Enzia Investment Thesis: Higher Education
Enzia Investment Thesis: Higher Education
Namita Dalmia and Shivam Jindal
Aug 22, 2023

Higher education in India is a tremendous opportunity, fueled by a confluence of various factors.  India boasts more than 40 mn students enrolled in higher education institutions, with the private sector taking 60% of this share. We have witnessed one of the fastest periods of enrollment growth in the last 15 years, yet our gross enrollment ratio is at 27% only. As a point of comparison, the USA has an enrollment ratio of over 85%. Countries like Germany, France, and Canada already exhibit substantial enrollment rates well above 60%, and China has also recently surpassed the 60% GER mark.

In India's National Education Policy (NEP) of 2020, the government has set an ambitious target of achieving a 50% higher education Gross Enrollment Ratio (GER) by 2035. This would entail the addition of nearly 3.5 crore new seats1. The envisaged increase in enrollment ratio will be facilitated by augmenting capacity through increased investments in the sector, coupled with a growing number of students opting for higher education with burgeoning aspirations.

While the 2035 GER goal establishes the stage for significant expansion, a more pressing question lingers regarding our commitment to delivering a meaningful education. The existing system grapples with several quality issues, rendering it somewhat ineffective. Subsequently, this gives rise to employability challenges on the one hand and leads to the closure of colleges on the other hand. Neither of this helps to achieve the GER goal. Hence, alongside the imperative of increasing the enrollment rate, it is equally crucial to prioritize productive outcomes for students. Both the objectives of increased access and enhanced quality must be addressed collectively to ensure forward progress and avoid falling into the vicious cycle of expanding capacity only to later rectify quality issues.

The government has already recognized the need to ease regulations and facilitate the quality expansion. This recognition is creating significant opportunities for entrepreneurs to innovate, build, and deliver high-quality programs, enabling students to achieve their potential. Entrepreneurs are actively exploring diverse pathways and establishing companies that leverage a wide range of pedagogical and business models. Although several edtech companies have already been built and scaled, there is still ample room for new companies to emerge.

Landscape of Higher Education Companies

To begin, let's examine the current landscape of companies operating in this space and the various business models they employ. There are several ways to cut the landscape. We have chosen to do the primary categorization looking at the (1) operational model of the companies, i.e. whether the edtech companies are operating the programs independently or collaborating with existing institutions. We then further look at the two key pedagogical dimensions: (2) Learning promise: Companies can focus on providing a certification, degree, or employment at the end of the program. And (3) Delivery method: Companies can offer learning through online, offline, or mixed approaches.

Exploring Operating Models of Interest

Of the different possible operating models, we highlight some of the opportunities that we are keen to investigate and invest in: 

a. Institution-linked programs: Scaling quality programs to reach larger number of students 

Traditionally, higher education has been limited by factors like geographical location, high costs, and limited enrollment capacity. Over a decade old phenomenon, MOOCs, or Massive Open Online Courses, overcome these barriers by offering a wide range of courses online, allowing anyone with an internet connection to participate. These are typically offered by universities, colleges, and other educational institutions, in partnership with online platforms that specialise in delivering these courses. Global players like Coursera, FutureLearn, edX, Udacity are examples of platforms that have helped institutions reach millions of learners simultaneously, often on a global scale. Indian learners have been the second largest MOOCs users after the USA over the past many years. 

As these courses have demonstrated their value and improved learner engagement, students have grown increasingly committed to their education through such platforms, demonstrating willingness to pay for a prestigious degree or certificate to advance their careers. Indian edtech companies have forged business models in collaboration with institutions both within India and abroad. Notably, these companies have strategically aligned themselves with various tiers of educational establishments, concurrently strengthening their brand alongside partnered colleges, and also tailoring their outreach to Indian and international candidates. Generally, a revenue-sharing framework is adopted, entailing companies receiving 35-55% of student fees. The Average Revenue Per User (ARPU) hinges on two primary factors: (i) partner institutions' fee structures and (ii) job assistance or assurance extended by the edtech enterprises. Crafting an effective distribution strategy and maintaining cost-effective acquisition are pivotal to achieving a contribution margin of at least 20-25% with first sale, particularly given the potential for a relatively slow-repeat or low-frequency business model.

