Edtech Growth & Early Stage Lessons

During the past week, Udemy, a platform for online courses, secured $50 million in funding, resulting in a company valuation of $3.32 billion – an increase from its $2 billion valuation at the beginning of the year. Similarly, Duolingo, the language-learning application, obtained $35 million in investment, now valued at $2.4 billion, a rise from its previous valuation of $1.65 billion earlier in the year.

These increased valuations for both Duolingo and Udemy clearly demonstrate the significant level of investor trust in the growth of remote learning within the educational technology sector. We will now consider some insights that early-stage companies can gain from observing more established edtech businesses.

Content is no longer the primary driver

Educational technology companies that have successfully combined informative material with engaging user experiences possess a significant edge in the marketplace. However, with the rapid expansion of the information economy, content is becoming increasingly commonplace. A persistent question arises: Why would an individual subscribe to a service for information readily available without cost on platforms like YouTube?

A viable strategy for edtech companies aiming for expansion involves offering core content at no charge and then monetizing more focused, specialized offerings. Luis von Ahn, CEO of Duolingo, highlights the appeal of their freemium model to consumers.

Over 97% of Duolingo’s user base accesses lessons without payment, yet this small percentage of paying users – approximately 3% – generates nearly $180 million in bookings, which the company utilizes as an indicator of revenue. Von Ahn states that the company is operating with a profit.

Duolingo Plus, the company’s subscription service, provides an experience without advertisements, enables offline learning, and delivers more detailed performance tracking. Nevertheless, the paid version isn’t drastically different from the free Duolingo experience—and this is intentional. The large number of free users reduces the company’s expenses related to customer acquisition, and the extensive user base provides Duolingo with valuable data to guide ongoing improvements on a weekly schedule.

While other edtech businesses, such as Quizlet, also employ freemium models, Duolingo’s achievements demonstrate that the increasing availability of content can be leveraged to benefit an edtech startup. In Duolingo’s situation, their 42 million monthly active users can now be utilized to support the development of additional products.

The Increasing Complexity of Workplace Education

Beyond the financial details, a noteworthy aspect of Udemy’s recent funding round is the 90% growth experienced by its Udemy for Business division. This platform serves a growing number of enterprise clients, including prominent companies like Instacart, Apple, Okta, Unilever, and PayPal. Udemy for Business focuses on enhancing the skills of existing employees, aiming to boost their engagement and overall performance in their current roles, rather than focusing on job placement.

Udemy for Business exceeded $100 million in annual recurring revenue (ARR) in October. According to a company representative, the business segment has expanded from $1 million to $100 million in ARR within a five-year timeframe – a significant achievement.

This development coincides with Udacity’s announcement of achieving profitability following a shift towards enterprise-focused online learning. Coursera, another major provider of online courses, reports that its recently introduced enterprise product, launched in March, now contributes to 25% of its overall revenue. It’s worth noting that these figures likely represent only a small portion of the total market potential.

David Blake, a co-founder of the upskilling platform Degreed, suggests that Udemy and Udacity collectively account for less than 1% of the learning activities within their client organizations. This indicates a substantial market size, allowing multiple companies to secure a share of the available spending. Degreed maintains partnerships with both Udemy and Udacity.

As Blake explained in an email, the necessity for comprehensive learning management remains largely unchanged even as individual players gain new clients.

For emerging startups, the considerable growth potential within the corporate learning sector presents a clear opportunity. Rather than targeting millions of individual consumers, these businesses are increasingly adopting an enterprise sales strategy – focusing on organizations with greater financial resources. New companies can capitalize on the presence of established market leaders by developing specialized online learning materials tailored to specific job functions. 

For example, a recently funded startup called Transfr, which provides virtual reality software for training in manufacturing and production, has seen its customer base increase fourfold since March and secured $12 million in funding, despite not yet being profitable.