Inflated valuations put edtech sector at risk: Screwvala

“One or two players have given the entire sector such a bad name," Screwvala said in an interview while drawing a distinction between K-12 education and UpGrad’s focus on upskilling and professional development courses.

Education startups broadly focus on the K-12 (kindergarten to Class 12) segment, test preparation (coaching for engineering, medical and other competitive exams), and higher learning.

“In the K-12 sector, the RoI (return on investment) has been poor. The big problem with K-12 has been zero cost of capital, flimsy business models and very low outcomes and RoI, and whether we like it or not, very aggressive selling, led by very aggressive marketing—That’s the bonfire," Screwvala said.

Valuations also need to temper in the edtech sector, he said.

Byju’s, the biggest education startup with programmes in K-12, test prep and upskilling, was last valued at $22 billion, but investors such as Blackrock and T Rowe have recently marked it down to about $12 billion. Unacademy, backed by Softbank, and Eruditus, backed by CPPIB, were last valued at more than $3 billion each, while UpGrad was valued at $2.25 billion.

“This is about the right environment because now deserving capital will go to deserving models, and the rhetoric and the thing will be to let us go and build businesses," he said.

Screwvala feels the valuations of two to three edtech companies need to correct.

“I feel there is a decimal point error in the valuations of these companies, and unless that is corrected, the segment will continue to be under pressure and raising fresh capital will be difficult. It has become a larger problem," he said.

The edtech sector witnessed significant capital inflows amid the pandemic-induced digital shift as schools closed. However, as the situation improved after covid restrictions were lifted, several companies started exploring offline segments. Screwvala believes startups can build big businesses with minimal capital investment. “From our present set of 125 unicorns, I don’t see more than 25 surviving over the next three to five years. Overall, there will be 300 unicorns, but those will be from the new crop of companies that are being built out silently," he said.

Last month, Screwvala, along with investor Temasek, invested ₹300 crore through a rights issue in UpGrad, with Screwvala contributing ₹212 crore.

The funds will be used to drive inorganic growth, including the acquisition of a university in India, in addition to the Atlas University in Mumbai that UpGrad has already set up.

“We are currently at $320-400 million annualized revenue run rate and expect to grow at 40-50% on that base in FY 24," he said, adding that the growth will come from higher upskilling and learners that are coming to the platform.

“Our completion rates are 85% and about 30-35% repeat rates."

UpGrad, which currently has 31 offices across India, the US, the UK, the Middle East, Singapore, and Vietnam, generates 75-80% of its revenue from its business-to-consumer segment, with the remaining 20-22% coming from business-to-business.

“We do not need more capital at this point in time. We did the rights issue so that we are well capitalized to execute our growth plans for the current fiscal," he said.

The company plans to list on the Indian bourses in the next two to three years. “This year, we will be profitable, and our June quarter is going to be the first quarter when we turn in profits," he said.

UpGrad is also trying to integrate all its businesses under one umbrella. “Starting this year, we will integrate all businesses under one umbrella so that it’s a clean balance sheet by the time we are ready for our IPO," he added.