We have strong interest in the following two areas:

1. Online Program Manager for Indian Universities: The University Grants Commission (UGC) has granted approval for over 500 online degree programs offered by more than 60 Indian universities. This achievement marks a significant milestone and is poised to further elevate the standard of quality education initiatives. Anticipating the approval of additional programs, such universities or institutions are likely to seek partnerships with suitable online platforms to establish their programs and extend their reach to a broader student audience, both within India and potentially internationally. Additionally, the UGC has eased the rules for institutions as they build online distance learning programs. While institutions have to take charge of 60% of their own content, they can utilise 40% of academic content from other sources. This enables further collaboration and opportunity for edtech companies to innovate and deliver on the learning promise as well as partake in larger revenue share with institutions.

2. Hybrid Program with Global Universities: In 2023 alone, over a million Indian students pursued education overseas in search of enhanced educational quality and improved employment opportunities. The programs offered by global universities evoke a sense of aspiration, providing access to global networks and promising better career prospects. However, these programs tend to be expensive and often entail significant opportunity costs. An innovative approach involving hybrid degree programs has emerged. Startups are collaborating with international institutions, expanding the reach of their programs and attracting students. These startups typically function as Online Program Managers (OPMs), allowing students to begin the initial phase of their degree through online education, followed by a seamless transition to in-person studies for subsequent segments. We view this as an appealing opportunity that will grow over time, as students can save on costs and reduce opportunity costs through the initial online program, while also gaining exposure, building networks, and accessing on-site program benefits.

b. Institution-linked programs: Improving quality of existing programs 

Despite enrolling over 25 million students in higher education in the last 20 years, India has struggled to maintain the desired level of education quality. A majority of the 1,000 universities and 40,000 colleges grapple with the dual challenge of insufficient faculty and outdated curriculum, which results in subpar placements. Edtech players are taking up the opportunity to help revamp these institutions so they can continue to stay relevant and graduate employable students. As placement rates improve through quality intervention, institutions also see a rise in enrollment rates and accreditation standings. Thus creating a significant win for partnering institutions and hence a significant opportunity for edtech businesses to build and grow.

There are two models of partnership: One, when a company takes charge of the entire program, from admission to placement. In this case, a revenue-sharing arrangement is typical. To make this work well, they need to make sure it does not cost too much to find new students. For long term sustainability, it's really important for them to create a clear brand that students recognize and connect with, making sure students associate their degree with the company as much as they do so with the college. On the other hand, colleges might choose to let companies be part of only some parts of the program (up to 40% of the work). These arrangements can translate into per-student fee contracts for coursework. To pay more money, colleges will find it valuable if companies also help students with finding better jobs by partnering with workplaces. While the programs are primarily delivered to students in an offline setting, building a scalable model necessitates use of technology for standardising academic delivery and running efficient operations. 

We have a strong interest in models that collaborate with institutions on both academic and placement aspects, aiming to secure favourable placement results for students. Through this approach, companies must aim to build their own brand closely tied to positive outcomes, thus reaping the benefits of profitable growth over the long term. 

c. Independent programs: Skilling and upskilling for better career outcomes 

Every year, approximately 10 million students graduate from higher education institutions in India. However, only about 14%2 of them manage to secure employment in white-collar positions. Even those who are hired often require an additional 3-6 months of training before becoming productive. In response to margin and cost-cutting pressures, employers in different industries have begun transferring the responsibility for training of new employees to the candidates themselves, often making employment offers contingent on successful completion of training programs. Moreover, the existing workforce faces the risk of becoming obsolete and losing job opportunities. This deficiency primarily stems from a lack of the essential skills and knowledge demanded by the evolving job market. To respond to challenges both at early and later stages of careers, edtech companies have launched independent programs to skill and upskill early-career professionals for gainful employment.

