The Chinese government recently announced that it would take steps to rein in after-school tutoring programs. That has caused panic among parents. The regulatory move is mainly set to reduce workload for students, who already spend three hours a day on school homework, but it hit a raw nerve of parents who have got 99 different problems but over-tutoring isn’t one. Days before the formal announcement, rumors already started spreading. My news feed in Wechat was simmering with complaints in disbelief: the exam-centric schooling system isn’t going away, now where do I get extra fuel for my child? The shares of China’s top two tutoring companies took a hit immediately after the announcement.
Chinese parents are understandably obsessed with supplementary learning. It’s a result of centuries of conviction in studying one’s way into a higher economic class, in a society with limited other options. The country’s public education system reinforces that belief by prioritizing one’s test-taking ability above other skills, in a 12-year long haul to get into the handful of top universities. Data shows 70% of families in China’s “tier-1” cities pay for extra tutoring. Although there are only four such mega-cities, the parents have been paying enough tuition to pave the path to a U.S. IPO for companies such as New Oriental and TAL Education, two Beijing-based tutoring giants serving those exact markets, before they went public in 2006 and 2010 respectively.
The share of families in the next-tier cities getting utoring has also risen quickly to about 50%-60% today, opening up meaningful new markets, as local income levels are growing on a par with Beijing and Shanghai a decade ago. Who will be the next TAL and New Oriental outside the most affluent cities? How would the brick-and-mortar giants fend off competition in the new regions, as well as online? These are billion-dollar questions the best entrepreneurs and investors are asking.
As China’s GDP per capita exceeded $8,000 in 2015, fast-expanding consumption took over industrial investments as the main driver for the economy. Education, as a major spend for Chinese families that accounts for 15%-20% of the budget, has entered a fast track. Two sub-narratives buttressing the growth are: first, families that already get tutoring want better services, such as in the case of 1:1 or small-class tutoring displacing large classes, and prefer well-trained teachers over self-taught freelancers. Second, families underserved or unserved outside tier-1 cities now want extra help for their kids too. The parents firmly believe in investing in kids’ education as the best defense against uncertainty in a dynamic economy.
Born and raised in Beijing, I got my entire K-16 schooling in China. Not until I came to the U.S. for graduate school did I realize that getting young students constant tutoring was not a default elsewhere. It was an essential for basically everyone wanting to thrive in China’s highly competitive school system, especially as parents are pumped by anxiety that’s not uncommon in any fast-evolving economy. As the saying goes, the only constant thing is change. The best defense line against that uncertainty is to provide the kids with all resources available, even at the risk of being excessive. The fear of under-preparing the children, which results in doubling down in the after-school programs, is what our team at Sinovation Ventures calls Anxiety No.1 when analyzing the inherent drivers for growing education demand.
In this regard, the best education product in our view is one that 1) delivers a good result assuaging the parents and students’ anxiety, a product which is inevitably always backed by strong pedagogy and solid teaching; 2) uses technology to leverage high-quality supply, such as through interactive live-streaming and the dual-teacher system; and 3) is highly scalable and has the growth potential of building a venture-backed business around it.
Here are some representative companies in our portfolio of this category:
- Gaosi Education: Gaosi started by offering math tutoring in physical learning centers in tier-1 cities. The company has expanded to providing online large classes for various subject matters and lesson-plan licensing to learning institutions outside tier-1 cities, through a dual-teacher system, to get high-quality teachers to a broader student base.
- Parallel Education: Parallel is headquartered in China’s most populated province of Henan, where it has deep roots in cities under-served by the likes of TAL Education and New Oriental. It’s typical of a strong local brand capturing parents and students’ mindshare quickly before tier-1 giants make an entry. Parallel has expanded beyond Henan province and got into nearby central China provinces and cities.
- OnlyHi Edu: Based in Shanghai, OnlyHi connects top-notch teachers with students all over China for 1:1 online tutoring for all subjects taught in elementary, junior high and high schools. The majority of the students are from tier-2 and tier-3 cities, whose parents are yearning for tier-1 city teacher resources and their strong teaching skills but have no other options to get connected but online.
