Long Shots

Twelve years ago at my friend’s party, I saw an amazing new music app that let you stream songs. The service was still in beta and the experience was amazing — you could listen to any song from any device even when offline, and you didn’t have to buy à la carte. The startup was run by two Swedish entrepreneurs and it was way better than iTunes.

Twelve years later, Spotify counts 380 million monthly active users and is the most popular music service in the world. With an exceptional user experience and best-in-class product, the Swedish team managed to turn around the entire industry, cracking down on piracy and fending off attacks from Apple, Amazon and Google along the way. With a $45 billion market cap and nearly +30% revenue growth, Spotify continues to innovate and lead in the Music industry.

Perhaps the most impressive characteristic about Spotify is its long user lifetime. I’ve been a subscriber for over 10 years paying $9.99 a month and I don’t intend to cancel. Like me, the majority of subscribers are long-time users, but they also span across multiple generations: Gen Z, Millennials, Gen X and Baby Boomers. It’s like electricity — everybody needs it! Unlike buying an album or a song, users constantly receive a more valuable offering with all their favorite artists, playlist, communities of friends, and new offerings. Because Spotify is able to maintain a world-class and highly personalized service, users don’t leave.

There are not many services that can retain users for such a long time. Apple, Spotify, Netflix and maybe Google and Amazon, depending on individual preferences. Not surprisingly, these are some of the largest market cap companies in the world, with some of the longest Life-Time Values (LTVs). A few newcomers could soon join this group, with Uber, Doordash, Coursera and Tesla likely to have repeat purchasers over a decade time. Arguably, Apple has been the “master of subscriptions” with each new iPhone purchase every few years creating a recurring subscription at $1,000 a pop. Maybe Tesla will top Apple when its users purchase their next car soon.

In the Education world, LTV has been one of the toughest challenges to crack. Traditionally, Edtech services targeted students in certain stages of their journey. A high school service was good for 2 years, a college service for 2–3 years, a corporate learning service for a few years. Accordingly, the unit economics of Edtech companies have been weaker. The relevant indicator, Life-Time Value to Customer Acquisition Cost (LTV-to-CAC) was in the 1.5–2.0x range historically, implying there is barely a profit on an individual learner basis. In order to be attractively profitable, a company needs to be at 3x or higher, meaning that the average learner will yield at least 3x the amount it took to get acquired.

But things are changing. As we’ve moved from BC to AD (Before Covid to After Disease), Edtech companies are beginning to find ways to retain learners longer. Some services take learners thru college and into the workforce. Others take learners from middle school thru high school and thru college. And now, we start to see services that have the potential to take learners from when they are in kindergarten through the time they learn on the job.

So what type of models will those companies have? A paid B2C subscription, or a B2B SaaS for schools and corporates?

At last year’s ASU GSV Summit, a panel of leading venture investors discussed the possibility of the first Trillion Dollar company in Edtech. While we are still some years away (Roblox is a $60B market cap today), some takeaways included that it will likely be a B2C freemium model with a B2B extension. Think of Apple, Google, Facebook, Microsoft, and how they all started as consumer services and expanded into B2B. Similarly, the biggest Edtech companies of tomorrow will likely be B2C subscription services with B2B extensions and with high user Life-Time Value.

The potential in Edtech is quite compelling! Capturing a learner throughout the entire K12 journey can yield a large LTV. In most of the Western World, after-school spending per student is about $1K annually, or $12K over a 12-year journey. Similarly, college students spend $100–200 per month on learning services that help them prepare and pass exams, which over a 4-years time is $7K. If someone created a subscription service that attracts students from the time they are in primary school all the way thru graduating college, that company will achieve an LTV of close to $20K over 16 years! That “Edtech Megastar” will blow past Apple, Spotify, and Netflix.

To achieve a longer LT and a higher V, retention is key. Spotify and Netflix have had annual retentions at 90%+, meaning that half of their subscribers stick for more than 7 years. Meanwhile, Edtech leaders have had retentions at around 40% in the past, meaning that half of their users leave after a year and the average life-time is less than 2 years. Now, some Edtech companies are starting to hit retention rates in the 60%s, doubling the user life-time to 4 years. As some of them manage to expand their services and to attract and retain learners across multiple age groups, their retentions will move even higher.

Ultimately, it will come down to Return on Education (RoE). Whether in B2C or in B2B, Edtech companies that deliver the highest value to learners will achieve the best retention and highest LTV. If learners receive tangible value and have reasons to come back again and again, the results will lead to powerful network effects, long LTV, high multiples, and a growing market cap. Those who can constantly deliver the highest value to learners, as measured by how learners are thriving in life and in a knowledge-based economy, will be the ones racing to a Trillion.

