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This article originally featured in Baillie Gifford’s Autumn 2019 issue of Trust magazine.
"This is exciting,” a colleague wrote to me. “You should get to know it.” And so I duly went out to meet a California-based education tech company called Chegg.
It was started in 2001 by three students at Iowa State University who had tired of paying for expensive textbooks. They had the idea of instead letting students rent textbooks for a semester at a time, at a fraction of the purchase price.
Chegg listed on the stock market in 2013 and quickly had the jarring experience of Amazon entering into direct competition. This forced Chegg to reinvent itself and shift from print to digital. It was creative desperation. Chegg pivoted and built up its digital rental business with a subscription rate of around $60 a semester. And these subscribers can now access study aids, including an enormous online question and answer bank – with 28 million answers fully worked out – for most major US academic texts, cover to cover. Chegg also gives students 24/7 access to tutoring using teachers often based in India and elsewhere in Asia.
In May 2018, Chegg acquired an artificial intelligence writing platform called WriteLab. It analyses students’ draft essays and suggests edits. WriteLab also poses questions, offering students the chance to decide exactly what they want to say, and how they want to say it. This isn’t a place to download essays. It’s a place to improve your writing. Generally, universities are happy to have students receive tutoring to help them finish their degrees and not drop out.
Importantly, Chegg has a vision of itself as a platform to go much further.
Today one of the biggest controversies with internet-enabled businesses such as Uber, Just Eat and Wayfair is what long-term profitability might look like. Will the margins and returns be worthwhile? Will the aggressive marketing and discounting persist?
However, the biggest pinch point for growing businesses, even those in a leading position, is typically customer acquisition – ‘how much do I have to pay in marketing costs to get people to buy or click subscribe?’ This is where Chegg is a real stand-out. Eighty-five per cent of Chegg’s customers are organic, driven by student recommendations to their peers on campus. It has an easy come, easy go subscription model: customers aren’t locked in, but they typically come back.
Chegg is seeing real cash flow today, and total net revenues were $321 million for the last financial year. Its financial position is improving each year. And this company could continue to scale and do it very profitably.
If Uber and Airbnb disrupted taxis and accommodation, then Chegg has ambitions to do the same for higher education. This is a market estimated to be worth $2 trillion a year by 2026 in the US alone.
Education remains one of the last big markets yet to be disrupted by technology. It has been dominated for centuries by inert institutions. And arguably, the college structure in the US isn’t set up for the student. It’s designed for the academics, or those who are running the university. If you’re a working individual studying in your evenings or weekends, the scheduling doesn’t fit around you, it fits around them.
We live in an on-demand world. We think food, whatever type we choose, should be delivered to our houses within, probably, half an hour at most. Customers, young people especially, increasingly expect this service elsewhere. But the education sector is a long way from catching up with internet companies that provide digital services which are personalised and delivered on demand.
When we look for companies to invest in, we are often attracted to platform businesses. Ones that are modern, light in assets, and have increasing, not diminishing, returns as they scale up. Being a platform, such as Amazon, Uber and Airbnb, means first developing an enormous user base.
Then you can start drawing in other markets, which your sheer number of users pull into your ecosystem. Uber brings in the food market, through Uber Eats. Amazon drew in web hosting, though Amazon Web Services. This is how growth opportunities can actually expand as you scale.
So in education, online textbook rental made the Chegg platform a place to find students. And then tutors were drawn to the platform.
Chegg has also pursued clever acquisitions. It purchased online tutoring company InstaEDU, to bring a critical mass of tutors onto the platform. Next Chegg acquired Internships.com in 2014, making the platform an attractive place for corporations to look for students to recruit.
The company’s chief executive, Dan Rosensweig, is clearly not a guy who’s scared of pivoting. Before joining, he was head of Guitar Hero, and before that was chief operating officer at Yahoo. When he came to Chegg, he came up with the smart deal to sell the physical textbook side of the business, which took up a surprising amount of capital, to Ingram Content Group. In return Ingram pays Chegg a 20 per cent commission on each rental.
Chegg became a lighter company that, instead of buying vast numbers of textbooks up front, can focus on being a digital platform. By pulling in new markets, such as tutors and internships, Chegg could end up with positive returns from scale.
One-on-one tutoring represents a $7 billion market in the US each year. Chegg’s 3.1 million annual student subscribers lure both tutors and companies to its platform. It is now eyeing India as the next big source of students to add to the platform. There are competitors for different things Chegg does, such as Tutors.com for tuition, or Amazon in textbook hire. But Chegg’s advantage is in linking these. People who rent textbooks are more likely to pay for tuition as well. Its strength is in drawing all these people together.
If Chegg could take itself to the position where it forms not just a platform, but a real part of the infrastructure of the education system, it’s not worth $4.5 billion.
It’s worth an awful lot more.
Chegg stated market value at 30 June 2019. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
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Malcolm has been joint deputy manager of Monks since March 2015. He joined Baillie Gifford in 1999 and became a partner in 2011.