MasterClass cuts 20% of 600-person staff to ‘get to self-sustainability faster’

MasterClass, an education platform that sells subscriptions to celebrity-taught classes, has cut 20% of its team to “adapt to the worsening macro environment and get to self-sustainability faster,” CEO David Rogier tweeted on Wednesday afternoon. The layoff impacts roughly 120 people across all teams, but no C-suite executives were cut, a MasterClass spokesperson confirmed to TechCrunch.

“Our mission — to make it possible for anyone to learn from the best — hasn’t and won’t change,” Rogier continued on Twitter. “This very tough step will strengthen our position both financially and strategically, allowing us to serve our members, employees and instructors for many years to come.”

A MasterClass spokesperson said that the company will be offering 11 weeks of base pay to all employees as part of a severance package, with one additional week for every year spent at MasterClass. The company is also waiving the one-year investing cliff, and employees will have the chance to extend options. The startup has committed to covering employee healthcare through the end of the year. It is also providing mental health counseling until the end of the year and job counseling for the next three months. Laptops can be kept for personal use.

There is no hiring freeze, the spokesperson confirmed. When asked for more specifics on what triggered the layoff, the spokesperson pointed to Rogier’s Twitter and LinkedIn statements.

MasterClass made a splash during the early innings of the pandemic by meeting a newfound consumer interest in remote education with aspirational content (aka, entertainment) from celebrities such as Serena Williams and Issa Rae. Offering paywalled, documentary-style content, MasterClass has raised more than $460 million in known venture capital from investors including IVP, NEA and Owl Ventures. Its model even inspired other companies: Outlier, founded by MasterClass’ co-founder, closed a $30 million Series B, and former Chess World Champion Garry Kasparov launched a “MasterClass for chess lovers” platform.

MasterClass charges a $180 annual subscription fee for users to access its library of content. The subscription model was responsible for 80% of the company’s revenue in 2018, and, as of late, is responsible for 100% of its revenue. The company was last valued at $2.75 billion, sources told CNBC.

While it is celebrated for leading the edutainment category, MasterClass has always had some clear hurdles to surpass, including getting users who gravitate to the platform for one class to stick around for other classes. The company has also spent heavily on marketing and on instruction. In 2017, the Hollywood Reporter said that most MasterClass instructors are paid at least $100,000 up front and receive a share of at least 30% of the revenue; it seems likely that those numbers have increased over the last five years.

MasterClass isn’t the only edtech scaling back after a period of spotlight. Eruditis, an edtech unicorn, laid off 40 people and had 40 people resign voluntarily, reports Inc42. The publication says that people on the talent acquisition, or hiring, team were impacted as Eruditis scales back its hiring plans, from bringing on 1,300 people over the past 12 months to only wanting 150 more people, at most, this year.

Section4, an upskilling startup launched by prominent NYU professor Scott Galloway, also laid off a quarter of staff, largely impacting the product team. Then, of course, in April, per the Economic Times, richly valued Indian edtech Unacademy laid off 1,000 employees as part of a cost-cutting measure. The same outlet reports that Vedantu, another edtech unicorn, cut 200 employees. Public edtech companies Duolingo and Coursera have also seen stock values slashed.

MasterClass just raised $100 million for celebrity-fueled content

MasterClass, a startup that sells celebrity-taught classes to people, has raised $100 million in a Series E round. The round was led by Fidelity Management & Research Company with participation from new investors including Owl Ventures, 01 Advisors and existing investors NEA, IVP, Atomico and NextEquity Partners.

The new financing brings MasterClass’ valuation to $800 million, according to Bloomberg, which broke the news of the edtech company’s then-impending funding round earlier this month. MasterClass declined to disclose its new valuation.

MasterClass charges a $180 annual subscription fee for users to access its library of content. The subscription model is responsible for 80 percent of the company’s revenue.

MasterClass views itself as neatly on the intersection of entertainment and education. The startup has produced 85 classes taught by celebrities, or “masters,” on their specialities. The platform has garnered blockbuster names like Anna Wintour to talk about how to grow a business, Gordon Ramsey on how to cook, and David Sedaris on how to be funny. The previews of classes are called “trailers.”

It also touches on the public’s innate curiosity about how famous people think and work. MasterClass tugs on that idea a bit by also offering classes that fundamentally do not make sense to be “digitized.” Think high-contact sports, like a tennis lesson from Serena Williams or a basketball lesson from Steph Curry. Or just general pontifications from RuPaul on self expression and Neil deGrasse Tyson on scientific thinking and communication.

Despite its flashy line up of stars, MasterClass doesn’t sell access but instead sells a window into someone’s work diary. Celebrities are not interacting with students on a day-to-day basis, and sometimes, not at all.

It is relatively a light lift for celebrities once they get their content on the platform, which of course only happens if they are personally invited to from the company. Any MasterClass on the site includes a number of lessons, broken down in separate videos that range from 20 to 30 minutes, and a downloadable workbook. Students for each class can flock to community hubs to chat with their fellow virtual classmates. There are opportunities for celebrities to interact with students, but nothing is put in the contract to make the instructors give back.

