Lack of scalable business models in education sector, real estate is biggest challenge: VCCircle Education Summit

The education sector requires patient capital while the companies need innovative business models which are scalable besides new ideas to address challenges like high cost of real estate and skilled human talent, according to participants at the VCCircle Education Summit held in Delhi on Wednesday.

The event, in its fourth edition, saw a packed house with a gathering of over 300 delegates including venture capital and private equity investors, entrepreneurs and investment bankers.

One common lament voiced by the panellists at the event was the small size of investments which in turn is a reflection of scalability in the sector. The average size of investments in the education sector still remain in the $5-15 million range and investors feel that it is likely to remain the same for the next few years.

Mohit Ralhan, managing partner, Indus Balaji Fund said, “There is no $1 billion company in the education sector. There are not too many companies deriving returns. Most companies are saturated at Rs 100-200 crore top line, except (those running) schools.”

He pointed out that even large scale companies are not profitable and for the next decade or so the average ticket size of investments is likely to remain in the sub $10 million bracket in the companies that can be scaled up to a top line of $50-60 million.

Ralhan added that it will be difficult for big funds to survive in the sector unless government does something for universities and schools. “The growth capital funds cannot derive 25 per cent dividends in education sector,” he said.

A lot of funding has gone into test preparation firms but some of them have been facing challenges in scaling up further.

Sandeep Aneja, founder and managing director of education focused fund house Kaizen Private Equity, for one said his firm is not interested in investing in another IIT-JEE test preparation company.

“Investing in education sector is a mindful activity,” he added.

Ashish Dhawan, founder and former chief of PE firm ChrysCap and currently founder and managing director of Central Square Foundation, said, “Business to consumer (B2C) model in education has a lot of opportunities.”

Infrastructure and real estate biggest challenges for education sector

Currently, private schools and universities are among the more scalable model besides online ventures in the education space. However, the business segment faces regulatory challenges as also high cost of real estate.

Raj Grover, chief mentor, Kangaroo Kids Education, said, “Employability and right talent remains a constant challenge. Apart from this, K12 schools are supposed to pay market prices for everything- employees, infrastructure, real estate cost, and facilities for students.”

Y V Rajashekhar, co-founder and managing director of People Combine Education Initiatives Ltd, said that real estate is the biggest obstacle while planning expansion.

Sharing his perspective on the problem, Manas Mehrotra, managing trustee, Greenwood High International School, said, “You have to be very particular in identification of city while expanding after evaluation the government regulations and cost.”

Investors have also identified other minor obstacles which also hamper the growth of this sector and they feel that promoters should be patient and careful while setting up an education company.

Anand Sudarshan, venture advisor at TVS Capital said, “Investors have underestimated the execution challenges in the education sector. We need to build consumer brands and attract consumers directly.”

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