The Indian edtech space was rocked this week by news that Allen Career Institute has acquired Doubtnut, an AI-powered learning app, for just $10 million – a massive fall from its $150 million valuation two years ago.
This startling reversal spotlights the rapidly cooling investor sentiment towards edtech in India and serves as a cautionary tale for high-flying startups.
Doubtnut: The Dazzling Rise and Painful Fall
Just three years ago, Doubtnut was the poster child of India’s booming edtech industry. Founded in 2013 by Tanushree Nagori and Aditya Shankar, the app used cutting-edge machine learning and image recognition to provide answers to student questions by simply taking a photo of the question.
Available in multiple Indian languages, it garnered tremendous attention and praise for increasing access and demonstrating an innovative approach to serve students in one of the largest education markets globally.
The startup hit headlines in 2020 when it raised over $25 million in a round led by Chinese giant Tencent at a $150 million valuation. Other prominent backers like PeakXV Partners and James Murdoch’s Lupa Systems also invested tens of millions, enthused by its rocketing growth.
Edtech titan Byju’s even explored a buyout of the fledgling firm at its peak valuation. Doubtnut seemed poised to become a breakout edtech success.
The Fall from Grace
But the good times couldn’t last forever. As India’s edtech euphoria cooled in 2021, cracks began to show in Doubtnut’s business model.
The shift from Doubtnut’s initial B2C model to a B2B2C model targeting schools and institutes failed to deliver results. Investors turned more cautious even as capital dried up across sectors.
Despite engaging multiple investors for a new funding round, no deal ever finalized due to disagreements over its valuation.
Making matters worse, product development languished and monthly active users stagnated. From the intoxicating highs of 2020, Doubtnut limped into 2022 dangerously low on cash and momentum.
By mid-2022, the once high-flying startup was effectively distressed. As per an insider, Doubtnut had completely run out of money and was about to shut down. In a desperate effort to save itself, the company began exploring fire sales to players like Allen.
The shocking decline in its fortunes manifested in a bid from Allen valuing it at just $10 million – a massive 93% value erosion from just two years ago.
For Indian edtech startups, Doubtnut’s reversal serves as a sobering reminder of their volatile fortunes. The stratospheric growth projections that triggered sky-high valuations are much harder to realize as markets normalize post-pandemic.
With investors increasingly prioritizing profitability over growth, edtech players big and small may need to temper their expansion plans. Doubtnut’s acquisition is the latest sign that sanity is returning to Indian edtech – though perhaps at significant cost to some.
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Allen Goes Bargain Hunting
For Allen Career Institute, Doubtnut’s distress represented a bargain hunting opportunity. The coaching giant, which helps students prepare for engineering and medical college entrance exams, has been exploring growth via acquisitions. And with deep-pocketed backers like Bodhi Tree Systems, it had ample warchest for dealmaking.
Allen had in fact examined buying Doubtnut in the past as well. But its earlier $150 million price tag made the startup unattainable. Now with Doubtnut’s value down over 90%, Allen sensed a once-in-a-lifetime chance to pick up technology and talent on the cheap.
The deal also helps Allen counter competition from rival Aakash, acquired by Byju’s last year, as well as online players like Unacademy. It gains access to Doubtnut’s academic question bank and AI capabilities to enhance its own hybrid online/offline model.
And by leveraging Allen’s vast network of coaching centers, it can potentially revive Doubtnut’s fortunes by plugging distribution gaps.
For Allen’s backer Bodhi Tree Systems, the deal aligns well with its strategy of buying distressed assets cheap and reviving them. It earlier picked up a stake in TV broadcaster Sony India at a bargain valuation as media stocks languished.
It may be hoping for a similar turnaround success with Doubtnut. Either way, the buyout lets Allen significantly bolster its tech stack for a fraction of typical edtech deal costs – making it a savvy move.
What Lies Ahead
The big question now is whether Allen can successfully integrate Doubtnut and breathe new life into the troubled startup. Technologically, Doubtnut still retains promising foundations, including its AI capabilities around image recognition and natural language processing.
Product-wise, nibbling at Byju’s stranglehold over the K12 segment may prove challenging. But Doubtnut could hold appeal as a value player in vernacular languages for Tier 2/3 audience. Allen’s vast physical footprint can aid wider distribution for Doubtnut’s products as well.
Financially, staunching losses by leveraging Allen’s assets will be critical. Bodhi Tree will likely invest further to fuel the turnaround. But executing operationally to cut costs and drive monetization will remain key.
Strategically, Allen may eye an eventual spinoff or IPO for Doubtnut once stabilized – similar to BYJU’s plans for Aakash. Its current focus will still be on capturing synergies with its core exam prep business. But restoring Doubtnut’s value and exiting later at a profit remains a possibility.
The Road Ahead
Ultimately, Doubtnut’s acquisition spotlights the maturing of Indian edtech – with breakneck growth making way for sustainable consolidation.
For past high-fliers like Doubtnut, it serves as a lesson that easy money and frothy valuations can disappear quicker than imagined. For distress buyers like Allen, such market shifts create bargain hunting bonanzas allowing smart value acquisitions.
As India’s capital winter rages on, we may see more edtech casualties. But for those with an eye on long-term opportunities, the time is ripe to snap up technological talent and promising startups on the cheap.
The Doubtnut deal symbolizes the wheel turning full circle for India’s once bubbly edtech story. For Allen, the road to reviving Doubtnut promises an uphill climb. But especially at this valuation, the rewards likely justify the risks.