MasterClass proudly touts the few exceptions where celebrities have chosen favorites in class: Electronic music producer DeadMau5 reportedly invited one of their MasterClass students to record a track alongside him. Serena Williams reportedly invited one of her students to play a game with her.

MasterClass declined to share how it pays the celebrities.

Last year, MasterClass more than doubled in terms of sales. The company also says its content is so engaging that people might sign on for a Steph Curry workshop, but then eavesdrop in on a Ramsey cooking session.

MasterClass raised the round as millions are at home with nothing to do. CEO and co-founder David Rogier said that the most watched chapter of a class is Chris Voss, former FBI negotiator, and his thoughts on the art of tactical empathy.

Beyond this anecdote, Rogier repeatedly denied to share any data on how MasterClass’ usage has changed since coronavirus began. The silence is notable only because its competitors and neighbors in the edtech space have been noisy as of late. The massive shift to remote education has already helped edtech companies raise millions across the board, from new unicorns to seed stage deals.

The silence might be because MasterClass has positioned its content as more entertainment-focused than simply education-focused. Since the company produces high quality, documentary-style content, it means that it might struggle to produce, similarly to the delays we’re seeing in the entertainment industry right now due to COVID-19 shutdowns.

Similar to other edtech companies, however, MasterClass claims that the new financing was closed less out of necessity and more out of opportunity.

Rogier said that the capital will be used to create new classes for students and up production to one class a week. The company is also experimenting with an audio-only mode, short form and augmented reality.

“Imagine if we had Steph Curry, but you had augmented reality on your phone so you could actually see where to put your feet,” he said.

MasterClass’s marketing strategy has recently been a topic of conversation because of how aggressive and ever-present it is. It seems like every YouTube video you watch, there is a MasterClass ad waiting to be your commercial break. It seemingly has only increased as everyone started to work from home.

While Rogier would not disclose MasterClass’ marketing budget (or how in the world it managed to crowd already crowded challenges) the strategy is a bit telling. MasterClass doesn’t compete with YouTube, it advertises on the platform. It is betting that the world wants a highly produced, celebrity-led class, and is willing to pay for it.

“If you’ve seen more ads, it is because they are working,” he said.

MasterClass is mastering scale as a media business

MasterClass’ $80M Series D announced last week marks a triumph in validating the potential venture-scale of content businesses in an era when many are founded with equal parts tech and media DNA.

The platform for online video courses on topics from film directing to tennis taught by iconic figures in each field (like Martin Scorsese and Serena Williams) launched in 2015 and has raised $160M from top VC firms like IVP, NEA, and Atomico while gaining brand recognition among millions of Americans. Neither education nor content startups have been particularly hot spaces for Silicon Valley investors over the last few years, so Masterclass’ breakout status calls attention to its strategy.

High-quality original content cuts above the noise

Due to the user inputs of subscription streaming services, a platform focused on its own high-quality original content can gain an advantage against the crowded field of quantity-over-quality competitors in monetization and defensibility while still achieving scale.

It’s a common tech industry mistake to treat all content the same – to focus on the engineering challenges of a platform but not enough on the creative challenges of captivating users (the classic Silicon Valley versus Hollywood cultural divide). Netflix’s current position as the dominant force in global film/TV stemmed from its own evolution from solely aggregating third-party content to aggressively investing in its own Originals.

From the start, MasterClass has taken a different path from other startups in the online courses segment of media (often called MOOCs, or massively open online courses) by specializing in capital-intensive, high-production-quality video series with the biggest names. Like a small film studio, much of its $1.9M in seed funding was used on recruiting the initial talent (Dustin Hoffman) and producing their first class (on acting).

Similar to starting a company in an industrial or highly regulated industry, starting a media startup focused on high-quality productions is capital intensive. But if the entrepreneur’s thesis is right and execution is strong, those big upfront investments can lock in competitive advantage. True in the case of MasterClass, they sold 30,000 course sign-ups within four months of launching.

Quality lets you build big franchises, makes it easier to attract the top creative talent while giving up less economics, and makes the business the center of gravity within its market such that consumers naturally choose it over any competitor as the main service to subscribe to…there’s just enough must-see content to keep coming back to.

This is the driving force behind the recent acquisitions of top studios and TV conglomerates like 21st Century Fox and Time Warner by companies who have a distribution platform they want to defend against Netflix (and it’s why Netflix is willing to strike nine-figure deals to lock in Hollywood’s top producers to years of creating Netflix Originals as Disney and others launch competitors). Once they have hit critical mass, it’s very tough to directly compete with such businesses even when you’ve billions to spend like Disney does.

The ROI of investing in top talent

MasterClass’ focus on bringing in top talent creates a positive cycle between viewers and the company. (Image from MasterClass)

When it comes to the educational content sector, quality doesn’t just mean production budget and storytelling ability. There’s a categorical difference between learning a skill from the very best talent in a field versus learning it from a wider class of practitioners who are just good or great. The very best typically have a fundamentally different approach. Consumers recognize this, and they also struggle to evaluate the value of courses taught by people they haven’t heard of. If educational content from the biggest VIPs can be accessed for a price point within grasp, it’s the sensible economic decision.

