Three ways to value a pre-revenue Edtech company
Technology innovation in education in India started as early as 2005 by the likes of TutorVista and EduComp, followed by the entry of next-generation edtech startups, such as Byju’s, post-2011. The sector, however, struggled with low adoption rates especially in the K-12 segment due to budgetary constraints and inertia. COVID-driven pandemic turned this around necessitating digitization of education infrastructure all around the world. This translated to massive user adoption as well as funding into the sector. The world saw startups getting valued at millions of dollars.
Many of these highly valued startups are pre-revenue and lack traditional valuation metrics such as revenue, profitability, and cash flows. Instead, these companies are valued at a multiple of their monthly/daily active users (MAUs/DAUs) or at forward median revenue/EBITDA multiples.
Method #1: Enterprise Value to Monthly Active Users (EV/MAU)
Method #2: Exit Revenue Multiple (Forward EV/Revenue)
Method #3: Exit EBITDA Multiple (Forward EV/EBITDA)
To illustrate, consider an Indian edtech startup, ABC, providing K-12 tutoring solutions.
Further details:
Business model: offers live one-to-one classes for all subjects and pre-recorded modules for grade I-XII
Average Revenue Per User (ARPU): INR 10,000
MAU: 20 million
Assumptions:
1. Monetization will happen in 3 years and profitability will be achieved in 5 years
2. Target return assumed to be 25%
Method #1: Enterprise Value to Monthly Active Users (EV/MAU)
Identify peers with a similar business model and derive their trading/transaction EV/MAU multiple
Peer Transaction (Vedantu):
EV/MAU: $600 mn/25 mn i.e. 24x
The multiple needs to be scaled to adjust for the difference in ARPU levels of the two companies
ARPU ABC/Peer ARPU i.e. INR 10,000/INR 20,000 = 0.5
Implying a valuation of $24x * 20 mn MAU * 0.5 = $ 240 mn
Method #2: Exit Revenue Multiple (Forward EV/Revenue)
Arrive at median 3 Yr Forward EV/Revenue multiple from comparable companies
Multiple the median forward multiple with ABC’s projected revenue to arrive at the valuation
If the projected revenue in Year 3 is $50 mn, then the valuation will be $50 * 7.73 = $387 Mn
Discounting the valuation at 25% amounts to a valuation of $200 Mn
Method #3: Exit EBITDA Multiple (Forward EV/EBITDA)
Arrive at median 5 Yr Forward EV/Revenue multiple from comparable companies
Multiple the forward multiple with ABC’s projected EBITDA to arrive at the valuation
If the projected revenue in Year 5 is $10 mn, then the valuation will be $10 * 51.56 = $515.6 Mn
Discounting the valuation at 25% amounts to a valuation of $169 Mn
Football Field
Plot the range of valuation arrived at using the above methods to summarize the valuation.
