A pandemic or a blessing in disguise: the boom of the ed-tech sector

A pandemic or a blessing in disguise: the boom of the ed-tech sector
The on-going COVID-19 pandemic has played a pivotal role in the success of online education across the globe.

Various ed-tech companies in India such as Byju’s, Unacademy and Toppr have been making the headlines by successfully raising enormous funding within a short period of time. The ed-tech sector has attracted funding of approximately USD 2 Billion during the year 2020, in addition to the various merger and acquisition transactions involving the major ed-tech players like Byju’s and Unacademy, including the most recent deal where Byju’s has acquired Aakash Educational Services for approximately USD 1 Billion.
With the advancement of technology, easy access, cheaper means and exposure of the masses to the world of internet, ed-tech entities were able to swiftly adapt themselves to the needs of the people by merging expertise and possibilities, to glorify the world of home-based education system, a big contrast to the traditional institutional education system. The courses provide the liberty to learners to personalize the process of learning and choose content based on their interest, convenience and style of learning, along with an interactive class-room experience, individualistic guidance and doubt-clearing sessions. App-based ed-tech platforms provide mobile accessibility and do not require the users to own high-end gadgets to subscribe for the offered services.

Given the huge potential, the ed-tech sector has witnessed unprecedented amounts of investment in the recent months. Given this boom, this article sets out certain key considerations for investors to bear in mind while investing in ed-tech companies in India.

A deeper understanding of the ed-tech sector: key pointers

  • Content and its ownership: It is critical to scrutinize the operational and business structure of an ed-tech entity to understand the nature of services offered, the customers it is catering to and the unique features being offered. In an ed-tech business model, which is primarily a platform providing access to educational videos or live classes, the content being displayed on the website is extremely important and so is the ownership of this content as value creation for such company is derived from its content. If the content is created and owned by third party consultants engaged by the target, the manner in which such content and its ownership is transferred to and for the benefit of the target is critical.
  • Key drivers in business model: An ed-tech entity will be able to draw the attention of investors basis its ability to: (i) ensure distinctiveness of the content / services being offered; (ii) exclusivity of its “key” content creators / educators; and (iii) safeguard itself by minimizing the risk to the maximum extent possible in relation to claims relating to intellectual property rights. Ed-tech companies employ different mechanisms to protect / safeguard the above interests and investors should bear the above in mind while conducting their business / commercial diligence exercises.
  • Protection of data: Technology companies and more specifically, ed-tech companies have been the recent victims of cyber security hacks. This has led to some debate regarding regulation (or the lack thereof) of the online education space in India which may help to tighten the bells and whistles around compliance. Notwithstanding, investors should be mindful to look deeper into such aspects which shed some light on the target’s preparedness against such attempts, if any.
  • Employer – employee relationship: Ed-tech companies often execute agreements with their educators who are engaged as consultants and not employees. A key issue to bear in mind in structures like this is the risk of such consultants being classified as employees if such a claim were to be made by any of them (like Uber and claims made by drivers in the USA). Investors should look closely at the contracts and business practices put in place by the target to determine the risk associated with such re-classification, if any, and its potential financial impact.
  • Liability under the Information Technology Act: Ed-tech companies in India often classify themselves as “intermediaries” under the (Indian) Information Technology Act 2000 to take benefit of the exemptions available to such intermediaries from the strict liability regime. However, often times, such a classification is only made on paper and the target’s business practices / policies often take away from such classification and may not be able to hold up such a determination if one were to put such policies / practices to test. It is therefore important for a potential investor to ask questions and delve deeper into these issues to see if there is any merit to such claims of classification being made by the target.
  • Applicability of foreign laws: Accessibility of the platform to users from foreign jurisdictions would expose the target to laws applicable in such jurisdictions, including the GDPR. Before investing: (a) it is important to understand if there are any access barriers implemented by the target with respect to geographical locations; and (b) an analysis of the entity’s compliance with applicable foreign laws becomes critical to ensure there are no outstanding penalties, which may potentially result in disruption of business operations of the entity. Opinion from a qualified counsel based in the relevant jurisdictions may be sought in such circumstances.
  • Data from minors: Given the natures of services being offered by these ed-tech companies, they often deal with data of minors who do not have the ability to contract under Indian law. Investors should examine the access barriers and policies put in place by the target to understand the manner in which the target deals with and processes such data. Separately, as minors are spending a considerable amount of time on the digital portals, ed-tech companies may need to implement specific processes to prevent instances of cyberbullying, and to ensure that the teachers / instructors are adept at dealing with minors.

Conclusion

With increasing internet penetration, and a push towards online education in the backdrop of Covid, ed-tech companies are only expected to grow further. A report published by Blume Ventures predicts that the Indian ed-tech sector will cross the USD 4 Billion mark by the year 2025. Accordingly, this space is predicted to see more funding and M&A activity in the near future, and it will be interesting to see how investors and stake holders work around some of the issues set out above even as the Indian authorities may potentially look to tighten the noose of compliance and regulations around the necks of such entities.

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IVCA Team

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The Indian Private Equity & Venture Capital Association is India’s apex association representing the interests of country’s private equity & venture capital industry.