The Scale Factor

The Scale Factor

The Expert:

Sandeep Aneja, founder and managing director, Kaizen Private Equity, India’s first education-focused private equity fund

Aneja, an MBA from Graduate School of Business, Stanford University, has over 17 years of professional experience in the consulting, operations leadership and investment management space. After his post graduation, he joined the venture capital industry where he was involved in successful transactions and startups including Bridgestream, Lassologic, Reconnex, GraniteEdge Network, Clairmail, Xactly Corporation and others. 

In 2009, he founded Kaizen Private Equity which has fund size of US $ 100 million. Aneja currently represents Kaizen on the management board of a distance education services company in India. He shares his views on how Fiction Knowledge Works can scale up taking into account the variables in the business.

Since the success of a vocational training business rests largely on its placement track record, and Fiction Knowledge Works currently has only four centres, all situated in the south, it might be too early to move outward geographically.

The Case:

Fiction Knowledge Works, incorporated in the year 2008, offers vocational training which includes soft skills for interviews and subject-sharpening skills for engineering and science graduate students in Tier-II cities. Apart from collaborating with colleges, the company has also partnered with corporate companies to help prepare students for their corporate career. The company charges students an enrolment fee. It is currently present in four cities, mainly in the southern region, and has trained over 2,000 students. The company is now poised for growth, the question is – how does it scale up?

The Expert Says:

The vocational training space in India is one of the largest sub-segments in the parallel education space. Vocational training constitutes programmes that prepare an individual (aged 14+ yrs) for a specific career or occupation through ability creation. The vocational education training (VET) industry is expected to grow at 25 per cent compounded annual growth rate (CAGR) into a Rs. 168 billion space by 2012*, the largest growing segment within the education space in India as shown by the chart below:

The space is driven by the lack of quality in core education, large scale training needs of industries for its potential employees and a recent push by the government towards a better-skilled India. The challenges, which most players face in the segment, are the lack of standards and defined skillsets to ensure employability, low paying capacity among a greater proportion of the target segment and the ability to scale up without diluting the quality of education.

Replicable service offerings and astute business processes in disparate geographies is a key factor for any vocational training company to achieve scale. Hence, Fiction Knowledge Works should assess its ability to deliver the same quality teaching in a different geography as it is highly dependent on the trainers at each location. Considering the company is already delivering the training in four cities, it must then assess its ability to monitor and control quality on a larger scale, while building strong business processes. After establishing some proof points on these areas, the company should prepare to scale.

Checklist

Once Fiction Knowledge Works is ready to scale, it must identify the mode to scale along with the business model. The key questions that must be answered in this case are:

Where does the biggest opportunity lie? And what is the pain point of the students who would seek this training?

What are the strengths and the differentiation of the company?

What are the weaknesses of the company? (excluding funding as a constraint)

What is the most cost-effective method of scaling without compromising either the brand name or the quality of education delivered?

On answering these questions, the company must identify the scale-up plan and choose the business model going forward. For instance, if its strength is placements and marketing, it might consider a franchisee model  viz-a-viz a self-owned and operated model for expansion. On the other hand, if the strength of the company lies in pedagogy and teaching, it may consider an owned model for expansion, where it has better control on the quality.

Since vocational training is primarily a service-oriented model, critical factors that will affect scaling up decisions will be the catchment area for student acquisition, availability of key resources like teachers and propensity to pay in every location. It is difficult to achieve all three factors in a location; hence, the company must have plans to address these issues with possible solutions like establishing a robust teacher training process, financing options either through bank loans or arranging corporate internships for an ‘earn-while-you-learn’ program that includes stipends.

Grow the team first

Decision on scaling up can also imply horizontal growth through geographic expansion or vertical growth up the supply chain. An answer to this will also come from the internal assessment of the team’s expertise and bandwidth. Since the success of a vocational training business rests largely on its placement track record, and Fiction Knowledge Works currently has only four centres, all situated in the south, it might be too early to move outward geographically. It appears that the company should engage in vertical integration and establish a strong training and placement team. The growth would also be best achieved through organic growth as the company is still at a nascent stage for inorganic growth.

The key success factor for a vocational training company is execution. Fiction Knowledge Works’ business plan must also chalk out how it intends to execute its plans to scale. The key issues that need to be addressed include:

Placement – How it intends to ensure that a reasonably high number of students are able to secure a job in the industry across multiple locations? This may require a strong placement cell/industry relationship team that is able reach out to corporates companies across India. The success of a vocational training company is more often than not dependent on the ability of the student to get gainfully employed. Only if the student feels confident of being employed post the vocational training course, will the company be able to scale.

Marketing – Student acquisition is generally a key challenge for vocational training companies as the industry is highly fragmented and competitive. Hence, establishing a brand and getting the local advertising strategy correct plays a key role. Very often the choice of the training company is made on brand recall among students.

Quality Control – Ensuring the quality of the training does not vary largely between centres and the experience of the teacher-quality is good for the student are very important. Guaranteeing quality control in teaching methodology through continuous training, teacher screening and/or use of technology will be critical.

Having identified the scaling up opportunity and the business model, the entrepreneur must then identify the resource requirement in terms of management personnel and finance. The typical waterfall for funding the business expansion should be internal accruals, bank loans and PE/VC investors. Since very few financing options by banks are available to small scale service industries, the entrepreneur has to most likely seek financial investors like PE/VC funds. The entrepreneur must ensure he selects the right institution to partner with and not just chase money and valuation.

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