments here and in the US. But also in K-12 and higher education and stuff like that. We think all areas are interconnected because one affects the other and so, if you've got a weak K-12 system, as we do in the US, it's going to move on and send students into higher ed, with education that isn't good enough. You see that here in India, higher education often is not giving enough skills to be adequate for the workforce.

GSV hasn't made any follow-on investments in portfolio companies till now. Do you plan any this year as many startups across the ecosystem have fallen back on their existing captable?

PhysicsWallah was two tranches, but it was the same round. So yes, we haven't really made follow-on rounds till now. The timing of our India investments was such that most of them raised adequate capital to not need follow-on, or they were smaller companies that didn't have product market fit and went out of business, but they're just a couple of those.

You should expect to see us have some follow-on this year, we'll see, yes. We've done that. FrontRow is one of the examples that didn't have a product market fit. They're very good entrepreneurs, they smartly understood it early.

What kind of AI use cases are you seeing in Indian edtech in the startups you are evaluating right now?

It's interesting because K-12 has faced challenges around CAC (customer acquisition cost) and all that sort of stuff. Certainly, we're seeing the greatest level of activity with generative AI in K-12. All of our normal school companies are retooling their businesses with AI.

They're all taking costs out, making content production easier, creating teacher's assistants, delivering a much better product with lower cost, with an AI generated – an AI co-pilot kind of thing. It is absolutely the most important thing that's happened in education.

We haven’t seen anything revolutionary in India as of now. Some of our portfolio companies have some really interesting AI products that they're unveiling. Companies like that have many millions of users already that can take a product and test it at scale, which early-stage startups can't test at scale. They can test at scale and kind of quickly get feedback on what something they want to go to market with.

It's also got risks, obviously but personally, I'm much more optimistic than I am pessimistic. You'll see the smart, agile companies really jump out there and start making improvements to their product and improvements to their internal processes that are more efficient. The hair on fire, highly urgent, larger companies with lots of data have an advantage that they can step on the gas.

Post-Covid, Indian edtech has seen a fall in demand for pure online models, pushing most of these companies to go offline.  What can the differentiator here be?

If you go back to the Chinese companies that were talking about going digital, but unfortunately the government effectively put them out of business, although, many of them were kind of coming back with different products.

What I love about where those guys come from is that they're kind of doing the inverse of a company that had a lot of sites and now putting digital in.

They have a massive digital following that they can now tap into, just frankly less frictionless business model, because you're actually able to take this customer base, which loves you and has such faith, and then help to the extent someone wants to be in the physical site. You can now serve them in the physical side as well. So it's the opposite of kind of the Chinese companies who started with all physical and then moved digital. It's an inverted scale. This is a scale coming down this way.

Founders are truly trying to meet where people need them.

Do you believe Indian edtech startups can still offer lucrative exits?

The Indian market is fantastic. The U.S. market has not been fantastic for IPOs. If companies are ready, which means they're profitable, have good growth, and have accounting in place. You don't want to go public before you're ready. That's the one thing I know. But there should be a nice queue of very good companies in probably 18 to 24 months out, in India that are ready to go public.

GSV had plans for setting up an office in India? How has that come around?

We are not doing that. We’ve hired people for our event team here, but we haven't hired an investment team. We're trying to get rid of offices, not add more.