Understanding The Economics Of Edtech Startups

I spoke to a few early-stage EdTech startups over the last few weeks. I had multiple questions answered. Here I am looking at the unit economics of such platforms.

The economics is mostly dependent on the student-teacher ratio. And that defines the whole experience as well.

There is broadly 3 range of ratio here:
1. 1to1 – WhiteHatJr.
2. 1to Few – Cohort based. GreatLearning.
3. 1to Many – Recorded classes. Byju’s.

The cost of acquiring a user(learner) is the same for everyone. The gross margins are 20% to 92% depending on the student-teacher ratio.

A 20% margin business for a non-branded teacher is impossible to break even. In D2C, 70% gross margin is supposed to be healthy. The same should apply here.

What would work well?
A hybrid model, where pre-recorded classes are followed with a few cohort-based workshops and then 1-1 doubt solving. This is the ultimate package that removes the creators branding requirement also. And gives control to the ed-tech platform.

Problems as compared to offline education
1. A 1-hour recorded video is about 3hrs of live class equivalent. Generally, recorded videos are condensed & edited, which results in poor learning because there is no buffer time to make notes or to think.

2. Chat for doubt solving is flooded with 100s of students. The rate of resolving doubts is poor.

There are 3 types of learning and all 3 are measurable in their own respects. :
1. Certificate-based – Mostly upskilling courses.
Branding of the certifying institute. – GreatLearning has Stanford, IIT etc.

2. Outcome-based – Competitive exams for admission.
The past success of institute – “AIR 1 is our student”.

3. Hobby Learning – ECA.
Branding of the teacher – Check Frontrow – Celebrity teachers.

All the 3 above are socially tangible.

Unlike learning and gaining knowledge. If you are just curious and have the capability to “learn on your own” – Youtube is enough. Alas, most of the millennials haven’t been taught to learn on their own. We need to be guided.

Understanding The Opportunity In Creator Economy

Originally posted as a Twitter Thread.
Interesting how Threads have become easier to write than blog posts.

We are trying to decode the creator economy that we use to guide us at Refrens .

The most important thing before we start. All creators must have their own audience. If your audience is owned by a platform that might go hostile later (a la FB) you are swimming in the wrong sea.

What you monetize is your audience. Your audience trusts you, your face, your voice, your brand. So like a teacher or doctor, your work is not delegatable. You only earn from as many as you can directly reach.

The creator economy falls into 2 brackets with respect to where their money comes from.
1) Those who teach the audience a new skill – and the audience pays. Example – @VaibhavSisinty@LiveFromALounge
2) Those who sell the audience a new product – and a brand pays. Example – @Bhuvan_Bam – also called Influencer

Change in Execution:
A. Some are creating digital products for other creators.
Lack of potential in capturing value, i.e. collecting fees for advice, enforces this. So you create an enabler product/platform instead of advising.

B. Some creators are now starting to own the brand that they promote ( a la Ramdev-Patanjali)
A broken influencer to sales attribution system enforces this.

What happens to other creators – like writers on @TeamPratilipi or @YourQuoteApp? They fall somewhere between 1 & 2. The audience pays, not to learn but to consume the creation. Freelance writers used to get fixed-fee from editors. Now they are micro-publishers themselves. (Read more about micro-entrepreneurs on Platforms)

Products in the creator or freelancer economy can do 3 things:
1. Provide a tool to create – Video editing tools, podcast creation tools etc.
2. Provide a platform to distribute – Reach and manage the audience.
3. Provide a platform to manage the business – payments, leads etc.

A good platform must do 2 of the 3 things above.
1. Youtube does all 3 of the above. But #3 partially only.
2. Spotify does 2 directly and 1 through Anchor.

Doing only 1 of 3 above means you are doing nothing specific to this audience. You would be anyone like Figma/Freshworks, with lower ARPU. You will be a commodity tool.

The challenge is in selecting a target market that is still large enough even when you combine 2 of the 3 above.

MS=10E – Sales Vs. Engineering Ratio in Tech Startups

For every $ spent on Engineering, spend 10 on marketing and sales.   

