Follow-on to My Original Post about a Mouse That Became a Giant

Follow-on to My Original Post about a Mouse That Became a Giant

See my original post for my initial thoughts about the Age of Learning's recent $1B post-money valuation.

Congratulations to Will Griffith and Iconiq on their decision.   And, once again - hats off to Doug Dohring and his team.  When there is such a temptation to succumb to the monetization woes and to shift away focus from the young kids educational apps space, Age of Learning has shown us that there is plenty of money to be made right where we are.   Coupled with the recent acquisition of  Toca Boca, this certainly puts new wind in our sails.

Here are some additional thoughts.

Based on my careful reading of the techcrunch article (a remarkably substantive piece by Ingrid Lunden) and additional homework, mainly involving App Annie, here's my educated guess at the play-script used by Age of Learning to get to the point of securing the funding of $150M in exchange for 15% of the resulting company.  It all makes sense in retrospect, but as the saying goes, hindsight is always 20/20.

Step 1. Maximize the value of subscribed user and the conversion rate from download to subscription.

Here's how:

  • Create a nice variety of game widgets and use them to present a LOT of content (over 7,000 activities at this point).  Withstand the temptation to abandon the creation of additional content, citing diminishing returns.  Stay the course.  Once the content size and update frequency passes a certain threshold, the offering becomes truly a service rather than a glorified product.
  • Make sure that content covers the entirety of  a given curriculum (preschool/pre-kindergarten/kindergarten curriculum, in the their case).  That value proposition is much greater than merely offering activities that supplement the curriculum here and there.  "We got it all" is in a different league from "We got a lot."
  • Wrap all that content under one subscription (and subsequently, in May of 2013, under one app listing).  That not only maximizes the value of subscribed user, but also minimizes the cost of acquiring that user. And while they still allowed the individual 20 apps to live out their single life in the App Store, they finally completely removed them from the store in Feb of 2015. 
  • Emphatically merchandise the content as a service, rather as an app - hence the constant reference to ABCmouse.com rather than the ABCmouse app in their advertising and marketing.   With so many free apps to choose from on Google Play, parents are loathe to spend money on apps.  In the educational kids space, 2% is considered a great conversion rate from free-to-premium on Google Play (App Store has higher conversion rates because there is much less free content there and because of the user demographics - though the latter is much less of a factor lately).  And even the parents that do buy paid apps, will almost never spend more than $5 dollars.  Subscription-based content, on the other hand, is processed by a more generous part of the parents' brain, especially if it's also available as a browser-based service on a website.   In fact, their ranks jumped dramatically when they added the prefix "ABCmouse.com" to their app store app name on November 6, 2014.  Even more interesting is the fact that only about 10% of ABCMouse's revenues come from users who first signed up for their subscription through the app.  The rest signed up through the site.  How do I know this?  Because ABCMouse's grossing rank on the iOS App Store across all categories is, on an average day, around 150.  That tells me that they are making about $25,000 to $30,000 a day, which adds up to roughly $10 million dollars a year.  Now, these store ranks reflect only the money they made when the user subscribes through their app, rather via a browser.    Since their total annual revenues are over $100 million, that tells me that their browser-based sign-ups account for over 90% percent of their total revenues.    
  • Note, however, that this percentage is specific to sign-ups rather than subsequent use of the service - so it would be erroneous to infer that over 90% of their customers use ABCmouse via the web, rather than via an app.    The reason that most of their sign-ups happen through the web is obvious.  Since a user can't click on their TV ads, they are advertising abcmouse.com, rather than their app in the App Store or Google Play. 

Step 2. Get massive brand recognition and user acquisition vehicle without paying for advertising.

  • Give away all your content to schools and libraries.   The brand recognition and credibility will skyrocket, not to mention the resulting organic growth: kids and teachers will tell the parents, who will then pay to subscribe for home use.  This is clearly more fruitful than trying to get schools to pay for app-based content.
  • In the comments on my original post, I was asked if their revenue model involved any B2C component.  The answer is that their revenue model is completely B2C! Their user acquisition model, however, is a different story. Age of Learning made their entire ABCmouse.com package accessible for free to teachers and libraries, .etc. That's how they built brand recognition and that's the entry point for a good chunk of their B2C customers - after all, that's how many of the kids get hooked on using ABCmouse in the first place.  According to Doug's LinkedIn profile page, ABCmouse is used in over 45,000 classrooms here in the U.S.    While that doesn't mean 45,000 schools, but still speaks of very significant penetration.

