Duolingo IPO: What you need to know

Pittsburgh, PA-based Duolingo is a web and app-based language learning platform that utilizes AI technologies to introduce users to new languages. The familiar meme-ified owl mascot speaks to its fun user interface. Its not all fun and games; a closer look reveals a fast growing startup that turns investors heads like the bespectacled owl.

It started during the free education wave of the early 2010s when MOOCs (massive open online courses) took off in an effort to democratize learning. A differentiating factor is that Duolingo didnt try to replicate a classroom. Instead, it uses features based on the world of gaming to keep users engaged. Now, Duolingo has over 500 million registered users worldwide, and provides 100+ courses in 38 languages. Most of its users use its free service; however, clients can subscribe to a premium, ad-free experience.

TL;DR:

• Anticipated IPO date: July 28, 2021
• Luis von Ahn (CEO) and Severin Hacker (CTO) started working on the app in 2009. After a much-watched TED talk given by von Ahn, it had a successful soft launch in Nov 2011 followed by an official launch in June 2012.
• Originally Duolingo provided free language courses in exchange for users translating copy, news articles, manuals, and so forth. Duolingo then charged other companies for these translation services.
• Total fundraising is $183.3 million via nine funding rounds. Notable investors include: General Atlantic, New Enterprise Associates, Durable Capital Partners, Arctic Ventures, Kleiner Perkins, Ashton Kutcher, and CapitalG.
• In 2016 they achieved $1 million in revenue. In 2020 they hit $180 million in revenue.
• Co-founder von Ahn is most well-known for previously creating ReCaptcha, which millions of people use every day.
• In 11/2020 Duolingo had a $2.4 billion dollar valuation and are currently seeking a summer 2021 IPO.

Duolingo at a glance

Successful businessman, MacArthur Fellow Genius Grant ” recipient and computer science professor Luis von Ahn, PhD came up with an idea for language learning using the power of technology. He was inspired towards language learning because growing up in Guatemala, he saw first-hand how having the ability to be bilingual in English increased peoples earnings opportunities and potential. “I wanted to do something that would give equal access to education to everyone,” says von Ahn, “and then I focused on languages because growing up in Guatemala I saw that everyone wants to learn English. Prior to Duolingo, he had already experienced success in creating and selling software application companies to Google: the ESP Game and Recaptcha.

Rather than creating a service where students needed to pay per hour, subscribe or pay hefty university-level costs, he envisioned Duolingo as free to everyone. It initially started as a web-based application in 2011. In November 2012, the iOS app was launched with the android app following closely behind in April 2013. The companys initial fundraising in 2011 was $3.3 million in funding from Union Square Ventures and Ashton Kutcher. The large initial funding is credited largely to von Ahns past success.

Duolingo was a hit even before its official June 2012 launch. Within a month of the November 2011 private beta, over 300,000 people were subscribed to the waitlist to join the app due to publicity generated by von Ahns TED talk where he discussed Duolingo. Between November 2011 and November 2012, more than 10 million people downloaded the app. Von Ahn shares, “from then until 2019 our growth was solely due to positive word of mouth, we didn’t do any advertising or marketing at all.” Initial clients for its translation service included media giants BuzzFeed and CNN. By 2014, the company moved away from the labor and resource intensive translation services and focused on its freemium model for learning languages. In 2014, they pivoted to the current freemium model and away from the labor and resource intensive translation services.

The company has won many awards, including:

• 2013, earned the title of iPhone App of the Year
• 2013, 2017, 2018, 2020, Most Innovative Company by Fast Company
• 2018, Genius Companies List by Time Magazine
• 2018, Best Places to Work by Inc.
• 2018, Top Company Culture by Entrepreneur
• 2018, 2019, 2020, Disruptor 502019 Change the World List by CNBC
• 2019, Best Workplaces for Innovators by Fast Company
• 2019, 2020 Best Startup Employers list by Forbes
• Story-driven Duolingo Podcasts for Spanish, French, and English learners that have reached #1 on Apple Podcasts

Duolingo was founded on the principle of making language learning universally accessible. It has added two other principles which are to make learning fun and personalized. This has led to its science-based language learning programs where it is said that spending approximately 34 hours in a language on the Duolingo app is equivalent to a university semesters worth of language learning. The companys user base has reached 500 million in 2020, compared to its beta start of around 100,000 users. User growth stalled from 2015 to 2018 when the company began to put more emphasis on monetization. In response, the company hired its first Chief Marketing Officer (CMO). With a CMO, user growth returned to its climb. In 2020 they added a Chief Financial Officer (CFO) and General Counsel to their leadership team in anticipation of continued growth and embarking on an IPO.

