Duolingo IPO: 5 Key Lessons for EdTech

Duolingo's Public Debut and its Implications

This week marked Duolingo’s entry into the public stock markets, generating considerable enthusiasm and spotlighting the edtech industry and its founding teams.

The language learning platform experienced a significant surge in its stock price upon commencement of trading. This occurred despite the company having previously increased its initial public offering (IPO) price range, and ultimately pricing shares above the revised upper limit.

Significance of the IPO

Duolingo’s IPO demonstrates that investors in the public markets recognize the enduring value inherent in technology-driven educational organizations with a strong mission.

The IPO is particularly noteworthy given the limited number of edtech companies that have historically pursued public listings.

For a comprehensive account of Duolingo’s journey – from its inception through its monetization challenges to its eventual IPO – our EC-1 report provides detailed coverage. It features interviews with numerous stakeholders, including executives, investors, linguists, and competitors.

Insights from Luis von Ahn

We recently had the opportunity to speak with Duolingo CEO Luis von Ahn. The discussion centered not only on the company’s IPO but also on the potential effects of the listing on other startups.

Duolingo’s IPO serves as a valuable case study for several types of companies. These include consumer-focused startups, organizations driven by a clear mission that monetize a relatively small user base, and education companies that have recently achieved substantial scale.

According to von Ahn, Duolingo views itself not merely as an edtech company with updated branding. Rather, the company attributes its expansion to a core focus on engineering principles.

The Power of Motivation

The company has found that offering motivation to learn, rather than simply promising language fluency, resonates with international consumers.

Investors believe this approach has the potential to scale and achieve profit margins comparable to those of software companies. Selling the process of learning, it appears, is a viable and scalable business model.

This suggests that consumers are willing to invest in the journey of language acquisition, and that this model can deliver substantial returns.

Duolingo’s IPO: Enhancing Core Service Capabilities

Duolingo’s development can be categorized into three key stages: initial user growth, the implementation of a subscription model for financial stability, and a current emphasis on educational advancements through the integration of more intelligent technologies.

The recent IPO is considered by Duolingo’s founder, Von Ahn, as a continuation of this third phase. It will facilitate the addition of “more sophistication” to the platform’s fundamental offerings.

A potential strategy for achieving this involves strategic acquisitions over the coming years, a path Duolingo has previously been hesitant to pursue. However, the rapid expansion within the edtech sector, particularly in language learning, presents numerous acquisition opportunities.

Von Ahn indicated that while no specific companies are currently under consideration, discussions with potential targets were ongoing prior to the IPO and will continue afterward.

Innovation at Duolingo extends beyond its primary language learning application. Currently, the company is developing a dedicated mathematics learning app.

Furthermore, Duolingo ABC, an application designed to foster literacy in young children, is also in development.

The S-1 filing reveals plans to introduce a “Duolingo Proficiency Score” across all languages offered. The goal is to establish Duolingo as a globally recognized standard for assessing language proficiency.

This initiative will also contribute to the growth of the Duolingo English Test, a significant revenue stream for the company. Substantial investment in outcome measurement and curriculum development will be necessary to gain credibility for this scoring system.

Despite a focus on improved learning outcomes, Von Ahn emphasized that Duolingo will remain fundamentally a “product and engineering-focused company.”

Future Development and Strategic Direction

• Strategic acquisitions are being considered to enhance core services.
• Expansion into new educational areas, such as mathematics and early literacy.
• Development of a standardized language proficiency assessment.
• Continued prioritization of product development and engineering expertise.

Duolingo's Perception: Beyond the Edtech Label

Luis von Ahn, Duolingo’s founder, positions the company as a consumer software entity enhanced by educational elements, rather than a traditional edtech company utilizing consumer software. This distinction isn't merely semantic; it reflects a deliberate effort to differentiate Duolingo from conventional players within the education technology sector.

Investors participating in the roadshow concurred with this assessment. Their primary focus centered on the platform’s organic growth, recognizing that many application-based businesses struggle with substantial customer acquisition costs that negatively impact profitability.

Notably, Duolingo’s financial model was benchmarked against companies like Spotify and Tinder, rather than fellow edtech IPO, Coursera. This comparison highlights a different approach to user monetization and growth.

Startups seeking validation from Duolingo’s success may need to consider this subtle but significant difference. While investors generally believe in the future of mobile learning, they haven’t unequivocally endorsed the prevalent freemium models or tutoring marketplaces common in the edtech space.

Von Ahn explained that Duolingo’s strategy involves monetizing a small percentage of a very large user base. This contrasts with the approach often adopted by other edtech companies, which aim to generate significant revenue from a smaller, more targeted audience.