- Limi Edu: Limi is laser-focused on elementary school math. Its core product is a full-stack solution for public school teachers that includes personalized lesson plans and assessments, as well as tutoring that can subsequently be purchased by parents to give students a leg up. Limi rides a new wave of digitizing China’s 250,000 strong public grade 1-12 schools, driving more innovative teaching and service solutions into the hands of educators and not just parents.
- 7day Education: 7day builds a robust digital assessment solution for public schools and smartly aggregates student data into an intelligence and analytics product for parents. It streamlines the most basic paper-based grading process for schools and uses student test data to reverse-engineer the most suitable teaching solutions for schools. As such, it is popular among school principals who are just as eager to enhance overall student performance and local school ranking. Similar to Limi, 7day is propelled by a strong tailwind of digitizing Chinese schools, with the support of local governments.
Gaosi Education’s dual-teacher classroom
As kids grow older and get into middle school, Chinese parents will often face a realistic question about budgeting for students’ after-school programming: should I prioritize preparing for an overseas university life or Gaokao, the mission-critical Chinese college entrance exam?
When I came to the U.S. to attend graduate school at Columbia University, overseas studies were more of an option for post-graduate rather than bachelor’s degrees. But as parents are more affluent and open to sending younger kids overseas and as SAT / ACT test prep services are maturing, the demographics of Chinese students going abroad are getting younger. Today, of the 350,000 strong Chinese students in the U.S., undergraduate students outnumber and outgrow the advanced-degree seekers. In the U.S. and other English-speaking countries such as Canada, Australia, and the U.K., China invariably contributes the largest population of international students.
“To leave or not to leave” is a question that Chinese parents now consider a few years earlier than in the past. This is what we call Anxiety No.2. This affects when and how parents and schools provide English language classes, starting potentially as early as in kindergarten. Younger Chinese parents are more cosmopolitan. To them, having kids learn English is not just about getting a good grade, but more of mastering a skill their kids would need in order to live a comfortable life overseas or simply live a culturally richer life, should they choose to stay home. In 2017, China’s Bright Scholar Education and Rise Education went public in the U.S. within months from one another. Their names may sound strange to the general public, but their solid English-tutoring businesses back in China would earn them a handsome 50x P/E multiple from Wall Street.
Here is a rundown of companies we’re betting on in this category:
- VIPKID: VIPKID provides 1:1 and small-class online English tutoring for Chinese 4-10 year-olds. Its robust learning platform seamlessly connects North America-based teachers with Chinese kids, making an immersive learning journey possible for both sides from the comfort of their homes. Their vision is to provide mobile learning not just for Chinese kids, but for the next-generation citizens anywhere on any subjects.
- BoxFish: BoxFish adapts the best English-teaching practices in developed countries into learning solutions for Chinese public school classrooms. The products are popular first among the top schools in China and then through a network effect gradually penetrating into next-tier schools and cities. BoxFish today also offers 1:1 and class-based English tutoring for after-school time.
- TopSchool: TopSchool builds small online classes connecting teachers and students across city-tiers to get ready for tests such as TOEFL, IELTS, SAT, and ACT. The main value proposition for students is to access quality teachers they don’t have in their cities offline. Their separate vocabulary-learning app also boasts of over 10 million users.
- Waijiaoyi: Waijiaoyi, literally translated as “Easy Foreign Tutors”, runs a B2B model by building a one-stop English-speaking tutoring solution for local learning centers who are unable to manage such tutors themselves or need a supplementary tutor pipeline. The lessons are delivered via 1:1 live-broadcasting or a dual-teacher system where the local centers only need to help maintain classroom order.
- Class100: While Waijiaoyi works with after-school learning centers, Class100 serves public schools with its unique dual-teacher English teaching model. The English-speaking tutors will dial into classrooms to work with the students on speaking and listening and domestic teachers will take over for writing and reading.