Industries value graduates emerging from such programs for their knowledge and skills. Over time, the better programs start becoming recognized as credible sources of talent for future hiring. There are three distinct operating models at play here. Firstly, there's a model focused on helping students build knowledge, competencies, and networks. However, it doesn't provide assistance in job searching. Secondly, there's a model that emphasises building knowledge and skills, along with offering career services to ensure better outcomes for students. Thirdly, there's the pay-after-placement model that not only trains students but also links their fee payments to achieving specific career outcomes. While in the first model, the company would be involved in training a large number of students over a shorter duration, the next two models require deeper and more extended programs, as ensuring outcomes requires a more profound intervention. In the third model, with outcomes directly linked to payment, the company manages to reduce customer acquisition costs and alleviate financing obstacles for learners. Nevertheless, this model necessitates resolving working capital challenges due to delayed payments. Companies offering program alternatives to traditional degrees often choose to initially run offline courses. This approach not only replicates the academic experience but also fosters a campus-like atmosphere and networking opportunities. Over the long term, like universities, these companies can transition to offering online and hybrid courses, enhancing their revenue potential.

Our strong focus lies in outcomes-linked models, their significance in establishing a robust brand and ensuring the company's long-term viability. Such programs also yield higher ARPUs (average revenue per user) and, over time, possess the potential to decrease acquisition costs, whether or not a pay-after-placement framework is employed. We are also actively exploring models where collaboration with industry players enables edtech companies to offer relevant certification programs with tangible value in the job market. However, we emphasise the significance of building a distinct brand closely associated with positive outcomes. Furthermore, we advise companies to mitigate risk by forming partnerships with multiple industry players rather than relying on just a few. This strategic approach ensures resilience and enhances the potential for sustained growth.

Exploring Educational Domains of Interest

Having examined various operational approaches, we now delve into our perspective on opportunities across distinct educational domains. We believe that relevant education programs need to be built or revamped for various industries, specifically which are experiencing significant gaps in demand and supply or rapid job expansion as well as where students are seeking promising and rewarding career paths.

Fundamentally, we identify opportunity domains through three key parameters:

1. Student Career Aspirations: domains with potential to provide candidates with career growth and advancement

2. Significant Gap between Demand and Supply of Candidates: industries abundant with substantial job prospects, yet constrained by an inadequate supply of skilled professionals to fulfil those roles

3. High Complexity or Cost of On-the-Job Training: domains heavily reliant on technical expertise, where the dispensation of on-the-job training proves challenging and costly due to the specialised nature of skills required.

Software engineering and digital skills have proven well on these three parameters and hence we have seen several companies built in that domain. These different companies have employed one of the many operating models described above. Another compelling example resides within the medical education sector, particularly evident in the nursing workforce. India needs more than 2 million nursing professionals to fulfil WHO’s norm of 3 nurses per 1000 population. Currently India has 1.7 nurses per 1000 population. In addition, Indian nurses are demanded all over the world thus presenting a great opportunity for Indian aspirants. We illustrate the opportunity in the exhibit below.

Concluding our Thesis: 

The opportunity to shape higher education is undeniably thrilling, offering a canvas where numerous thriving entities can coexist and prosper sustainably. While considerable progress has been made in providing programs for software and digital skills, other domains are yet to be explored. Specialising in specific domains and delivering tangible, quantifiable outcomes for students, new companies have the opportunity to innovate and grow. Moreover, from the initial stages of college admission to the later phases of a professional journey, distinct aspirations and challenges emerge. Lastly, companies can establish robust ARPUs and build substantial revenue by addressing the needs of ten-thousands or hundred-thousands of students, while leaving space for other players to serve the rest of the population. Establishing student outcomes as a cornerstone is key, as this is especially pivotal in the intricate realm of education.

Technology acts as the pivotal catalyst for standardising delivery yet creating personalised learning experiences for students. The crux lies in crafting top-notch educational programs that seamlessly adapt to evolving industry demands, equipping students with the skills for productive employment and dynamic career progression. 

In essence, the higher education landscape presents an exciting canvas for diverse stakeholders to thrive cohesively. By strategically addressing distinct student needs and leveraging technology, startups can carve a significant niche, contributing to the evolution of education while fostering their own enduring success.

Note: 1. https://pib.gov.in/PressReleasePage.aspx?PRID=1642061; 2. Source: Omidyar Network India - Redseer Report, 2019
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