PhysicsWallah is chalking up plans to increase allocation for mergers and acquisitions (M&As) to $100 million from the current $50 million, co-founder Prateek Maheshwari told ET. The Noida-based unicorn is looking to acquire startups operating in various test-prep segments, in addition to augmenting its geographical presence, he added.
UpGrad co-founder Mayank Kumar said the company was looking at possible acquisitions to add to its B2B (business-to-business) and workforce training capabilities.
Similarly, edtech unicorn Lead is evaluating businesses that expand its reach, or add products that can ride on its distribution, said co-founder and chief executive Sumeet Mehta.
Some edtech startups that haven’t been able to raise fresh funding over the past year are looking for a quick exit, an investment banker representing investors of edtech startups told ET on condition of anonymity.
Edtech companies raised $3.1 billion in 2022 from 182 rounds, significantly lower than the $5.4 billion raised in 2021 through 331 rounds, according to Tracxn, a data platform for privately held companies.
Discover the stories of your interest
The funding crunch has made edtech startups prune costs by cutting down on marketing spends and employee expenses. Over the last year, companies such as Byju’s, Unacademy and Vedantu have fired nearly 6,000 employees. As per data sourced from Tracxn, there were 29 acquisitions in the edtech space last year, down from 37 in 2021.
ETtech“We originally allocated $20 million, and then stretched it to $50 million. We are rethinking this number again. In my view, we should be using the entire $100 million for acquisitions but (PhysicsWallah founder and CEO) Alakh (Pandey) needs to approve, the board needs to approve, so we’ll see,” Maheshwari said.
In June 2022, the profit-making edtech company had raised $100 million in its maiden funding round led by Westbridge Capital and GSV Ventures that catapulted it to unicorn status, or those privately held companies with a valuation of $1 billion or more.
PhysicsWallah is currently targeting edtech companies offering test-prep courses for Group C and D state-level examinations, in addition to staff selection commission railway examinations.
“I see a gap around curriculum development, where we see an opportunity for the company. Another market is in grey-collar jobs training. Our reach is mostly in the 15 northern states, and we are also planning to acquire a company to expand into Malayalam and Tamil segments, for which discussions are on. It is a bit difficult to build penetration in the deep South,” he said.
Maheshwari also pointed out that the company had so far only acquired profitable companies. “We have been very conscious that we don’t want to pick loss-making assets. We have acquired 7-8 companies this year and are coming across a lot of assets that we’re evaluating.”
UpGrad’s Kumar told ET that the idea was to look for companies that have reduced their cash burn rate and sustained businesses, and not ones likely to wind up if they cut costs.
“Once these companies are bought, their fixed costs will be reduced, leverage on top of the existing fixed costs business, and cut their burn to make it into a profitable business.”
ETtechThe Mumbai-based company, co-founded by Ronnie Screwvala, Phalgun Kompalli, and Kumar, has acquired education companies like Harappa Education, Exampur, Talentedge, Study Partners, Work Better, Knowledgehut, Impartus Innovation and Rekrut India.
Mehta of Lead said there was a need to look at targets with healthy unit economics.
“We are looking at businesses that either expand our reach – if they have good school relationships or good content, we’re interested – or if there are companies that have products that can ride on our distribution,” he said. “For us it is important that unit business economics is strong. Ideally, even if it is not profitable, it should be neutral or close to profitability. Ultimately, we will only acquire businesses that are strong in terms of content and learning outcomes.”
Last month, Lead said it was acquiring the K-12 India business of British educational services company Pearson, which has been divesting its K-12 businesses in other geographies as well.
Another founder of an edtech startup present in the higher-education and skilling space said that the B2C side of the segment could witness a shakeup.
“On the B2C side, there has to be a shakeup. So many companies came in during Covid-19. During waves, people don’t listen to sanity,” the founder said. “A few companies are also looking to hive-off cost-heavy businesses and divest them to entities for which those segments make sense,” he added.
The investment banker cited earlier, however, pointed out that a key sticking point in the various M&A deal discussions were on the structure of the deal.
“Even bigger edtech firms are not doing very well. Some of them are offering equity-swap deals, which is not something the investors of the target startups are on board with. Cash is the king of the hour, and it is what the investors are demanding,” the Mumbai-based banker said.
(Graphics & illustrations by Rahul Awasthi)