Weekly commentary on startups, entrepreneurship and business

Edition 44

We have to vanquish prejudice,
embrace inclusion and ensure equal rights"
Justice Dipak Misra

Dear *|HTML:FNAME|*,

Before we dig in, I'd like to share what Semil Shah calls the "best tech picture of the year". For what it is worth, I have always been a Musk sceptic and I am clueless to how Musk's behavior is going to pan out for Tesla. On the other end of the spectrum are the very mature interviews by David Rubenstein, the co-founder of PE firm Carlyle. I would highly recommend watching them, especially the one with Masayoshi Son. It is compelling to see how CEOs of large, successful organizations tick, with Musk on one end of the spectrum and Rubenstein on the other. 

Last week, it was disclosed BYJU's is set to raise $300MM from private equity investors, at a unicorn valuation of $2Bn.

BYJU's, founded by the eponymous CEO Byju Raveendran, has been a money-raising machine. Since its Series A just 6 years ago, the company has raised capital regularly, raising $250MM and becoming a unicorn in the process. Investors in the company include Mark Zuckerberg's foundation, which as per BYJU's Wikipedia (till Sept 08th) made a "majedar" investment. All of us would have seen BYJU's fervently explained Pythagoras theorem, even in places as unexpected as the movie theatre (I personally find the explanation non-intuitive and confusing). It is clear BYJU's has put its money to good use in marketing, and has targeted parents of students on its way to raising even more capital. But how did BYJU's come about?

BYJU's was started as a standard coaching class for CAT, the exam to get into Indian BSchools, and therefore targeted individuals in the 21-25 age group. Byju R. started from a small town in Kerala, and went on to take the CAT. After scoring a 100 percentile he began teaching his friends, and then (he claims) cracked all the top business schools. Seeing the potential in CAT classes, he soon progressed to taking sessions in stadiums. Through this story it is fairly clear that Byju's is an incredibly energetic salesman, and let's keep that in mind because young companies are images of their founder. Seeing an opportunity in the K-12 segment, BYJU's gradually pivoted to online and offline video learning. Why the company pivoted is credit to the CEO's acumen, in identifying a market and business model that is extremely lucrative. 

In my earlier piece on WeWork and real estate, I identified the theme of core human needs being huge markets. One large theme which is yet to see a runaway unicorn success is education. K-12 education is an incredibly large market, and it also has the peculiar feature of the customer (parent) never being the end user (child). Additionally, because parents want the best for their children, they are very insensitive to price. On the disadvantages, education is notoriously difficult to "scale" like software because the same "product experience" doesn't work for everyone. In many ways, education needs the opposite of what Uber, Swiggy and the likes do - it needs non-standardization. While many markets, like India, have fairly standard curriculums, the learning needs and capabilities of each individual are different and hence the educational product delivery has to be personalized. The need for "hyper-personalization" has made education a fundamentally fragmented market, with countless schools, tuitions and ancillary content companies. The key to remember here is education necessarily should result in performance improvement and learning. From a software's perspective, these are hard to quantify, and this is exactly while so many schools with their regular test-taking exist in the first place. 

While we may debate on the effectiveness of schools, a lot of them do deserve due credit for contributing greatly to each educated individual's life. I, for example, cultivated an affinity for English and writing because of my school (and teachers). A lot of us have gone to coaching classes and have also read online content to understand things better. We could, therefore, look at learning as a three-layered process - core, secondary and tertiary. Core is school, secondary is coaching/tuition, tertiary is course-related knowledge. The first two measure and try to ensure our performance (active), the third is by and large dependent on us (passive). It would thus be fair to categorize the first two as education, the third is at best content. 

BYJU's is likely in the third category, driven to hypergrowth via marketing and a robust sales model. Digging deeper into how the company positions itself, on its website it mentions 1000+ videos (i.e. it's a content company). On their main video (which has the Pythagoras video, again), the company is described as a marriage of "content, media and technology" (i.e. it's a content company). The company claims to have the "best teachers", one of which is a goateed gentleman with a mic explaining sound waves through a slinky. While he may be good, I am not sure if he is the best teacher around for sound (i.e. it's not learning, but a content company). BYJU's also claims to use the buzzwords of data science and adapative learning to improve student performance but shows no statistics of student performance. This should be fairly straightforward to demonstrate in India's standardized curriculum, but it still doesn't (i.e. it's not education, but a content company). While the company's aspiration is no doubt encouraging, the company is not ed-tech (at least not yet) but a content company marketing aggressively. That in no way, though, implies that it is a bad business today.

