As edtech grows cash rich, some lessons for early stage

Last week, Udemy, an online learning marketplace, raised $50 million at a $3.32 billion valuation, up from a $2 billion valuation earlier this year. Language learning app Duolingo raised $35 million on a $2.4 billion valuation, up from a $1.65 valuation from earlier this year.

The valuation bumps for both Duolingo and Udemy underscore just how much investor confidence there is in edtech’s remote learning boom. Today, let’s examine some lessons early-stage startups can learn from late-stage edtech.

Content is no longer king

Edtech startups that have figured out how to convey information while engaging users have  a competitive advantage but, as the information economy booms, content is growing more and more commoditized. It’s an age-old question: Why would someone pay for information they could get for free on YouTube?

The solution for edtech businesses seeking growth is to make its content free and then charge for more specialized services. In Duolingo’s case, CEO Luis von Ahn says consumers are drawn to its freemium business model.

More than 97% of Duolingo users take lessons for free, but the remaining 3% account for nearly $180 million in bookings, a metric the company uses as a proxy for revenue. The company is “more than breaking even,” according to von Ahn.

Duolingo Plus, its paid product, is ad-free, offers offline access and more comprehensive tracking metrics. However, it’s not a world of a difference from the Duolingo free product — and that’s part of the point. Free users have saved the company paid acquisition, and widespread usage gives Duolingo insights on what they need to do on a week-by-week basis.

Other edtech firms, like Quizlet, offer freemium services, but Duolingo’s success suggests that content commodification can be used to an edtech startup’s advantage. In Duolingo’s case, its 42 million monthly active users can now be repurposed into other products.

Corporate learning gets noisy

Financing aside, the more interesting factoid from Udemy’s latest raise is that its Udemy for Business product surged 90%, with enterprise customers that include Instacart, Apple, Okta, Unilever, PayPal and others. Udemy for Business doesn’t necessarily try to accomplish job placement, but instead trains employed workers to be more engaged and productive in their current jobs.

In October, Udemy for Business surpassed $100 million in annual recurring revenue (ARR). Udemy’s business product grew from $1 million to $100 million in ARR in five years, according to a spokesperson for the business. A powerhouse, to say the least.

The news comes as Udacity, which recently raised debt, announced that it has achieved profitability since moving to enterprise online learning. Coursera, another massive open online course provider, says that its new enterprise product, launched in March, accounts for a quarter of its total revenue. Interesting to note? They’re just scratching the tip of the iceberg.

David Blake, co-founder of upskilling platform Degreed, says Udemy and Udacity represent “sub-1% of learning inside [any and all] of their clients.” In other words, the market is big and everyone can have a piece of the wallet. Degreed partners with both companies.

“So the need to manage 100% of the learning is largely unaffected as any one player adds more logos,” he wrote in an email.

For early-stage startups, the massive growth opportunity in corporate learning is easy math. Instead of trying to sell to millions of individual consumers, businesses are going the enterprise route — selling to people who have more purchasing power. With big players in the market, early-stage startups can latch on to their coattails by creating online learning coursework for specific jobs. 

Case in point? This week, I wrote about a newly backed startup, Transfr, which sells virtual reality software for manufacturing and production companies to teach in-demand trade skills. Transfr, while not yet profitable, raised $12 million and has quadrupled customers since March.