With COVID-19 shaking up the educational system for kids (and adults) of all ages, it’s not a surprise that EdTech is experiencing a boom like never before. The global EdTech market size reached $89,5B in 2020, and in some parts of the globe (e.g. Asia Pacific) it is expected to maintain compound annual growth rates of up to 22.6% from 2021 to 2028.
Students all over the world are forced to study at home, and technology that makes this process easier is seeing rapid adoption and acceptance by professionals in the mainstream.
This is not only true for communication software. Online courses, note-taking apps, and equally importantly, gamification apps, are all seeing massive growth because of the sudden and forceful shift in the status quo.
In these extremely beneficial market conditions, it might be quite surprising to hear that Yogome, creators of educational mobile games for kids like “Smartkids - Learning Games”, “Math With Amigos”, “Math Heroes 1: Basic Fun Math for Kids”, among others, and a shining example of a successful Latin American startup, is shutting down after having raised $36.5M in funding.
While on the surface everything seemed to be going splendidly with the startup, below the hood Yogume was having serious issues that it’s founders were trying to hide.
An employee of Yogome suspected that the usage data of the company’s apps were manipulated and they tipped off one of the investors. This led to an internal investigation issued by the board of directors of the company that uncovered that Manolo Díaz, one of Yogome’s founders, was using a bot to manipulate the data and heavily inflate the usage numbers of Yogome’s products, making the company seem like a much better investment than it was. In its $26.9M Series B funding announcement, the company claimed to have six million active users across more than 50 countries - numbers that are relatively likely to have been inflated.
Following the investigation, the decision was made that the only viable option was to shut down operations. In a company event, a speaker made the announcement to all team members with the following words:
“The conduct by the previous management has compromised finances and integrity of the company by possibly having committed fraud. The board of directors, as well as its investors and financial advisors, have met over the past few days to investigate and analyze the current state of the company as well as possible fraud… Based on an analysis of the economic situation of the company, and the effects of the crime of fraud, the decision has been made to end the operation definitively, since the company is in a situation of no return.” (translation from Spanish via Forbes)
Yogome’s 150 employees (the majority of which working in Mexico City, the rest in the USA) were forced to sign their resignations.
John McIntire, the chairman of Yogome’s board and an advisor to Exceed Capital, which was the lead investor in Yogome’s last funding round, was overseeing the liquidation of the company.
After the shutdown announcement, a few employees spoke with local business media. It became clear that the internal usage data and the one that was shared externally were different. In an interview with EdSurge, a formal staff member shared that the company culture was one of extreme secrecy when it came to sharing information about growth and user numbers even internally – quite logical if management wants to prevent a leak like the one that happened.
If you’ve read some of our previous articles in this failed startup series, like the one of ScaleForce, you might have noticed that the fake-it-till-you-make-it attitude and the spectacular failures of generously-funded startups are two things that go hand in hand.
A lot of people would argue that this is not a bug in the system, but rather a logical outcome of the innovative startup environment. Startup investors and especially venture capital funds are chasing sky-high valuations and rapid growth exclusively. Mediocre returns (i.e. normal lifestyle businesses) simply aren’t enough to justify the extreme risks associated with tech startup investments (more than 90% of startups fail).
This means that if you are a startup founder and you want to be noticed by VCs, you are essentially in the business of selling dreams. The thing that would win you a massive funding round is your ability to convince investors that your business has the potential to 100x their investment and to become a market leader in the niche it’s operating in. Of course, for most people, the way to do this is to adopt an air of confidence and expertise and to tell a compelling narrative built on top of the real performance of the business and facts of the market.
It is not difficult to see, however, how some of the more desperate and morally flexible founders would be tempted to nudge the data in order to make it a bit more supportive of their narrative. Of course, this is fraud, and if it results in massive funding rounds as is the case of Yogome – a serious case of it.
Naturally, this begs the question of why the due diligence done by investors isn’t more stringent. However, due diligence is costly, and bearing in mind that almost all startups fail because of lack of product-market fit rather than fraud, it makes sense for VCs not to over-invest in searching for fraud in every startup they are interested in.
These factors in the tech startup funding environment mean that cases like Yogome and the notorious Theranos are somewhat inevitable. Because of this, the overall reaction in the sector isn’t very surprising – yes, Yogome is an unfortunate case, but it is in no way indicative of the overall health of the Latin American startup scene or the global EdTech market.
As a startup founder, however, the important lesson you can take from this is that chasing sky-high VC funding isn’t the only way to succeed. In fact, most startups are bootstrapped, and having a profitable and healthy lifestyle-sized business might be preferable to the reality of VC-backed startups for which everything other than astronomic growth is a failure.