He further stated that companies aligning their business models more closely with Duolingo’s are likely to benefit from the positive perception surrounding its recent performance. The traditional edtech approach, he suggests, has prioritized high revenue per user over widespread adoption.

Key Takeaways for Edtech Startups

The roadshow investor perspective suggests a preference for scalable models with organic growth. Focusing on attracting a massive user base, even with lower individual monetization, appears more appealing than relying on high-value transactions from a limited pool of users.

This implies that edtech startups should prioritize strategies that drive organic user acquisition and foster long-term engagement. A large, active user base can create opportunities for diverse revenue streams, including advertising and premium features.

Implications of the Duolingo Model

• Organic Growth is Key: Investors value platforms that can expand their user base without excessive marketing spend.
• Scale Matters: A large user base provides a foundation for sustainable revenue generation.
• Freemium Viability: The success of Duolingo’s freemium model suggests it can be effective when coupled with a massive user base.

The Impact of China’s Edtech Regulations on Duolingo is Projected to be Minimal

Just prior to Duolingo finalizing its IPO price, China announced stringent new regulations designed to curtail for-profit tutoring companies. This regulatory action created uncertainty, and validated concerns previously expressed within the public markets and among edtech investors.

Although Duolingo does not operate as a traditional for-profit tutoring service, it functions within the broader edtech sector and maintains a presence in Beijing – its sole international office.

Furthermore, the company had recently been increasing its marketing investments within the Chinese market.

Luis von Ahn, Duolingo’s CEO, directly acknowledged the situation in China, stating his reluctance to speculate on future governmental actions. He emphasized that predicting the policies of the Chinese government is unreliable.

Von Ahn anticipates a limited negative impact, and even a potential benefit, from these changes. He believes the regulations will primarily affect companies that represent indirect competition to Duolingo.

Despite its current neutral position, von Ahn conceded the possibility of future regulations that could influence the company’s operations. He highlighted the unpredictability of the Chinese government’s decisions.

“Predicting governmental actions six months ago would have been impossible,” von Ahn stated. “Therefore, basing the company’s future on the Chinese market would be imprudent.”

He affirmed China’s importance as a market, noting ongoing investment, but also underscored the inherent risks associated with operating within the country.

Key Takeaways

• Duolingo is not directly impacted by the crackdown on for-profit tutoring.
• The company maintains an office and marketing efforts in China.
• CEO Luis von Ahn acknowledges the uncertainty of future regulations.
• Duolingo views the situation as potentially beneficial due to impacts on competitors.

China remains a significant market for Duolingo, but the company is proceeding with caution.

Growth Slowdowns Post-COVID: Not Always Detrimental

Examining Duolingo’s latest S-1/A filing, a discussion of its growth trajectory is warranted.

The company projects a 45% increase in growth for the second quarter, based on the midpoint of its reported revenue range. This figure represents a significant decrease compared to the 129% growth experienced in 2020 and the 97% growth observed in the first quarter of 2021.

It was unrealistic to expect Duolingo to maintain the exceptionally high growth rates seen during the peak of the pandemic. A 45% growth rate in the second quarter should not necessarily be considered slow, especially considering the company achieved 42% growth between Q1 and Q2 of 2020.

However, the deceleration from its previous growth rates is undeniable, regardless of mitigating factors. Investor response to the company’s pricing and initial trading suggests a willingness to value consumer edtech companies at software multiples, even with diminishing growth.

Growth's Potential to Offset Increasing Losses

Building upon our previous discussion, even a slowing rate of substantial growth can alleviate concerns regarding profitability. While Duolingo experienced a greater net loss in 2020 compared to 2019, the loss represented a smaller percentage of its overall revenue.

Notably, the company's initial quarter of the current year demonstrated a loss nearly equivalent to its entire net loss from 2020.

Despite this, the second quarter results revealed a reduction in losses, although they remained higher than the slightly profitable Q2 of 2020. However, these figures have largely escaped significant scrutiny.

Observers familiar with enterprise software are likely questioning this perspective, perceiving it as an overly cautious approach to financial analysis. The success of large SaaS companies demonstrates that robust growth can lead to diminishing losses.

However, it is crucial to avoid assuming that strategies effective for companies like Slack will automatically translate to Duolingo. Although both offer software directly to consumers, the similarities largely conclude there.

Therefore, the relative unimportance of Duolingo’s losses suggests a positive indicator – albeit a moderate one – regarding the future financial health of the edtech sector.

Further analysis of the Duolingo IPO and the broader edtech landscape will be provided by Natasha and Alex on Monday’s Equity podcast.