Duolingo landed onto the public markets this week, rallying excitement and attention for the edtech sector and its founder cohort. The language learning business’ stock price soared when it began to trade, even after the unicorn raised its IPO price range, and priced above the raised interval.
Duolingo’s IPO proves that public market investors can see the long-term value in a mission-driven, technology-powered education concern; the company’s IPO carries extra weight considering the historically few edtech companies that have listed.
For those that want the entire story of Duolingo, from origin to messy monetization to historical IPO, check out our EC-1. It has dozens of interviews from executives, investors, linguists and competitors.
For today, though, we have fresh additions. We sat down with Duolingo CEO Luis von Ahn earlier in the week to discuss not only his company’s IPO, but also what impact the listing may have on startups. Duolingo’s IPO can be looked at as a case study into consumer startups, mission-driven companies that monetize a small base of users, or education companies that recently hit scale. Paraphrasing from von Ahn, Duolingo doesn’t see itself as just an edtech company with fresh branding. Instead, it believes its growth comes from being an engineering-first startup.
Selling motivation, it seems, versus selling the fluency in a language is a proposition that international consumers are willing to pay for, and an idea that investors think can continue to scale to software-like margins.
1. The IPO event will bring “more sophistication” to Duolingo’s core service
Duolingo has gone through three distinct phases: Growth, in which it prioritized getting as many users as it could to its app; monetization, in which it introduced a subscription tier for survival; and now, education, in which it is focusing on tacking on more sophisticated, smarter technology to its service.
Von Ahn said that he views the IPO event as an extension of this third phase, bringing on “more sophistication” to its core products. This could take the form of acquiring companies in the next couple of years, a strategy that Duolingo has been somewhat allergic to. As early-stage edtech booms, though, the talent rush even within the subsector of language learning will give Duolingo plenty of potential targets. Von Ahn said there are no specific startups the company is looking at yet, but has been meeting with companies before the IPO and will continue to do so.
All innovation won’t exist on the main language learning app. Duolingo is working on a math app right now, for example. It also has Duolingo ABC, a literacy app for kids.
The S-1 also shows that Duolingo eventually plans to launch a “Duolingo Proficiency Score” across its offered languages, with the hopes of creating a “widely accepted indicator of language proficiency level [that would] make Duolingo a global proficiency standard.” It will bolster a growing revenue stream for the company, the Duolingo English Test. Reading between the lines, Duolingo will need to put boatloads of capital toward outcome tracking and curriculum development to get to a place where its score is taken seriously.
While he did hint at focusing more on learning outcomes, von Ahn was specific in his view on Duolingo ahead: “The idea is to still be a product and engineering-focused company.”
2. Roadshow investors didn’t view Duolingo an edtech company
As he hinted above, von Ahn likens Duolingo more to a consumer software company with an education twist than an edtech company with a consumer software company. The difference is more than semantics; it’s a hint that the startup doesn’t want to be looped in with traditional edtech companies because it believes its app, and business model, is different from others in the sector.
Roadshow investors agreed. Von Ahn said that investors were most focused on organic growth of the platform, because many app businesses have high customer acquisition costs that hurt the bottom line.
He added that Duolingo’s business model wasn’t compared to Coursera, another recent edtech IPO, as much as it was compared to Spotify and Tinder.
Edtech startups that have been looking to Duolingo as validation of their business models thus may need to take into account this nuance. Sure, philosophically, investors are betting that edtech will live, and thrive, on phones in the future. But financially, investors haven’t said a “heck yes” to edtech’s popular freemium models or tutoring marketplaces.
While von Ahn wouldn’t predict what this means for startups, he did offer some context on why Duolingo got received closer to software startups. Duolingo monetizes a small fraction of a massive base, which is a different strategy from trying to attract a smaller user base who you then make a ton of money off of. The latter, he thinks, has been employed by edtech startups often.
He added: “I think education in general has gone for the, ‘We’re not going to have that many users but we’re going to try to make a lot of money.’ I don’t know how investors are going to react to things, but I would say the closer they are to our business model, the more companies will benefit from our ‘halo.’”
3. China’s edtech crackdown will have a “neutral” impact on Duolingo
Days before Duolingo’s IPO pricing, China confirmed a regulation crackdown that would significantly restrict for-profit tutoring startups. The announcement led to a chill, and an “I told you so” that trickled down to the public markets and edtech venture capitalists.
While Duolingo isn’t considered a for-profit tutoring service, it is edtech and has an office in Beijing, its only international office. The company has also been beefing-up marketing efforts in China over the past few years.
Von Ahn addressed the tensions in China directly, saying that he’s not in the business of “trying to guess what the Chinese government is going to do next.”
“This is not going to affect us very much, and if anything it will probably affect us positively,” he said, as expected. “It is probably going to hurt some indirect competitors.” Despite being in a neutral spot today, von Ahn didn’t dismiss the idea of future regulation that could impact the company.
‘Six months ago, nobody would have guessed what the Chinese government was about to do, what they just did,” he said. “So I don’t know what they’re going to do six months from now — It would be foolish for me to bet our company on China … it’s a good market, we’re investing in it, but it’s China.”
4. In certain cases post-COVID growth declines aren’t lethal
Turning back to the company’s final S-1/A filing, let’s talk growth.
Duoligno estimates that it grew 45% in the second quarter, observing the midpoint of its revenue range for the three-month period. That is far below the company’s 2020 growth rate of 129% and its Q1 2021 growth rate of 97%.
It’s doubtful that anyone anticipated that Duolingo would post the same growth rates this year, lacking as broad a tailwind as it enjoyed during the earlier pandemic quarters. And you could argue that 45% growth in the second quarter just isn’t too slow — after all Duolingo grew 42% from Q1 2020 to Q2 2020 alone!
But the company’s deceleration from its 2020-era growth rates is still sharp regardless of how we caveat it. The company’s pricing and early trading indicate that investors were more than content to pay software prices for consumer edtech, even at a company with rapidly decelerating growth.
5. Growth can still absolve rising losses
Continuing our preceding point, decelerating if yet-rapid growth is enough to discount worries about profitability. Duolingo posted a larger net loss in 2020 than 2019, though a smaller deficit on a percentage-of-revenue basis. More recently, the company’s first quarter included a loss in the three-month period nearly commensurate with its total 2020 net loss.
The company’s second quarter results from this year indicate that its losses fell, but remained above its marginally profitable Q2 2020 result. And yet have we really spent any time discussing these numbers? Nope, because they don’t matter.
Fans of enterprise software companies are shaking their heads as they read this, irked at our indecorous financial conservatism. After all, haven’t big SaaS companies shown that growth makes losses shrink in their very shadow? Yes, of course. But we shouldn’t presume that what works for say, Slack, will work for Duolingo. Both sell consumer-facing software, but the comparisons really end there.
So the fact that losses don’t seem to matter much in Duolingo’s case is a point — a modest one, but still one worth holding onto — in favor of edtech’s future liquidity.
Natasha and Alex have more coming on the Duolingo IPO and edtech more generally on Monday’s Equity podcast.
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