What should be the ratio of sales to Engineering? As high as possible. 10:1 is plausible. For every $1 of effort in making the product, there should be $10 in selling it. Includes founder’s time, software purchase, and external resources. This is true for SaaS and Consumer companies.

A lot of focus in Tech startups is on getting the product right, hence expanding the product or engineering team is the most intuitive thing to do. Yet, a lot of startups that are successful have a not-so-beautiful product, with not many fancy features. Naukri.com, JustDial, Indiamart, Makemytrip and many such have been sales first company. Their competitors might have “better” products to showcase, but they still won.

Selling is important to make the product. Selling gives a constant feedback loop to your product that engineering can utilise.

Imagine a software product as a research project. Once you have cracked the right work flow, it is easy for anyone to copy it. So even if you find something small, run with it and sell it. Would you want to keep funding a research project forever?

Another way to figure this out is to look at your Key metric. Does it change with 1 more engineer or 1 more marketing/salesperson?

But what about “great product is the best marketing”? Great product drives good retention, repeat and referral. You still need marketing to fill the top of the funnel and sales to nudge the bottom of the funnel.

Why do startups have a hard time doing this?
1. Because they are too shy (introvert) to understand enough about sales.
2. Head count wise it sounds a lot. In an avg. SaaS organisation an engineer is paid 3X of a sales executive.
3. Spending more ads requires orchestration of support and sales team also. Marketing spend cannot be increased without the support of a fast recruitment and training team.

If you still have a tough time justifying this, think of engineering and product as Capex (to set up a factory). Marketing and sales spend is the Opex (for raw material). If the factory is setup, keep adding more raw material.

What is your MS:E ratio?

*I use marketing and sales interchangeably because a lot of low-ticket size DIY SaaS companies only have marketing teams.

Moving The Problem With Money

Scene: A startup in a large market is growing 5-10% week on week. The startup founder wants to grow faster. For this he needs to convince suppliers beyond the organic pull.

Problem: The suppliers don’t trust him because he is relatively new. Hence, they are asking for a minimum revenue guarantee. The founder is good at creating a product but not very good at selling, so he is not able to convince the potential suppliers.

Potential Solution: The founder thinks if he has enough money in the bank, he can offer minimum revenue guarantee to suppliers and that should be enough to convince them. So he ventures out to raise funds.

Solution or New Problem: Now he is working on convincing an investor instead of the vendors. He will now dilute equity to give advance revenue to suppliers. Is the problem solved or moved? 

Moved Scene: What he doesn’t realise is that the business model has now changed from a zero-inventory marketplace to a high-risk trading, where he has already unwritten the supplier. In the previous model the supplier was working to make sure things on the marketplace sell, now they have no interest in helping drive sales.

Changed habits: The suppliers habit haven’t changed, but the founder and his team is now used to buying inventory instead of convincing anyone. More suppliers are interested in selling to him. Supply chain metrics is measuring number of new suppliers added every month. The team goes berserk and buys any and everything to show better numbers in quarterly reviews.

New Problem: A lot of unsold perishable inventory that has already been paid for. Some of it is not sellable.

New Solution: Sell everything at lower price. Any revenue is better than no revenue. Bad inventory gets bad review, so the team now spends in refurbishing that inventory.

New Problem: Additional investment required to maintain and refurbish inventory.

Side Problem: Suppliers are buying their own inventory at lower price. Real buyers are missing.

End Result: Low equity holding. High inventory holding. Unhappy customers. Suppliers still don’t trust you because they can see the gap in your model and are scared of the bubble bursting. 

Moral: Learn to sell and convince the right person. Don’t move the problem with money.

Over simplistic? I know. But you get the point.

The Ultimate Hook – Discounts for Consumers, Tools For Businesses

In India, most consumer internet brands have used discounts as a hook to lure in users. If your service is good, those users will stick. If not, they will go to the next brand that gives discount. Discounts are good to drive consumption, change habits and make people use your app to indulge in the newly formed habit.