This dynamic drives word of mouth marketing for MasterClass courses (“My screenwriting class is taught by Shonda Rhimes!”), accelerated by the large social media followings of the instructors and the free publicity their course generates in the news. Whether it’s music, gaming, television, and book publishing, media is a hits-driven business and the reason the biggest names command big paydays is because they can deliver outlier value.

By comparison, other VC-backed MOOCs (like Coursera, Udemy, Udacity, and others) focused on the quantity of courses over the quality of courses, resulting in large libraries of lower production quality videos from less well-known instructors that may be helpful, but struggle to stand out from other resources online. Nearly all the MOOCs pivoted as a result: first from pitching their content to pitching consumers on the certification they could get for completing all the content, and then a second time in switching focus to sell to corporates (for internal training and employees’ continuing education) because MOOC credentials weren’t gaining mainstream respect fast enough.

You have to be the most trusted brand to win as a premium subscription

Describing MasterClass as merely “celebrity courses” misses the point. By anchoring in big-budget, carefully produced video series – which includes only partnering with the biggest names in a field – they are building consumer confidence that their future offerings will all meet the same standard – the sort of trust Pixar built by starting slowly with a steady stream of high-quality, big budget animated films.

With a direct-to-consumer streaming platform, this trust for the underlying brand opens the door to a payment model that reflects it: a premium subscription. MasterClass is already moving beyond selling access to individual courses: 80% of revenue now comes from users paying a $180/year all-access subscription. The company looks ever less like a MOOC and more like a Netflix-style SVOD (subscription video on demand) platform for educational video series.

MasterClass launched with just three courses, and still has only 39, but the financial impact of each course is substantial. CEO David Rogier told TechCrunch’s Kate Clark last week that the company’s revenues were just shy of the leading MOOCs, Udacity and Coursera, which are understood to be in the $70-100M range. The MasterClass video library will have a longer shelf-life than educational videos from unknown names as well: people two decades from now will still care how Werner Herzog thought about film directing techniques and how Marc Jacobs thought about fashion design even if technology and culture have changed dramatically.

It is worth noting by comparison that while Netflix is spending more than ever on content – a whopping $13 billion this year – its library is shrinking substantially, not expanding. It too is anchoring itself in better content – expensive, must-have original shows instead of licensed re-runs from other networks – because it’s the exclusive, must-see shows that make consumers consider it the must-have subscription.

Each subscriber makes a streaming service stronger

The more subscribers who sign up for must-see content by the celebrities they look up to, the more MasterClass can invest in the next slate of courses to ensure more hits, and the more data it collects on user engagement to improve their productions. This dynamic can give direct-to-consumer streaming services network effects…each additional user’s data marginally enhances the experience of every user, and the more active they are, the more personalized their experience can become.

The data MasterClass, Netflix, and other SVOD services collect from users informs their understanding of the elements that constitute a hit show and enable them to more wisely allocate resources, tripling down on what works best while cutting investment in what doesn’t. This feedback loop empowers them to grow faster than competitors can keep up.

Neither Netflix nor schooling: the edutainment market is open

The key strategy question in the educational content space is often whether to expand deeper or broader. MasterClass offers quality in terms of talent and production value but has made big investments into adding introductory courses across a wider range of skills from a wider range of VIPs rather than creating more advanced course material for users to keep progressing in one skill area. MasterClass sparks users’ interest and gives them an insightful grounding, but it’s not a training program to advance people already pursuing that skill professionally.

Going far deeper into topics with a world famous instructor could be just as, if not more, lucrative but the dramatic differences in the right user experience and price point for each niche – think bike racing tactics versus hedge fund investing strategies – make it unlikely this can be pulled off effectively by one platform.

Such a strategy does present opportunity to prestigious digital media brands though (whether it’s The Financial Times in finance, Vogue in fashion, or Billboard in music); they could leverage their prestige in a given niche to partner with the biggest VIPs and craft premium-priced, best-in-class courses for practitioners (perhaps with a credential that carries weight due to the brand recognition and brand prestige of the media company).

Where MasterClass is gaining traction is in targeting a mass audience of more casual learners, and it is succeeding at getting them to pay a substantial price by the standards of media or consumer internet platforms. It is operating in a territory that offers people more concrete learning (and more interactivity) than a Netflix documentary while not being so specialized as to be a professional course. It may go a level deeper than it has thus far, but it doesn’t seem to be targeting the opportunity to be an in-depth online course provider.

What MasterClass is becoming is a Netflix for “edutainment” – a media company native to the SVOD era that could own the turf Discovery Inc. seized in the cable era.  By expanding across interest areas and regularly collaborating with icons who appeal to different demographics, they may build the must-have subscription of interactive video series for humans’ wide-ranging intellectual curiosity.