Why is this tutor agency startup so highly valued by investors?

Question

I am currently a university student, looking to make a bit of extra money. I got excellent grades in high school, so I was looking into tutoring.

I figured from research that I could get some clients from either family or by using an online ad site (ones a bit like Craigslist but for tutoring). Then, I stumbled upon a tutoring "agency". It basically pairs you with students and handles the payment but takes a cut. I was a bit baffled by this startup. It also has a valuation of $1.7 billion so it's no blip.

My problem is that this (quite valuable) company doesn't seem to provide value to me as a tutor (or any tutor). From the advertised data, it seems that they take 5-40% of the sale price (it is quite vague). Not only is the rate lower than what I could make independently by a fair bit, but they proceed to take a pretty large chunk every lesson. However, they only provide value once, when they match me with a student (I guess they also handle payment, but that doesn't feel like it justifies the price tag).

Am I missing something that these billionaire investors aren't? To me, this seems like quite a bad deal for the tutors, as I can accomplish the same thing as them by using Zoom, but earn more.

Edit:

It seems to me that this business model wouldn't be as good to invest in as something like "Gumtree/eBay for Tutors", where tutors can make listings. This provides the same value (finding a tutor), but at less cost to both parents and tutors, as it is a one off fee and not a continual one. Is there something I'm missing?

Answer 1

There is an interesting phenomenon in the world of eCommerce that the existence of an established online marketplace for a specific family of goods or services makes it very difficult to find clients without going through that marketplace.

The reason is that consumers consult that online marketplace first and immediately find what they are looking for. They don't even consider to look for people providing that service directly, because that's inconvenient for them.

The result is that:

• eBay killed local flea markets, second hand stores and classifieds ads as a place to offload stuff you don't need anymore
• Uber killed the local taxicab companies
• GrubHub, Deliveroo, UberEats etc. took over restaurants' own delivery websites
• Booking.com and other travel portals took over hotels' own booking websites
• Amazon took over... pretty much every small-scale online store in existence

All the small businesses who used to sell their goods and services directly now have to go through these large websites if they want to get any customers. They don't want to pay the commission or bow to the exploitative terms of service (including the obligatory "you must not offer your goods/services anywhere else for a lower price than through us" clause). But they are forced to, because the big marketplaces have all the customers.

What these venture capitalists see in GoStudent is that it might perhaps end up doing the same to the tutoring market. When that service ever manages to establish itself as the website you go to when you are looking for a tutor, then tutors will be forced to use it. Otherwise they won't get any clients anymore.

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Think of it that way:

You aren't paying the platform for the value they provide to you as a tutor. The customer pays the platform for having a convenient way to find you. They are paying the platform through you, because you will have to increase your prices in a way that tutoring is still worth it for you if you subtract the hefty commission.

Answer 2

In business, cutting out the middleman is always more profitable for the upstream seller, provided they can secure the same deal flow.

A good ‘wholesaler’ earns their money by providing value to both ends.

Consider supermarkets.

As a consumer, you might be able to buy your rice from a rice farmer, provided you are willing to find one who you can communicate with and who is willing to sell you one small bag of rice once in awhile. Or you can go to your supermarket and buy prepackaged rice at higher prices than the supermarket pays their farmers.

The farmer could bring their rice to the city and spend the day selling rice one bag at a time, or they can sell them by the truckload to the supermarket.

Clearly, there is a business case for being a middleman.

In your example (which I have not investigated in detail), one stream of value they might provide is a ready pool of tutors for students, possibly with some ranking system to identify the better and perhaps more expensive tutors, and a ready pool or students for tutors.

If you had to find your students on your own, it would be unlikely that you could click a link and have someone ready and waiting when you happen to have an hour to spare. You’d need to be methodical about it, establish your credentials, and perhaps go through a number of rejections. All that costs you time and possibly money.

That’s a long way of saying that no, it’s not a silly idea prima facie for a business to charge for introducing students and tutors to one another.

Answer 3

One aspect you may not be considering: how valuable is a $1.7bn company? Probably not nearly as valuable as you might think. This valuation certainly does not necessarily mean that somebody is willing to buy the company at that price. Instead it often follows from a bunch of misleading accounting: a whole multitude of funding rounds and price guarantees leading to extreme stock dilution meaning that only a tiny fraction of the company is paid for at that price leading to a hugely overestimated valuation. It's quite easy to engineer a new company over the one billion mark without that being very meaningful. https://www.businessinsider.com/study-nearly-half-of-tech-unicorns-overstate-their-valuations-2017-8?r=US&IR=T

Answer 4

Your question is basically, “Why do tutors use tutoring agencies when they can just advertise themselves and not give away 20-30% of their earnings to these pesky tutoring agencies?”

Firstly, just to clarify: If I advertise by myself without an agency, let’s say I charge £20 per hour to the student. The student pays me £20 directly. Then when I use an agency, I still get £20, but it is the parents who pay the agency an extra £5. That’s usually how it works. So as a tutor, I get the same amount with or without an agency.

Now let me address the question from the perspective of a full-time self-employed tutor, then the agency, then the student/parents. The answer is: because using a tutoring agency is easier and less time-consuming than advertising yourself. It gives you an immediate way to apply to (tens of) thousands of students - in your local area - or otherwise (for example if you want to tutor non-local students online).

You can instead/also advertise in local shops and local schools, facebook etc. Which I also do. But I have to admit that this independent advertising takes a lot more time and effort compared to applying via tutoring agencies. For example, I spend 2 whole days per year driving round my area, putting my flyer up in local newsagents/supermarkets/other shops. This is not an insignificant amount of time. Also, if you want to put your ad in a shop, most of them charge £1+ per week, so this has to be factored into the equation…

So in summary, it is the instant access to thousands of students you are targeting to tutor, and the saving of time and the ease of getting new students that you are paying the tutoring agency for.

As for the tutoring agency’s business model, it’s pretty obvious to me that it makes sense from a “maximising profit” perspective. The agency gets a bigger profit than a one-off payment from the tutor/student in order to get their contact details. Also, sometimes the student (or tutor) decide to discontinue with one another after the first lesson or two due to not being on the same wavelength/other reasons. So what should the one-off payment be? A large one-off amount doesn’t make sense for the tutor/student and a small/medium amount doesn’t make sense for the agency compared to the 20-30% for each lesson.

Finally, from the perspective of the students/ students parents: there are tens, possibly hundreds (especially due to the Covid lockdown began in March 2020) of tutors on the agency website. The students and their parents can view the profiles of all these tutors on the tutoring agency website, and decide which one is most suitable for them. That is the main thing the student/their parents are paying the agency for. Therefore, if the student/ their parents don’t care too much what type of tutor they get, or if the parents are frugal with their money, then I think it makes more sense for them to avoid tutoring agencies and to look out for an add in the window of the local newsagents, or on facebook. Else if they do care, or if the student is very particular in what they need (especially if they have specific learning difficulties or tutor quality requirements), then using an agency is probably preferable to not.

I’m not sure what you mean by, “I can accomplish the same thing by using Zoom”. Accomplish what?