Duolingo IPO: What it Means for EdTech Startups

Duolingo's Successful IPO and its Implications for the U.S. Edtech Sector

Amidst evolving regulations impacting China’s education technology landscape, U.S. edtech firms are experiencing a positive development: the remarkably successful initial public offering (IPO) of Duolingo.

IPO Pricing Exceeds Expectations

Duolingo initially projected an IPO price between $85 and $95 per share. This range was subsequently increased to $95 to $100 per share. Ultimately, the company priced its IPO at $102 per share, surpassing the revised upper limit.

This pricing performance mirrors that of highly sought-after enterprise software (SaaS) companies, which have garnered significant investor interest in recent periods. Furthermore, the stock market has demonstrated a willingness to assign generous valuations to consumer-facing technology companies boasting strong brand recognition, such as Airbnb. Therefore, the strength of Duolingo’s IPO pricing wasn’t entirely unexpected.

A Positive Signal for U.S. Edtech

Regardless, this outcome represents a favorable result for the U.S. edtech industry. Prior to setting its IPO price range, TechCrunch observed that Duolingo was poised to achieve a new, elevated valuation. This observation led to certain projections.

Duolingo has now successfully priced its shares above its increased range. This is a significant achievement.

In more straightforward terms, Duolingo has established a higher revenue multiple than previously anticipated, suggesting that the potential exit value of edtech companies could exceed the expectations of private-market investors. The company was last valued at approximately $2.4 billion in November. At its IPO price, Duolingo’s nondiluted valuation now stands at $3.66 billion, excluding the potential purchase of 765,916 shares by underwriters at $102 per share.

Valuation Growth and Market Context

This represents a roughly 50% increase in valuation within a six-month timeframe. While not comparable to the rapid growth seen in some high-profile companies, it remains impressive, particularly considering Duolingo was priced towards the end of 2020, following the disruption of the global education market by COVID-19, which drove increased user adoption of edtech startups.

Investors arguably secured a favorable deal at that earlier valuation. Duolingo anticipates Q2 2021 revenues of $57.9 million, based on the midpoint of its projections. This translates to a run-rate multiple of nearly 16x. For comparison, the median multiple for publicly traded SaaS companies currently stands around 14x, according to Bessemer. Consequently, Duolingo, a consumer edtech company, is now valued at a higher multiple of its revenue than the average public enterprise SaaS business.

This outcome may seem surprising, given historical perspectives from venture capitalists regarding consumer software (typically exhibiting higher churn rates than enterprise SaaS, and therefore lower valuations) and edtech (often perceived as a challenging market with fewer successful outcomes compared to other software sectors, resulting in lower valuations). Duolingo embodies both of these characteristics.

Key Takeaways for Edtech Investors

Several conclusions can be drawn from this development:

• The recent regulatory changes in China appear to have minimal impact on edtech companies outside of the Chinese market. There is little evidence of spillover effects onto edtech businesses not heavily reliant on the altered Chinese landscape.
• Edtech valuations can now rival those of mid-tier SaaS companies, and potentially surpass them. Given the increasing valuations of SaaS businesses in recent years, this is encouraging news for the sector, facilitating potential venture-level exits. Duolingo’s IPO pricing serves as evidence of this.

Edtech investors should find this news encouraging, particularly given recent challenges. This positive development offers a welcome boost. Best wishes to all founders in the field.