For B2B, discounts are not a sustainable way to create new marketplace.

Here are some reasons:

  1. Timing – Businesses do not have a need for a new service/product all the time. You can buy an extra t-shirt if there is a heavy discount but can you buy something extra for your business just because it is cheaper. An extra phone number? No. An extra LMS? No. Over procure commodity for trading – may be yes. Sustainable? Debatable.
  2. Cost – B2B has High ticket size transaction so high absolute amount of discount is required to move the needle.
  3.  No lock-in. If it’s a commodity service/product, it’s easy to come in and easy to leave.

Let’s look at “tools” as a way to create a sustainable B2B hook? 

We are not talking about selling the SaaS tool for profit but using a SaaS tool as a hook to marketplace or network. How does a tool fight the above 3 problems.

1. Timing – There is always a need for the tool, new companies will adopt your tool faster because they haven’t adopted any tool as yet. If a tool itself is powerful, it might give competitive advantage to early adopters and hence drive industry-wide adoption. A popular category tool will always find takers.

2. Cost – Initial development cost is as much as it take to create a SaaS company. Incremental cost of serving a new customer is negligible with SaaS. Giving it out for free or at a lower price will hurt, but not so much if the network it is building is valuable. Read this on when to choose free as a pricing model.

3. Lock-in – SaaS Tools are great for business lock-in, here’s why:

  1. Workflow and adoption – Each tool has its own workflow, if you have adopted one, it is very difficult to leave unless the incentive to move out is too high.
  2. Data – Moving existing data to a new system is cumbersome, if possible at all. Doing it across an organisation is like moving a mountain.
  3. Network effect is a true lock-in and a SaaS tool can do a strong seeding before the network effect kicks in. It’s like supporting each other  for sustainability.

Why do tools not work to seed a network/marketplace?

  1. Bad tool – The tool itself is of low value or bad. In this model, you still have to make a good SaaS product. Future network effect is not an excuse to make a bad tool today.
  2. Unrealted tool and network utility – There is little to no relation between the tool and the network. This will end up being 2 products in the same org competing for resources and that do not add value to each other.
  3. The network is not valuable– The utility of network is of low value. You have a working and sticky SaaS tool but the value unlock is not valuable enough for businesses using it.

The tool, the network and the relation between the 2 must be analysed for this to work. It’s tricky, but when it does work, it is great.

Some companies doing SaaS enabled marketplace in US

  1. Stripe – Payment tech is really a SaaS tool. A lending company unlocks major marketplace level value. If a lending company has to be built otherwise, what seeding or lock-in do you have?
  2. Wave – Free book keeping software. Upsell accounting services.
  3. Zenefits – Low cost HR software, capture employee data, upsell insurance.
  4. Invoice.2go.com – SaaS for book keeping. Upsell invoice discounting.

All of them have used SaaS for seeding the demand side of marketplace. None of this has used a network effect. FrieghtOS has seeded the supply side. Network effect is still minimal.

Examples in India:

  1. Wishbook – Funded by Naukri. A SaaS tool for apparel manufacturers. Building a B2B marketplace on top.
  2. IconScout – Won grants from Adobe. SaaS tool, delivered as plugins for popular design tools, to manage your design assets. Building design assets marketplace on top – icons, illustrations, stock images.
  3. Refrens – Yours truly’s startup. We made an invoice and payments system for freelancers and SMEs (SOHO), and seeding sales referral network on top.

Ecosystem will take time to embrace this as a model because this is literally like making 2 products at once, with 3 chances of going wrong.

Will marketplace enable tools? Or tools enable marketplace or is it a case of “it depends”?

Related reading: 1, 2, 3.

Why Do People Consume Content? How to Distribute and Monetize Effectively?

There is a lot of debate lately about the right business model for news content. Ad supported models are failing for various reasons and some publications are seeing success with paid subscriptions. Here I have categorised various forms of content based on why it is consumed and how best it can be distributed and monetized. Please see the chart below. The rest of the article only tries to advocate the chart.

How to monetize content effectively
Click to expand

Here’s a look at different reasons why people consume content online. See details in the chart above.

