Four numbers to consider from 2U’s IPO filing

With the emergence of large-scale MOOCs over the past few years, it has become common to hear discussions of online education in terms of access and scale – access to low or no cost courses and scale of tens or hundreds of thousands of students. Of course MOOCs are but one form of online ed, and with 2U, Inc filing for an IPO in 2014, we have another example of a very different, and lucrative, approach to online education. 2U’s model extends high-tuition, elite programs to a small group of students. To get a sense of this approach, consider four remarkable numbers that are based on 2U’s S-1 filing.

To provide context for these numbers, 2U’s model is somewhat unique, as described in Techonomy:

. . . 2U offers weekly live online (synchronous) classes and a sophisticated social networking platform that lets students and instructors interact. Most degrees offered through 2U also require completion of physical components such as global MBA residencies, student teaching apprenticeships, and, for nursing students, operating room training on campus and clinical experience in their communities. [snip]

Another difference is that 2U classes are small—just 10 to 15 students and a professor onscreen in a Brady Bunch grid—so admission is selective.

2U makes $10,000 – $15,000 in revenue per student per year

From our inception through December 31, 2013, a total of 8,540 unique individuals have enrolled as students in our clients’ programs. [p 1]

For the years ended December 31, 2011, 2012 and 2013, our revenue was $29.7 million, $55.9 million and $83.1 million, respectively. [p 2]

Not all of the 8,540 unique individuals are still enrolled as of 2013. However, if we assume (for simplicity’s sake) that 8,000 current students are generating $83.1 million in tuition revenue, that gives a lower bound of ~ $10,000 per student per year. It’s more likely that 2U had closer to 5,500 students (based on 84% retention rate and some students completing their programs), which gives an upper bound for 2013 of ~ $15,000 per student per year.

2U makes an average of $10 million in revenue per customer per year

2U made $83.1 million in revenue with just eight of its nine customers (the Berkeley program did not start in 2013 – see p 90). This one is simple math.

Despite this revenue, 2U is still losing money – a lot of it.

For the years ended December 31, 2011, 2012 and 2013, our net losses were $24.9 million, $23.1 million and $28.0 million, respectively [p 2]

How can this be? It turns out that it is quite expensive to start up these high-touch online programs. As described in Techonomy in fall 2012:

Shouldn’t eliminating on-campus costs such as classrooms, dorms, and parking lots translate to savings for students? Paucek says, “The notion that online is somehow a cost-saving mechanism is simply incorrect. You’re only saving cost if you make the experience low quality. We partner with a school that wants to become preeminent in their field online. We will not partner with a school if they expect to see online be discounted in any fashion.”

He says 2U spends up to $20 million ramping up a single school’s program before seeing a return. The company, which started with $98 million in VC funding, employs more than 400 [up to 600 in fall 2013]. Between 50 and 80 are dedicated to each degree program, and 2U offices on every partner’s campus offer services beyond IT. For example, for Georgetown’s online midwifery M.S., Paucek notes, “there’s no digital baby; we find a critical placement for the student in Iowa or Oregon or Florida or wherever they are.”

2U’s customers make an average of $10 million in net revenue per year

How much does each customer make in program revenue? We don’t know, but we can guess. 2U’s business model is based on revenue sharing with the customer, but the company is very careful to not state publicly what percentage of tuition revenue goes to the company and what goes to the school. The master services agreement for USC (which accounts for more than half of 2U’s revenue) explicitly redacts the percentage (note that 2U was formerly called 2tor):

2tor will be entitled to [***]% of the Net Program Proceeds [p 28]

However, we do get a sense from an interview of CEO Chip Paucek in Inc.

The company is now working with eight universities in total, across ten graduate degree programs. 2U’s contracts with the schools last some 10 to 15 years. 2U also recently announced a program called Semester Online, which offers for-credit undergrad courses on a class-by-class basis. Though Paucek won’t reveal revenue, he says that 2U, now a 600-employee company that’s raised $102 million in venture capital, has booked $230 million in tuition across all its programs this year. Through a revenue share agreement with the schools, 2U will make more than half of that.

In an article about the upcoming UC Berkeley data science program, there is this claim:

Between the 2U and Berkeley course offering, UC Berkeley will be receiving 65% of the initial course fees, a number that may increase slightly as time goes on.

My best guess is that the schools and 2U split revenue somewhat evenly, so let’s assume 50% goes to the schools. If this is true, then consider that 2U’s customers are making on average $10 million of net revenue per year (after subtracting out 2U payments).

Update (2/24): Clarified language on net revenue.

In terms of bookings, 2U’s customers booked $230 million in tuition revenue in 2013.

2U’s customers are charging $17,000 – $45,000 per student per year in tuition

These are not programs aimed at reducing the cost of education. These are elite programs charging high tuition with the promise of high-paying jobs for the graduates. UNC charges $89,000 for a two-year program, UC Berkeley $60,000, USC $34,000,  and Georgetown $77,000 (all for two-year programs).

And all of this business comes from a quite small base of less than 9,000 students and nine customers as of the end of 2013. Once seen in this light, it is clear that 2U’s concept of scale for online education is in scaling revenue – for itself, for its customers, and for its students.