Duolingo provides the following services via their software applications: Duolingo, Duolingo for Schools, Duolingo English Test, Duolingo ABC, Duolingo Events (connecting learners in real-time to practice language skills), Podcast (story-driven podcast for English, French & Spanish learners), Duolingo Stories (provides practice with reading and listening comprehension) and Dictionary (provides direct translation augmented with useful examples). Their products are available anywhere people have access to the internet. Von Ahn utilized his prior experience as a pioneer of crowdsourcing to create Incubators within the company, which unite linguists, native speakers and book readers to design and launch courses. One unique feature of the company is that they have even obscure and fictional languages available. Due to the work of the Incubators, they have added the following to Duolingos offerings: Welsh, Catalan, Latin and fictional languages from Star Trek and George R. R. Martins A Song of Ice and Fire.

They have increased the number of courses and languages they offer every year. Starting with one course at their launch in 2011, by 2012, they offered five courses. The number grew to 11 by 2014, 18 by 2016 and 62 in 2019. Now they offer over 95 courses in 38 languages. In addition to adding languages, in 2020 the company has now branched off into a childrens offering geared at teaching kids aged 3-7 how to read, Duolingo ABC.

Duolingos mission is: developing the best education in the world and making it universally available. They take universal access very seriously. Another feature of Duolingo is it offers English language certification for $49, much lower than the $250 it can cost in India, China and other countries. Users are able to take the test on the Duolingo app from a smartphone and results are sent back in 48 hours. Founder von Ahn wanted to offer this affordable service because growing up he saw first-hand how verifiable English knowledge in a non-English speaking country drastically increases an individuals earning potential. His parents ensured that he was bi-lingual in English and Spanish growing up and he realized what a privilege that was and used that as motivation to start the business and keep the products free or affordable for users. The company gives back in other ways. For example, in November 2020, it was announced that the company was committing $150K to support arts in Pittsburgh, PA.

As a private company, Duolingo is not obligated to publicly disclose any revenue or profit figures. Nevertheless, in a 2020 interview with Forbes von Ahn stated he expects the company to generate over $160 million in revenue for 2020. A spokesperson shared that the company is cash flow positive; but exact details are unknown.

*these are total bookings figures, actual revenue may be lower

How Duolingo makes money

Duolingo makes money via Duolingo Plus (its premium subscription), display ads and its language proficiency certification tests. The business model used is called a freemium business model. Von Ahn shares that he expects and wants people of limited means to use the apps for free forever; but that people with means should pay. Between 2-3% of the registered users pay for the advertisement-free premium version. In 2019, nearly 83% of the revenues came from the premium subscribers. Currently the company has 1 million premium users. As is internet standard, users can cancel at any time.

Duolingo fundraising to know about

The company has gone through nine rounds of funding between October 2011 and November 2020 to raise a total of $183.3 million. Notable investors include General Atlantic, New Enterprise Associates, Durable Capital Partners, Arctic Ventures, Kleiner Perkins, Ashton Kutcher, and many more.

Heres a breakdown of the key Duolingo fundraising over the years:

• Series A: 10/2011; $3.3 million; from Union Square and Ashton Kutcher
• Series B: 09/2012; $15 million raised; from New Enterprise Associates
• Series C: 02/2014; $20 million; from Kleiner Perkins
• Series D: 06/2015; $45 million; from CapitalG; valued: $470 million
• Series E: 07/2017; $25 million; from Drive Capital; valued: $700 million
• Series F: 12/2019; $30 million; from CapitalG; valued: $1.5 billion
• Series G: 4/2020; $10 million; from General Atlantic; valued: $1.65 billion
• Series H: 11/2020; $35 million; from Durable Capital and General Atlantic; valued: $2.4 billion
• Venture Round: 12/2020 Undisclosed amount from Anton Alikov and Arctic Ventures