A few companies are already starting to show a basis for high RoE and long LTV. India’s BYJU’S, which initially started as an after-school service for primary- and middle-school students, has been adding to its suite of services to increase student RoE, and recently also acquired Aakash and GreatLearning to expand into higher ed and beyond. Coursera, which democratizes access to the world’s best universities and captures students as early as teenagers, has a natural span from high-school thru through college and into the workforce. Its RoE is equally powerful across those age groups, creating high LTV as learners keep coming back to learn and to up-skill. Course Hero, initially helping college students to get “unstuck” before exams, has created a personalized student graph and is expanding into middle- and high-school. With the recent acquisitions of Symbolab and Quillbot, they are also reaching for the younger and the older.

Meanwhile, companies that deliver learning through gaming are well positioned to capture long LTVs. Games can be equally attractive to a 10-year old, a 25-year old, and a 50-year old, as long as they are fun and engaging. It’s not a surprise that three major Edtech companies that are built around gamified learning are among the front-runners in the industry.

Roblox, which is one of the original metaverse creators and one of the largest gaming platforms with 50 million daily active users, has learning embedded in its core; users learn to code in order to create and to grow in a virtual world. At a $60 billion market cap, Roblox is the largest edtech company in the world. Duolingo is championing language learning by applying machine learning and artificial intelligence (ML/AI), creating hyper personalization and gamification. Among the many startups that offer language services, Duolingo has had the most engaging content with the highest RoE for learners across all age groups. Today, DUOL is a $4 billion market cap company. Norwegian Kahoot! has had massive success with its quiz-based learning app, crossing 5 billion players, from kids in primary school to employees in corporations and everyone in-between. Kahoot! is a $2.5 billion market cap company and the business is doubling.

Another big trend catalyzing longer LTVs is Edtech as an Export. We are seeing increasingly more companies that are going global and are breaking away from national borders. Ten years ago, Coursera was among the first Edtech companies to be truly global from day one. Today, the list of businesses with less than 50% of their users in any one geography is long and growing: Kahoot!, Photomath, Emeritus, Roblox, Hotmart, Domestika, Masterclass, Kajabi, Brainly, Classdojo, Novakid, Labster, Preply, GoStudent…to name a few.

Even India-based companies are starting to play into this trend. Despite a massive market opportunity at home, several companies have gone global; Bangalore-based Quizizz is a gamified quizzing platform that counts less than a tenth of its users in India. Coding champ Brightchamps is widely popular across all of Southeast Asia. And life-long learning leader Emeritus is equally popular in the U.S., Europe, LATAM and Asia. Unlike in China, the Indian Edtech market is opening up and many of its leaders are becoming global powerhouses.

Emeritus is an interesting example also because of its expansion into K12. In 2021, the company acquired iDTech, a platform that connects tutors with kids to teach them coding. With the acquisition, Emeritus and its university partners (who offer the content) can capture students from a much earlier age, with the opportunity to retain users thru college and into the workforce, which is Emeritus’ core business. From the point of view of Emeritus’ university partners like MIT or NYU, the move is compelling as it expands their TAM from the traditional college age of 18–26, to a much wider group of 10–80 year-olds.

Capturing students earlier is an emerging trend. SF-based Outschool, which has a sweet-spot in primary- and middle-school, saw inbound demand from families to accept their kids even earlier, at ages 3–5. Accordingly, they created content for pre-schoolers in 2017. Non-profit star Khan Academy made a push into Pre-K in 2018 when launching Khan Academy Kids, a play-based and interactive app that teaches kids word pronunciations, numbers, and enhances their creativity. Last March, Duolingo launched Duolingo ABC to teach kids how to read. And last month, Kahoot! launched Kahoot! Kids to offer social-emotional learning, math, and reading to its users at ages 2-7.

With high Return on Education and longer Life-Time Value, business models are becoming more attractive. The longer LTV increases visibility and investors’ confidence, resulting in higher multiples. In BC, most Edtech valuations traded at discounts to other tech sectors, but in AD the underlying trends in Edtech accelerated and the future got pulled to the present. Public and private companies saw improvements in fundamentals and growth, resulting in higher multiples and bigger valuations. Besides a massive uptick in new learners, companies keep learners longer and drive RoE higher, which increases retention and visibility. As a result, Edtech valuations are now closer to SaaS, with many of the leaders trading with P/S multiples in the teens.

While we don’t know when we’ll reach the first Trillion dollar company in Edtech, we have a sense of what they’ll look like. The winners will be platforms that provide the highest RoE by constantly delivering the best value to customers, resulting in strong network effects and in hundreds of millions of learners globally. Their services will be sticky and span across multiple age groups, creating high Life-Time Value.

Disclosure: GSV owns shares in Coursera, BYJU’S, Course Hero, Photomath, Emeritus, Domestika, Classdojo, Quizizz, Brightchamps, OpenClassrooms, Lead School, Guild Education, Masterclass.