Education sector needs patient capital; many prefer franchise route

Education is a recession-free sector, but requires financial support to expand and survive. Entrepreneurs present at the third edition of VCCircle Education Summit held in Delhi today, were of the view that in spite of the growing number of companies in the sector, niche business models which attract PE investors need to evolve still. At the same time, the franchise route may turn out to be a successful play in the education space.

More than 250 top and emerging education entrepreneurs joined the event, besides venture capital & private equity investors, consultants and bankers.

Pramod Maheshwari, CEO and MD of Career Point, a listed education firm focusing on providing tutorials, said "Our first round of funding came in 2008 and we then realised that scale is always a challenge in the non-formal education system. We had to reach a scale to get funds." The company got listed in 2010 and currently has a top line of Rs 90 crore.

According to Maheshwari, the company did not adopt the franchise model for some time as it did not have the processes and the technology in place to run franchises, and could not find the right kind of partners. "We had to shut down 37 franchises since it was not a viable model at that time. But we are now open to the franchise model as we have enough cash and scale to monitor our franchise partners," he said.

Krishnan Ganesh, founder & CEO of TutorVista (bought by Pearson), also highlighted the challenges in the education sector. "In this business, one investor usually sells his stake to another investor and listings are not always the ultimate exit route. IPO is virtually non-existent in this space and only a few companies have had successful listings. Even when you are looking for PE funding, you need to show scalability and stability, and a potential exit for the investor," he said.

Pearson bought 17 per cent stake in TutorVista in 2009 and last year, increased its stake to 76 per cent by buying more stake from Sequoia Capital and Lightspeed – early investors in the company.

"You need to have a socio-economic motive and not just an ROI motive to do business in the education sector," said Sanjeev Duggal, CEO and director of Centum Learning Ltd. "I would call this a patience capital model. It is a 10-year game if you invest in an education company. You can't expect returns before 7 years. It is not a 3-4 year story," he pointed out.

Since many companies are unable to raise funding before reaching a sizable scale, most of them are adopting the franchise route. But even that can be a challenging route.

Amol Arora, managing director of Shemrock and Shemford Group of schools, said, "Of course, the franchise route does not require private capital to expand. But then, availability of finance in the play school sector is a challenge. When we started in 1992, private equity was not an option for us. Hence, we had to choose the franchise route, but you need to be very cautious while choosing a franchise partner in a knowledge sector."

"The maximum investment in the education sector is happening in the test preparation institutes (tutorials)," said Sandeep Aneja, managing partner at Kaizen Private Equity. "But as far as the PE exit cycle in the education sector is concerned, it is not necessarily longer. The right business models do have a short exit cycle," he pointed out.

(Edited by Sanghamitra Mandal)