BYJU's, the content company, aims to achieve a revenue of $200MM (1,400Cr) this year. The company was at a revenue of $80MM (500Cr) just last year, a full growth of 100%. The implied valuation of the company is $2Bn, 10x its revenue. Valuations for similar private companies are 2-3x of revenue, so the company needs to get to a $1Bn revenue for its valuation to be in line with M&A/public. If you project its historical growth, the company will take 3-4 years to meet this revenue. For private investors, this is a great time horizon. BYJU's sells its products from 23,000 INR to even 90,000 INR ($400 - $1,000). To get to a revenue of $1Bn, it needs to sell at most 2.5MM of its courses.

In 2017, the company did 250 Cr ($40MM) of revenue, with an employee cost of 62Cr ($10MM) - 25% of its overall, marketing at 20%. I would expect sales is another 20% - putting S&M at ~50% of revenue. In 2018, the company did 500 Cr ($80MM) of revenue, likely spend 250Cr ($40MM) on sales and marketing and added 450,000 paid users. That puts CAC at ~$88. With the company selling courses for the entire year via SD cards or streaming at ~$400, and the only per "unit" (i.e. customer) cost being content which is spread across 5 years and many students we could assume a high gross margin. The company is profitable on CAC even at an 88/400 = 22% gross margin, and I would reckon the gross margin is close to 75%.  BYJU's covers both CAC and cost of delivery with a high margin right on its first purchase!

This is where you begin to realize BYJU's the content tech company is all about making the first purchase, while true education is anything but. India has roughly 71MM students in coaching classes and ~250MM students. BYJU's needs to only sell 1% of the market once to reach a billion dollars (2.5MM students). You now begin to see why it is such a clever business model, given the size of the market. The company calls it a subscription, it is actually an annual purchase which forces a larger ticket size. Even if the customer purchases just once, BYJU's is already profitable on the customer. If the customer does not renew, the market is big enough to acquire a lot more customers. Additionally, the nature of natural churn in the market i.e. students who graduate from classes will not need BYJU's actually helps it. New customers keep coming in, and the market has little "memory" on product quality. Feedback on a "bad product" is also fuzzy because the user is different from the customer, and bad learning could also be attributed to a "bad" student. Evidently, engagement is not even necessary - all the business needs to do is make that first sale. For the short term, very good marketing can make the company grow rapidly. In the long term, we are all dead.

It still begs the broader philosophical question, though - will BYJU's evolve to truly change India's education?
This week, I look at Air Taxis, Fake Islands and Colin Kaepernick. 
  1. [Large Startups]: Uber discusses aerial taxi services with PM Modi
  2. [Work Culture]: How to get rich without getting lucky
  3. [Growing Startups]: Inside Glossier's plans to shake up your make up*
  4. [Buzzwords]: AI generated music is changing the way hits are made
  5. [Life x Startups]: Meet the venture firm that invests only outside the Valley
  6. [The New Monopolies]: What the hell is going on with Apple?
  7. [Data!]: Why paid marketing sucks and hypergrowth^
  8. [Modern Economics]: The approval economy
  9. [Classic Economics]: These fake islands could spell economic trouble
  10. [Business is Entertainment]: Nike's big gamble on Colin Kaepernick
Based on an excellent recommendation by members of the community, I asterisk* paid articles. I have started adding podcasts, which use a caret^. Please do drop in reads that you found interesting this week here and I would love to accommodate them. You can pass on the love by sharing this with your friends and colleagues who can sign up here, and these are all the previous editions

I started this with the belief that there is a whitespace on conversations by venture capitalists in the entrepreneurial and startup ecosystem in India. This is my small way of starting a conversation. In case you have any feedback on the structure, design or content please feel free to reach out to me in reply to this email. 

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