Path to the Duolingo IPO

Duolingo initially began discussing pursuing an IPO in 2017 but shelved discussions in 2018. The startup reached unicorn status in December 2019 with a $1.5 billion valuation after an infusion of capital from CapitalG. In 2020, they started discussing the IPO plans publicly again. The company experienced a huge growth in users during the global COVID-19 pandemic. Duolingo has not filed the IPO yet or set an IPO date. However, they have hired Goldman Sachs and Allen & Co. for the IPO and expect a summer offering. Duolingo, Goldman Sachs and Allen & Co., have yet to release statements about the anticipated amount to raise or what the expected valuation will be. Most observers are expecting the valuation to exceed the November 2020 valuation of $2.4 billion.

What investors should know about the Duolingo IPO

While all investments have risks, lets explore some of the specific risks investors might need to consider with a Duolingo IPO. Duolingo has not experienced any controversy related to the ethics of their business practices. They did originally utilize volunteers to make their courses better; however, they have ended that practice which means that the company has full and total control of the creative process. Their major registered users by language group are: English 399 million, Spanish 142 million, French 101 million, German 61 million, Italian 40 million, Portuguese 20 million. Their most popular course is English for Spanish Speakers. Their second most popular course is Spanish for English Speakers. An important consideration for the company going forward will be user acquisition costs. This will determine whether they pursue new users in their more popular language groups versus pursuing new users in less utilized language groups. It will also determine whether they focus on increasing the number of users in the more popular courses, versus starting new courses and pushing for users to try those.

While they do have a subset of their users that are paying for their premium service, past history shows that their user base shrank when they were aggressively pursuing monetization. The company will need to balance growth and monetization with the desires of their users and the users willingness to pay for the service so that the company remains profitable. They are completely aware that the current freemium model isn’t sustainable since the bulk of revenue is derived from less than 3% of users. CEO von Ahn has stated recently that he wants to change from the freemium model to imitate the successful monetization of users done by Spotify. Investors need to consider not just whether this is a good model, and Spotifys success indicates it is, but whether that model is applicable to Duolingos industry. A study from Nielsen Music showed that 90% of the U.S. population listened to music. Language-learning does not have the same reach. It is often seen as a luxury. While the global pandemic has increased some segments of the populations free time, and increased the free user base, that does not mean they are willing to spend money on Duolingos products.

Duolingo has competitors facing some of these same issues as well. Known competitors would be traditional places where people learned languages prior to the advent of free, online courses: community education centers, community colleges, colleges and universities. Other competitors would be those in the English as a second language industry who are specifically focused on teaching English to non-English speakers. Other competitors are: Babbel, Pimsleur, Kahoot! and Rosetta Stone. Kahoot! is publicly traded on the Oslo Stock Exchange and Rosetta Stone is publicly traded on the New York Stock Exchange. The others are privately held companies. Competitors for the Duolingo Language Test product are the ones providing the TOEFL – these previously had a quasi-monopoly on the language testing market.

Duolingo has continually used data to maintain its competitive advantage and grow by evolving to meet users needs. It regularly runs tests to discover new ways to optimize the design of a course or the user interface. Artificial intelligence is embedded into the app to analyze mistakes and slightly alter courses to fit user requirements. Still, Duolingo has been criticised for its lack of depth, because in general, people who complete a course will only reach an A2 CEFR level-a basic understanding of a language. In response in 2020, the company added more B1 and B2 level content, and plans to make courses even more in-depth with podcasts, freeform writing and audio lessons. Another anticipated plan for the company is that von Ahn stated Duolingo is interested in buying businesses in the education and language-learning industry to augment its growth.

Related: Find more Future-Ed stocks on our themes page

Bottom line

The bottom line is that Duolingo is pursuing a summer 2021 IPO with the help of bankers Goldman Sachs and Allen and Co. Duolingo will benefit from the current educational industry trends of learning moving beyond traditional learning institutions. If Duolingo can master a monetization strategy while continuing to expand their product offerings, there is potential for gain for investors.

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