The edtech sector, once a shining beacon of innovation and growth, is currently grappling with a significant decrease in funding. This alarming trend has raised concerns about the future of education technology in the country.  

The start-up ecosystem of the Indian edtech sector is one of the top three funded geographies in 2023 YTD, which is next only to the US. Despite this, this space has experienced a decline in funding, just like its global counterparts. SME Futures digs deeper to find out the reasons behind this decline.

The current scenario 

As the world was forced to sit at home during the pandemic, people were compelled to bring technology into their homes in almost every space. Consequently, the edtech sector in India witnessed remarkable growth during the pandemic as the demand for online education skyrocketed. This in turn propelled the growth of numerous edtech start-ups.

However, as the pandemic subsided, classes began to happen offline and the funding landscape has seen a substantial downturn in the last year, leaving many edtech start-ups in a precarious position. 

According to a report by Traxcn, the total funding into the Indian edtech space plunged 48 per cent to US$ 971 million in 2023 YTD (January 1, 2023, to August 7, 2023) from US$ 1.87 billion in the same period in 2022 and declined by 50 per cent as against the same period in 2021. Also, the number of funding rounds in 2023 YTD experienced a drop of 77 per cent and 82 per cent compared with the same period in 2022 and 2021, respectively.  

Neha Singh, Co-founder of Tracxn, states, “With the pandemic driving up demand for online education, funding in this area increased 76 per cent from US$ 2.29B in 2020 to US$ 4.03B in 2021. Q3 2021 became the most financed quarter, with $2.47 billion in funding.”

“However, as the pandemic receded and educational institutions and offline coaching centres reopened in 2022, the demand for edtech solutions decreased. Because of this shift in consumer preferences, prominent edtech businesses have shifted their product offerings to include offline centres in order to compete and continue their businesses,” she adds.

As per the report, most of the funding into Indian edtech start-ups in 2023 was secured in the second quarter. This space received funding worth US$ 713 million in Q2 2023, accounting for 73.43 per cent of the total funding raised this year. This is an increase of 37 per cent compared with the corresponding quarter last year. 

What caused the funding crunch?  

Starting in 2022, the global economy began to face a slowdown caused by various factors making investors more cautious. They started focusing on more sustainable business models and a clearer path to profitability.  

Customer acquisition costs have always been high for the companies in this sector and with declining demand it has become even more difficult for them to attract new customers. Many major edtech companies have had to resort to cost-cutting measures. Several factors have contributed to the decrease in funding in India’s edtech sector.  

Neeraj Tyagi, Co-Founder & CEO of We Founder Circle, a community-based investment platform, says, “First, the high valuations of edtech unicorns in 2021 had made investors more cautious about investing in the sector. Many edtech companies were valued at billions of dollars, even though they were not yet profitable. This has made investors question whether these companies are worth the investment.”  

“Second, the increasing competition in the edtech market has made it more difficult for start-ups to stand out and attract funding. There are now thousands of edtech companies vying for a share of the market,” Tyagi adds.  

As most start-ups were running with a mob mentality while diving into this sector, thousands of edtech start-ups were launched, leading to saturation in the market. Umang Sangal, Founder, Uplifters, says “The edtech industry expanded quickly during the pandemic, which may have saturated the market and reduced financing.”  

Weighing in, Ivy Chin, Partner at Inflection Point Ventures (IPV), a start-up investing platform, says, “This saturation has made investors more discerning, resulting in increased competition among edtech start-ups to secure funding.”   

Chin also feels that the recent turmoil at Byju’s, India’s most valuable edtech company, has further exacerbated investor concerns.

“By missing financial statement deadlines, defaulting on a significant loan, and experiencing disruptions in its leadership, this event has likely contributed to a loss of investor confidence in the sector,” she adds.  

Backing this up, Singh of Tracxn contends that the combination of the dwindling demand for edtech solutions and investors’ preference for more sustainable business models has had an impact on the funding in this sector.

“Investors’ focus has shifted to sustainable business models and a clear path to profitability, but the higher customer acquisition cost for companies in this sector has been a barrier that they will have to overcome to gain investor confidence. And the companies that can do this will be able to do well in the coming years,” she adds. 

What is stopping investors?  

There are plenty of reasons behind why investors have started backing out from investing in edtech start-ups.

Highlighting some of those, Chin from IPV states, “As an investor, several barriers give me pause when considering further investments in edtech start-ups, reflecting both personal and industry-wide concerns. Firstly, market saturation is a significant concern. Secondly, regulatory uncertainties in the education sector could be a deterrent.”

“Also, the competition in this sector is fierce, leading to pricing pressures and the need for continuous innovation to stay ahead. This can make it challenging to achieve sustainable profitability. Lastly, the rapid pace of technological advancements means that edtech solutions can become outdated quickly. As an investor, I must assess whether a start-up can adapt and evolve in this dynamic environment,” she adds.

Tyagi from We Founder Circle asserts, “Many edtech start-ups are still not profitable, and it can be difficult to predict which ones will eventually become profitable. This is because the education market is complex and many factors can affect the success of an edtech company, such as the quality of the content, the level of adoption by schools and students, and the regulatory environment.” 

While investors are feeling apathetic towards edtech funding, start-up founders are also going through many challenges at the same time.  

Reflecting on the challenges that he himself has had to face as a founder, Sangal says, “There are challenges due to sector saturation, demonstrating impact, regulatory obstacles, monetisation plan, and post-epidemic uncertainty.”  

Despite the challenges, the edtech sector is still a promising one. If its founders quickly correct their approach and valuation and focus more on profitability, this sector will have a lot of potential. As the education system continues to evolve, the edtech companies that can provide innovative solutions will be well-positioned to succeed.  

Although the recent decrease in funding in India’s edtech sector is a cause for concern, it should be viewed as a temporary setback rather than as a death knell. To weather the storm, edtech companies must adapt to the changing market dynamics and prioritise innovation and user engagement. Simultaneously, the government needs to provide regulatory clarity and support to foster a conducive environment for investment.