  1. Utility – You already know a specific question. You are looking for an answer. To save time and/or money.
  2. Hope – You don’t know the question but you will know when you find a good answer. Gives you hope of being smarter, instills long term pride. Most non-fiction books and business tycoon blogs fall in this space. There is some shareability in such content.
  3. Porn – There are no questions. There are no answers. It generally has no takeaway but it instills some emotion like envy, nostalgia or anger, which is short lived. Quantity rather than quality should be the focus here. It has to be new for the consumer, irrespective of when it was produced. This is just like real porn that instills momentary lust but has no value after you have (s)wiped off. Such content has high shareability due to the emotion it triggers.
  4. Professional Utility – This is a mix of Utility and Hope. It revolves around consuming content around your specific profession. This content is partially actionable for the consumer but is not an answer to any specific question. Industry journals fall in this category.

Same content could be packaged in different ways for different audience.

  • Reading about the price of a newly launched iPhone is porn.
  • When you are looking to buy it, is utility.
  • An iPhone seller would need to subscribe to price change alerts, serving professional utility.
  • A consumer brand owner might read about the price change pattern in the hope of understanding the strategy.

Some Examples to Understand the Context of the chart above:

  1. One would subscribe to Scoopwhoop or Buzzfeed on Facebook but would you subscribe to it over email? May be not. How often would their article land on a search engine result page when you are searching something? Not enough to make them survive.
  2. A price action movement in stock price for a stock trader needs to be reported instantly (Professional Utility). But if you are just drooling over a 40% price jump news for a tech stock IPO, you are most likely just reading for orgasm, hence it’s a porn content. You were never really searching for that content.
  3. Inside.com does a great job of category specific news digest emails. Most of the content they serve has low shelf life hence they do not write but just curate the content.   
  4. Skift.com for travel industry is a great professional utility content. Similar to Medianama for digital media in India. Most of their content has short shelf life but is important for their specific industry.
  5. Subscribing to the-ken.com is hoping to become smarter. It doesn’t serve a particular industry but their articles cover some nuances of doing business in general. Subscribing to Naval Ravikant on twitter serves a similar purpose, hence we might even buy his quotes packaged as a book.
  6. A how-to site wikihow.com would serve limited purpose to subscribe on twitter or FB but do great if it shows up on Google’s result page.

Building for New User vs. Power User

When we built version 1 of Freecharge, it was targeted at first time online transacting users. The transaction flow had more explanations regarding “Why” a certain info was required and “How To”. We even had to explain things like we are safe to transact. The media coverage helped. We did succeed but the flow was slow for repeat users.

In 2011-12 when Paytm was becoming popular they were particularly attracting the power users. Faster flows, coupon screen could be skipped, maintain wallet, recharge over IVR. The users who only wanted a clean and fast recharge moved to Paytm.

Had Freecharge started with a power user flow, we may have never succeeded. It would have been impossible to explain things with minimalist UI. Had Paytm launched with the first time user UI, there would be no reason to move to Paytm.

I recently moved all my family’s MF to Kuvera. While there are many apps trying to get users to buy Mutual Fund through them, Kuvera has 2 features that gets the power user i.e. single sign-in for family accounts and ability to import old transaction. MF is a complicated product for first time user to figure out on their own online. Once the power users are captured through these features, these users can influence the laggards as well.

Depending on what you are building and when, it is important to note if you are building for first time users or a more valuable product for a power user.

What “Women at Home” Want? How Can They Make Money?

Hotstar was the first and fastest 100MN download app from India. Indian women were a major contributor to this. They are the bread buyers of the family so it make perfect sense for media companies as well.

Stay at home women in Indian households are major consumers but they are also considered a major reason for low growth of Indian economy. The social structure does not allow enough freedom to go out of home for standard work hours.

I am particularly talking about educated women in urban Indian family. Typically a women’s income in such family is “additional income” and not mandatory to run the household income.

Here are few traits that I have been noticing. It will help you understand what they want.

