Interest in digital learning platforms has significantly increased, driven by substantial shifts in both professional and educational environments during the recent global health crisis. Now, a leading innovator in this space is announcing new funding as it achieves profitability following a strategic focus on enterprise solutions, catering to organizations and governmental bodies aiming to enhance their workforce’s technological capabilities to meet contemporary requirements.

Udacity, a provider of online educational programs and the originator of the “Nanodegree” concept in technology fields such as artificial intelligence, software development, self-driving vehicles, and cloud technologies, has obtained $75 million through a debt financing agreement. These funds will be allocated to further development of its platform, with a particular emphasis on attracting more business-oriented clients.

Udacity reports substantial growth within this sector, noting a 120% increase in Q3 bookings compared to the previous year, and a 260% rise in average recurring revenue during the first half of 2020.

Udacity states its clientele includes “five of the world’s top seven aerospace corporations, three of the Big Four professional services firms, the foremost global pharmaceutical company, Egypt’s Information Technology Industry Development Agency, and three of the four branches of the United States Department of Defense”. These entities collaborate with Udacity to create customized training programs tailored to their unique needs, in addition to utilizing existing courses from its extensive catalog.

Udacity also collaborates with businesses to develop programs as part of their corporate social responsibility initiatives, and partners with technology companies like Microsoft to promote the adoption of their tools among a wider developer base.

“We are experiencing considerable demand from both enterprise and government sectors,” explained Gabe Dalporto, Udacity’s CEO, who assumed the role in 2019. “Previously, interest was largely reactive, with organizations and Fortune 500 companies proactively reaching out to us. We are now focused on establishing a dedicated sales team to actively pursue these opportunities.”

This announcement represents a positive development for a company that has previously faced scrutiny, in part due to challenges in establishing a sustainable and profitable business model.

Established almost ten years ago by a team of three robotics experts, including Sebastian Thrun, a Stanford professor who played a key role in the development and management of Google’s autonomous vehicle and broader innovation projects, Udacity initially aimed to collaborate with colleges and universities to deliver online technology courses (Thrun’s academic reputation and the popularity of MOOCs likely contributed to this initial strategy).

However, after encountering difficulties and high costs, Udacity shifted its focus to becoming a vocational training provider for adults, specifically targeting individuals who lacked the time or financial resources for traditional full-time education but desired to acquire technical skills to improve their career prospects.

This change led to significant user growth, but profitability remained elusive. The company subsequently underwent several rounds of workforce reductions as it restructured and refined its business approach.

Currently, Udacity continues to offer courses directly to individual learners, but Dalporto anticipates that enterprise and government clients will soon account for approximately 80% of the company’s overall revenue.

Previously, Udacity had secured nearly $170 million in funding from a prominent group of investors, including Andreessen Horowitz, Ballie Gifford, CRV, Emerson Collective, and others. This latest funding round takes the form of a debt facility provided by Hercules Capital.

Dalporto stated that the decision to pursue debt financing followed the receipt of multiple offers for an equity investment.

“We received several term sheets for equity financing, but then an unsolicited debt term sheet was presented,” he said. The company then evaluated the cost of capital and potential dilution, and “determined that debt was the more advantageous option.” He added that equity financing is currently “not being considered,” but may be revisited in preparation for a potential public offering. “We are currently generating positive cash flow, so there is no immediate need, but an IPO is a possibility in the future.”

As a debt facility, this funding does not necessitate a reevaluation of Udacity’s valuation. The company was last valued at $1 billion five years ago, but Dalporto declined to comment on any changes to this valuation based on the (incomplete) equity term sheets it had received.

Education is in session

The current level of attention Udacity is receiving – from both investors and within the company itself – reflects the broader increased focus on online education platforms over the past year. Within K-12 and higher education, efforts have centered on developing improved technology and learning materials to maintain student engagement and continuity of learning when traditional classroom settings are unavailable due to social distancing measures implemented by schools, districts, governments, and public health organizations in response to COVID-19.

However, the need for online education extends beyond traditional academic settings. Businesses that have transitioned to remote work environments due to the pandemic are encountering a complex set of challenges. These include maintaining employee productivity and team cohesion when physical proximity is lost, ensuring the workforce possesses the necessary skills for the new work landscape, and equipping businesses with the appropriate technology and skilled personnel to support current and future work models. Simultaneously, governments are focused on mitigating the economic impact of the pandemic.

Online education is increasingly viewed as a potential solution to these challenges, creating significant opportunities for technology companies specializing in online learning tools and related infrastructure, alongside companies like Coursera, LinkedIn, Pluralsight, Treehouse, and Springboard, which focus on technology-related courses and learning platforms for professionals.

Similar to other market sectors like e-commerce, this growth isn't a sudden development, but rather a significant acceleration of an existing trend.

“Considering Udacity’s growth trajectory, commitment to sound business practices, and expanding presence across diverse industries, we are pleased to make this investment. We anticipate collaborating with the company to support its continued global expansion and ongoing innovation in upskilling and reskilling initiatives,” stated Steve Kuo, Senior Managing Director and Technology Group Head at Hercules Capital, in a press release.

Dalporto highlighted several areas within the enterprise and government sectors where Udacity is currently involved, representing a natural evolution of its existing vocational training programs.

One example is Shell, an energy company, which is retraining structural and geological engineers – individuals with strong mathematical backgrounds but lacking expertise in machine learning – to enable them to contribute to data science initiatives, as the company integrates more automation into its operations and explores new energy technologies.

He also mentioned that Egypt, and other countries inspired by India’s success, are providing technology skills training to their citizens to facilitate employment in the “outsourcing economy.” The program in Egypt has reportedly achieved an 80% graduation rate and a 70% rate of “positive outcomes,” meaning participants have secured employment.

“Specifically within the fields of AI and machine learning, the demand for these skills is increasing at a rate of 70% annually, yet there is a significant shortage of qualified professionals to fill these positions,” Dalporto explained.

Udacity currently has no plans for acquisitions in the next 6-12 months. “We have substantial demand and internal work to address, making acquisitions unnecessary at this time. While we will consider acquisitions in the future, they must align with our overall strategic objectives.”