Coursera files to go public
The main points: edtech will finally have another interesting public market exit. Coursera could become a global demand aggregator for education. If successful the IPO could have positive ripple effects for edtech startups.
Last Friday Coursera filed its S-1 with the SEC, taking a big step in its way to becoming a publicly listed company. The filing gives us the opportunity to review its business model, financial performance and get some sense of its growth strategy.
Why it’s significant
Education is a $5 trillion a year industry. Yet the universe of publicly listed education companies is very small. This can be explained by a history of public sector provision at the K-12 level and the dominance of non profit institutions in higher education. For profit companies have had a secondary role with only a few exceptions.
Technology has the potential to change this, raising expectations about the role that for profit companies could have in transforming education. Up to now those expectations haven’t been met with truly big ideas. Looking at the composition of edtech unicorns it looks mostly concentrated around test prep and tutoring companies that add some efficiency to the existing system. There’s significant size in some of these companies, especially in Asia, but there’s little ambition to transform education.
Coursera might be different.
Back in 2013, I was part of the team at IFC* that invested in Coursera’s Series B round, initially sized at $43 million. Back then its user base was in the low single digit millions. Massive to be sure, but small relative to the global opportunity. It was clear that Coursera had hit a nerve. The challenge was to build a business around the huge demand for globally distributed high quality education. The S-1 sheds light into the evolution of Coursera’s business model.
Initial thoughts on the S-1 filing
From a quick first read of the S-1, these are the things that caught my eye:
1. Coursera could become an aggregator in the purest sense of Ben Thompson’s theory. His core argument is that the internet shifts power from supply to demand, specifically to those companies that can aggregate demand. Coursera is positioning itself as a trusted curator of high quality education. Unlike information (Google), products (Amazon) or car rides (Uber), education is a higher stakes purchase. Future income and quality of life can be impacted, so it takes time to build trust in this space. Coursera seems to be driving in this direction. If successful it could be a massive business with a very long runway of growth.
2. Its revenue base is diversified and potentially confusing. Revenue from one-off Consumer purchases makes up 66% of sales, while Enterprise clients represent 24% of revenues and Degrees are at 10%. Management expects the share of Enterprise and Degrees to increase (page 81 of the S-1). This would imply a move towards higher quality revenue and higher margins. The “top of funnel” Consumer business will probably still be central to the business model, but financial performance might look very different (and better) in the long run.
Source: Coursera's S-1 filing dated Mar/05/21.
3. Monetization is low but it might not matter. Coursera’s Consumer business generated $3 per average registered learner in 2020. It looks low when compared to social media monetization (e.g. Facebook’s $32 average revenue per user last year). The role of the Consumer business might be to aggregate demand and build the brand, while profitability is generated by the Enterprise and Degree businesses. If Coursera can move to a saas-like business model with predictable high margin subscriptions in enterprise and even higher margin through revenue sharing in the Degree business, then monetization at the consumer side doesn’t matter as much.
4. Consumer retention looks strong. The graph below shows a cohort analysis in the Consumer business. I was surprised to see the persistence in revenue generation from older cohorts, suggesting potentially attractive unit economics. It’s disappointing that the filing doesn’t include more explicit information on customer acquisition costs and lifetime values (maybe it’s there and I missed it).
5. The Enterprise business looks good, not yet great. It’s growing quickly (10x in 3 years) and has high margins (69%) which is impressive, but net retention is just ok at 114% for 2020.
6. Profitability is a question mark. The numbers don’t look great. Gross margin is decent (53%) and potentially getting better due to changes in mix. But R&D together with Sales and Marketing drive a big loss from operations that doesn’t seem to be getting better. Negative cash from operating activities is especially concerning. What’s missing is a deeper understanding of unit economics and ROIC. Part of this is due to accounting rules that require tech companies to expense R&D when incurred. That’s not Coursera’s fault. But the company could probably do a better job of explaining the overall economics of its business.
7. Valuation could be interesting (or not). Given recent decline in tech stocks, Coursera’s IPO price and subsequent trading will be interesting to watch. It’s likely that Coursera will be a sub-$10 billion market cap company, giving investors the chance to bet on a growth story that has unlimited market opportunities and a winning global brand.
Implications for edtech startups
If it goes well, this IPO could be great news for edtech startups, especially those building interesting new products without simple revenue models. Beyond the IPO, Coursera’s experience as a public company will probably have a big impact on how the investor community views education technology businesses. Strong growth and improving profitability would be big pluses. And since education does not look like a winner-take-all space, there should be ample room for other bold companies to succeed at scale while Coursera flourishes.
* Full disclosure: I was part of the team but did not lead the transaction for IFC.