  1. Age 25 to 60. Married.
  2. Can use popular apps on smartphone. Not necessarily tech savvy. More browse, less search.
  3. They are influential but not necessarily on Instagram.
  4. Everything goes Viral. Word of mouth is fast. Comparable to college kids.
  5. Have free time from early noon to early evening. Not necessarily on all days. Not at the same time everyday. About 30-50 hours a week.
  6. Do not appreciate physically intensive work like data entry. Creative works helps.
  7. Need Social recognition for work. They need “colleagues” to work.
  8. Not pressed for money. Not looking to meet a need or target to achieve.
  9. “Sales” and “Creation” are most suited. Operational work is difficult remotely. Any work that requires time adherence is difficult.

There are few companies that are trying to tap this workforce. Let’s see what they are doing right.

  • Foodybuddy – The startup enables home chefs to sell online. This domain has been explored by startups earlier. Shef just graduated from YC to address the same domain. Amongst other things the one thing they are doing right is that they are selling long shelf life items. Along with immediate consumption item like dosa, they are also selling dosa batter. They are selling pickles and Ladoo. These need to be less predictable in terms of time of service. It’s difficult to beat a restaurant’s time adherence for immediate consumption food. Fast and convenient will always over take taste. For other stuff it is has a strong story, as powerful as that of Lizzat Papad’s self help group. Women do creative work, app handles sales and delivery.
  • Meesho / Glowroad / Shop101 / Wooplr– These are decently funded apps. All in the dropship category. Mostly selling non-branded women clothing. Apparently they are doing good in tier-2/3 towns. The local store may not have as much curation and catalog size so these apps work. Meesho sellers are like ecommerce assistants. Curating on Meesho is a creative skill. Same audience as Amway or Tupperware. Women do the selling work, app handles supply.
  • Flyrobe’s Trunk ShowFlyrobe is into rental of premium clothing. They are trying their hands becoming the suppliers for women who want to setup kiosks at local Flea Markets. They deliver the goods before the orders are placed by the consumer and allow of a more physical viewing. The unsold inventory can be returned. App handles supply.
  • Makemytrip has had work from home holiday consultants for sometime now. Sales centric again. But makemytrip gives leads to their holiday consultants. Users aren’t really selling to their own network. Time adherence will be higher in this case.

At my new startup, Refrens, we are looking at bring more work to this audience. Creative people who are good at what they do but may not be able to go out and sell.

Identifying Your Product’s Category – What Shelf Does It Go To?

Kingfisher recently launched Radler in Gujarat. It’s an aerated beverage, similar to Sprite or Mountain Dew. They promote it as 0% Alcoholic Drink. There are atleast 5 more “0% Alcoholic Beer” drinks sold in Gujarat. Branding the product closer to beer allows it to differentiate it from “soft drinks” and also keep a premium pricing.

In software products when you are making a category defining product for your market you have to choose your “tags” well. Is Slack replacing team emails or improving chat? Is Airtable a smarter Excel or a faster built custom app.

At my last startup, FindYogi, I liked to call it a “shopping decision platform”. I would always need 3-4 more sentences to explain what we do. Had I called it a “price comparison site” it would have been easier for people to understand in the first go. It would hurt the team’s ego that we were building in a crowded domain and not building anything fancy but that would be a separate problem to solve.

These “tags” are different for employees, partners and investors. This is your quick pitch and the goal is to let the audience put you in a “bucket” or “shelf” they already know.  

  1. Keep it simple and generic. Even if it defines only half of what you do. A “price comparison site and we also help you decide which product to buy” is a better pitch than starting with complicated phrases.
  2. Let the audience link it to a popular product that they might already know. Let them come up with that bucket in their head and don’t get offended with whatever they call you. If it’s a 50% match, it’s a win.
  3. Let it evolve with time. Product and market maturity will give you new tags. Embrace it.

At my new startup, Refrens, I am currently pitching to potential users as “JustDial +Linkedin for B2B service providers”. It doesn’t sound fancy but gets me a foot in the door. This is how a user defined it. I am going to stick with this for some time before I find a better pitch.