Step 3. Now scale the user base by paying for advertising.

Here's how that's done.

  • Once LTV has been proven to exceed CPLU, advertising will clearly pay off. There is now enough traction and confidence to obtain the funding in exchange for debt (i.e. as loan) rather than for equity (i.e. investment). 
  • That appears to be exactly what Age of Learning has done in June of 2011 (when their revenues were less than $1 million) and April of 2012 (when their revenues were still less than $5 million) - obtaining $31.5 million in debt financing.  Granted that $2 million a year was used to pay their management team, according to their Form D filings, and granted that a portion of the remaining amount likely went into expanding the subscription content, my guess is that the rest went into advertising.    And, in our space, that's quite a respectable budget to spend on advertising.
  • Note that their earlier rounds of financing were based on the strength of their browser-based revenues, rather than their app-based ones.  How do I know this?  Their debt financing rounds took place in 2011 and 2012, as I mentioned above.  And yet, based on AppAnnie, their all-in-one subscription app was not released until Dec of 2012  - AFTER both rounds of debt financing.  Furthermore, it was not until February of 2014 that their app grossing rankings became impressive enough to show up in AppAnnie's chart.  How, then - were they both able and willing to obtain that $31.5 million in exchange for debt rather than equity - if the profit-generating app subscription offering was not published yet?  Must be that the money was raised on the strength and the metrics of their browser-based sign-ups alone.  This jibes well with my conclusion that web-based sign ups account for 90% of their revenue earlier in this post.
  • Rather than limit yourself to clickable ad formats, unleash a substantial TV advertising campaign.    I would also assume they utilize remnant ads opportunities, to further reduce user acquisition cost.

Step 4.  Get VC funding at a topline multiple of 8.

  • Age of Learning's annual revenues (it all comes from ABCmouse subscriptions, to my knowledge) now exceed $100 million and they have over a million paid subscribers.  As an aside, math tells me that when they say over a million subscribers, that means a few million subscribers.   After all, how else could they get that $100 million in annual revenues if their subscriptions are priced $8 for a monthly and $80 for an annual subscription.  Consider the fact that, based on our experience, almost 50% of the users will go for the monthly option.  Of those, less than 20% will stay on for the entire year (though, given that our curriculum content is not yet as prodigious and comprehensive as ABCmouse's, their retention rate is likely higher).   (They also try to up-sell their users to their Assessment Center  for $30 for 6 months, but my guess is that the uptake on that is quite limited).   That means that it would be impossible to get more than $100 million/year out of  one million users, which tells me that the actual number of their users is substantially higher (unless I am considerably wrong about the uptake on their Assessment Center, which is a possibility).
  • That means that Age of Learning's $850 million pre-money valuation reflected a healthy topline multiple of at least 8.

 

Please feel free to comment and correct any of my assumptions or observations.

To all my fellow travelers in the young kids educational app space, here's to the more fundings and acquisitions to come!

 

 

Andrew Snow

Marketing Director | Digital Media Specialist | Startup Advisor

4w

Even though this article is several years old, it has been one of the few gems I came across in my EdTech market research. You clearly have a special ability to take superficial data and turn it into deeper, more meaningful insights. Thank you for sharing Alex!

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Great post Alex. Thanks for sharing. We faced the same problems that you mentioned in the post.

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Yuval Rechter

VP Ads & Performance at Flip Shop

7y

very good post, thank you Alex, hope you are well!

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Great insights. One additional reason that I surmise that Age of Learning is driving users to sign-up via abcmouse.com is to optimize margins. They don't have to share revenue with the app stores when transactions are completed in the abcmouse.com environment.

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Jacob Zax

Founder & CEO at MusiQuest

7y

Thank you so so much for writing this Alex. Incredible insights in here for anyone trying to scale an educational technology company.

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