The Effects of Herd Behavior of Education Investors
What is it that makes impact investors and philanthropies alike to make a beeline for India?
All things considered, we are a nation with our own share of multitudinous issues in healthcare, education, sanitation etc., for them to create a tangible impact with their capital. More so with India’s education sector which caters to the largest K12 population in the world offering high scope for the scale to reach even the most remote learner across its vast geography.
It’s almost been a year since I started working in the Impact Investment space and during this time I tried to understand investment strategies of different investors in the space of education and skilling. What is conspicuous however is an interesting herd behavior that is hard to miss. What I am referring to is the prevalence of too much capital chasing too few companies in the education sector. This means that the impact investors are putting excessive cash in a few companies with tried and tested business models to ensure capital protection along with returns.
This herd behavior suggests a more passive investment play that jettisons the need to put in the long yards of evaluating new ideas and business models that are outside their comfort zone. Being able to tell the goats from the sheep is an important characteristic that determines success for an impact investor. This merits the need to stay true the impact investing philosophy of balancing financial returns with social returns for impact. Those who do not subscribe to this cannot call themselves as impact investors.
Good news is that this year saw a substantial rise in cumulative education investments in India. However, around 85% of the total education investment went into Byju’s. The reason I am negatively surprised by it is that it’s common sense that there can’t be one solution to any of education/skill related need. Why? Because the human mind is complex. The complexity is as such that there is a need for diverse delivery models, platforms, approach and not to mention enough bandwidth to catch up with the trends in learning behaviors as well. Every person learns differently and there cannot be one completely successful solution.
The herd behavior among the investors leads to over-capitalization in some companies. I am not implying that Byju is over-capitalized, we are yet to see where the company goes. But one another example is Educomp. We all have seen what over-capitalization can do to a company.
On the other end of the spectrum, this herd behavior causes a paucity of funds for those enterprises which hold the potential of generating greater social impact through education solutions. What’s worse is that impact investors in their need to diversify opt to invest in ‘Me-Too’ companies which copy the business models of those which are toast of the town.
To run a start-up effectively, the entrepreneur needs a splendid idea, devotion, diligence and persistence alongside investors and funds. Even though the idea is well thought, and the strategy is clear, investors don't invest in new ideas. Numerous edupreneurs are compelled to drop the idea because of the absence of confidence and of course the lack of the money to run the business.
The need of the hour, however, is for impact investors to back to the drawing board, reflect on their core reason to be in this space and demonstrate the courage of conviction to bet on enterprises that fueled by passion and potential to make a difference. I may not be an expert in this space yet, but I will, just as you should, remember that an investment favoured by the herd can easily become overvalued because the investment's high values are usually based on optimism and not on the underlying fundamentals.