Is the Education investment opportunity for real? – Aravind G.R

“Sorry, I don’t need any money right now”. No, this is not me shooing away pesky telemarketers, it’s the line I hear from the archetypical ‘Gyani Sirs’ who run education companies.

While the whole investment community has been upbeat about the education space for most part of the last decade, why aren’t we seeing as many deals? For both sides (i.e. investor & investee) the answer still lies in the quality of opportunities. By quality, I mean a combination of team, product/service and more importantly the valuation expectation.

From the potential investee’s perspective: “I don’t need any money”- because:

  1. My business is working capital positive- My students pay up almost the entire fee in advance when they enroll; whereas my expenses are deferred throughout the duration of that course.
  2. I’m not planning to invest much, even while I’m expanding (Well, ‘going national’ is the buzz word I use for expansion) since my plan is to employ franchisees who would cough up the capex.

(Comment: A large number of MBA test prep companies threw caution to the wind and accepted franchisees all over the place. An average franchisee has little skill to maintain the quality of delivery that the particular brand of test prep company is known for)

From the Investor’s perspective: I’m being extremely cautious & picky while investing because:

  1. I‘m not sure what works: While ‘me too’ models works in every other sector, models which are followed elsewhere in the world do not seem to work here. I can take calculated risks, but I’m yet to see successful models emerge out.
  2. I cannot stomach the valuation expectations: Last week a news article quoted some bankers saying that some promoters in the sector are expecting valuations as high as 40 times EBITDA. This creates two problems: The first one being, how do I justify this valuation to my investment committee. The second being ‘exits’- An M&A opportunity diminishes as soon as the company crosses  the 15-20 crore revenue mark, they just become too expensive (with asking rates at 80-100 Cr) for any Indian education company to buy.
  3. I don’t know how to handle a situation where ‘Gyani Sirs’ say that we are used to showing only 50% as ‘white’, our revenues are actually two times the number you see in our P&L statement.

Summary: The volume of investment activity will continue to be muted over the next couple of years. We believe the industry will make a natural progression towards maturity and only then will the activity mirror the potential the sector posseses.

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About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

2 Responses to Is the Education investment opportunity for real? – Aravind G.R

  1. Hi

    Yes one of the major challenges in the “formal” higher education is the issue of “Double Books”. Not only does it lead to bad governance, because of the web of law surrouding Higher Education there is a grey area in everything do with it. That possibly is the reason why we do not find professionals/entrepreneurs from the corporate world entering the “formal Higher Education” world. A big %age (could be 75% or even 95%) of the private higher education institutes are run by Real Estate Developers and Politicians or supported by them.

    However because of the sad state of quality of education there is a lot of business that function as the support to these institutions complementing their services or even outsourcing the entire services offered by Formal Higher Education Institutes. There are big opportunities in this area and entrepreneurs from the corporate world have been operating in this arena. These themselves have robust business models.

    They also have an upside. Since they are working very closely on the sidelines of the formal higher education institutes their business models can be quickly adopted to move into the formal higher education space as soon as the market/legal system opens up.

    • Aravind G.R says:

      Hi Karthik,

      I agree that the bad governance is one of the major hindrances stopping quality professionals & entrepreneurs entering into the formal education system. Thankfully, it is changing, I was surprised to see test-prep companies and many higher ed colleges in tier2&3 towns now employing professionals to run the show.

      While the support system to higher Ed institutes is very robust model, we are yet to witness anyone scaling up. With scale comes the ability to initiate formal learning; similar to Educomp which started out supporting schools and now runs more than 50 schools under the Millennium brand.

      -Aravind

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