The rise of Massive Open Online Courses (MOOCs) has given rise to several startups like Coursera, EdX and Udacity (UCITY) with a mission to provide high-quality education to students anywhere in the world. However, MOOCs came with their own set of problems like low course completion rates and monetization. Udacity has come up with solutions to these problems and is one of the first MOOC startups to join the billion-dollar Unicorn Club.
In 2011, Stanford University Computer Science Professor Sebastian Thrun and Peter Norvig offered an online, free course in artificial intelligence for which over 160,000 students from all over the world enrolled. In January 2012, they decided to launch Udacity in order to democratize education and make it affordable and accessible. Its first two courses launched in February that year taught how to build search engines and program robotic cars.
Udacity went on to offer courses in algebra, statistics, computer science, etc. It also launched a three-year online degree course on the MOOC platform in collaboration with Georgia Tech that cost $7,000 in January 2014. It had 1.6 million users in 12 full courses and 26 free courseware in April 2014.
In June 2014, Udacity pivoted its strategy to bridge the gap between real-world skills, education, and employment using MOOCs. It collaborated with AT&T (NYSE:T) and Georgia Tech to launch a Nanodegree program, which is designed to teach programming skills to qualify for an entry-level position at AT&T. The course takes about a year to complete and costs $200 per month.
Udacity has experimented with several business models. It currently offers free versions of all its courses but invites students or their sponsoring companies to pay fees for these nanodegrees. It collaborates with industry giants like Cisco (NASDAQ:CSCO), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), AT&T and Facebook (NASDAQ:FB) to develop its courses. Its target customer is now someone already working in the field and looking to upgrade skills to win promotions or a better job. While the academic courses had only a 2% completion rate, the nanodegrees were a more successful venture with a completion rate of 60%. It has 4 million registered users and 11,000 paying students.
Udacity does not disclose its financials but has revealed that it is growing at rate of 30% per month and is profitable. Its annual revenue run rate is believed to be $24 million.
In November 2015, Udacity raised $105 million in Series D round led by international media, services and education company Bertelsmann at a valuation of $1 billion. Until now, Udacity has raised a total of $160 million in funding from investors including Andreessen Horowitz, Peter Levine, Baillie Gifford, Bertelsmann, Cox Enterprises, Charles River Ventures, Drive Capital, Emerson Collective, GV, Recruit Holdings, Steve Blank, and Valor Capital Group. Udacity plans to use the funds from this latest round to expand into China, the Middle East and India where the demand for this kind of platform is very high.
Coursera's Business Model
While Udacity is betting on a business model in collaboration with industry giants, rival Coursera is betting on content and certificates from top universities. Coursera was founded by Stanford alumni Daphne Koller and Andrew Ng in 2012. It offers course certificates for a flat fee of $49 on successful completion of the course. Reports suggest that Coursera earned $8 million -$12 million from certificates in 2014.
Another revenue generating offering from Coursera is specializations. Launched in 2014, they cost $300-$600 and feature a series of 3-10 courses followed by a capstone project where the student applies the newly acquired skills to earn a certificate. Coursera has partnered with companies like SwiftKey, Google, Instagram and Shazam for the capstone projects. Early this year, Coursera announced that when students enroll for Specialization courses, they will be asked to either pay a fee or apply for financial aid. Free access will allow them access to videos, discussions, practice assignments and view-only access to graded assignments.
Coursera offers 1,100 courses from 121 universities, about half of which are outside the US. It has 15 million registered users, of which about 75% are also from outside the US. Coursera has received a total funding of $146.1 million from investors including Kleiner Perkins Caufield & Byers, New Enterprise Associates, Black River Ventures, EDBI, GSV Asset Management, GSV Capital, International Finance Corporation, Laureate Education, Inc., Learn Capital, Times Internet, World Bank, and Yuri Milner. Its latest round of funding was held in August 2015 when it raised $49.5 million in a Series C funding round led by New Enterprise Associates.
The problem with the MOOC segment is astronomical amounts of funding has so far resulted in relatively low monetization. How investors will make money remains a looming question.