- Lianbang Online: Lianbang Online, under the parent brand IQEQ, builds a dual-teacher learning system for kindergartens, primarily outside tier-1 cities. When it comes to English, art, and creative thinking classes, external teachers will dial in via Lianbang’s large-screen live-broadcasting system and interact with kids. The lacking of qualified teachers for “soft skills” in kindergartens prompted the CEO - a formerly kindergarten principal herself - to build the solution to close the gap with tier-1 cities.
Online classes via 1:1 and small-class live-streaming by VIPKID and TopSchool
Traditionally, Chinese learners would see education as ending with college graduation. That perception has changed as Chinese colleges started expanding enrollment quickly in the early 2000s - resulting in a 7x growth in fresh graduates from 2001 to 2017 - with the economy unable to adjust fast enough to absorb the new labors. Public data shows the immediate employment rate for post-secondary graduates fell by 10% from 2011 to 2015, and the portion of fresh graduates in young unemployed grew almost 30% in the last decade.
What happened in parallel with the colleges expanding (a policy-driven move to increase public education attainment) was the emergence of online technologies. In fact, Sinovation’s first education investment, made in 2012, was a live-streaming platform called Duobei (acquired by Guangdong Songfa Ceramics) that enabled experienced professionals to build courses for adult learners. Online education transforms postsecondary and professional education as much as the K-12 education. The maturing technology infrastructure makes possible to provide high-quality, cost-efficient education for adults, catalyzing the inherent need for upskilling for a better life, as the government builds up a system of state-backed certification for various skills.
The addressable population is huge. The share of Chinese adults over age 25 that hold a postsecondary degree is only one third of that in the U.S. at the moment. In a society that highly values education credentials, the pay gap between those with and without a degree is significant. Even those with a degree from a traditional college might not easily find a job because of outdated curriculums and weak career services offerings at most Chinese colleges. The urge to get credentials or trending skills to qualify for a modern job and a decent living is what we call Anxiety No. 3.
Over the past two decades, first generation postsecondary learning companies such as Beida Jade Bird Group and Tarena International (listed on Nasdaq) have been established to serve the aforementioned demographics. Newer generation skill development companies keep emerging with better trained teachers, better pedagogies and creative online learning models. The latest Chinese IPO’ed education company in the U.S., Sunlands, is one such company that focuses on test prep for Self-Taught Higher-Ed Examination (STE) for adults, all through online classes. Public data suggests online education for adults will grow over 30% annually through 2022.
In this space, the best business model, from a venture-backing perspective, is one that scales and proves robust results over time. Such results could be test-pass rate, job placement rate, salary increase, or other quantitative / qualitative metrics. The results need to be clearly measurable so that new students could be drawn by brand name and word-of-mouth referral efficiently.
We’re excited to back the following companies in this category:
- IT Cast: IT Cast runs months-long brick-and-mortar bootcamps for a rich selection of subjects, including Python / AI, mobile development, e-commerce operations and web security. It stands out by high-quality teachers and strong pedagogies. It recently opened a campus for a 3-year program as a non-credentialing college alternative, which allows students to only tuition pay if their salary reaches a certain level after they graduate.
- Dui’a: Dui’a provides online test-prep for various skill certification exams, including accounting, teaching, human resource management and government affairs (for entry-level government employees). The classes are aligned with the latest exam standards and have increasingly become a must-have supplement for test takers.
- Alpha Elephant: Alpha Elephant leverages Wechat and in-Wechat “mini programs” to efficiently acquire students through social commerce. They mainly offer mobile-based large classes for hundreds of students interested in entry- and medium-level new technologies such as Python, AI, chatbot, and blockchain.
- Zhihu: Zhihu is a platform similar to Quora in the U.S., but with multiple paid features (including advertising, crowd-paid Q&As, and “knowledge influencers” live-streaming) and very high user engagement. Zhihu and other platforms that offer bite-size knowledge packs and life / work hacks have seen a strong tailwind over the last three years as mobile users are increasingly seeking useful and also fun content online.
Zhihu’s live-streaming page by theme and by latest session
So how are all these related to our investments in the U.S.? We will dive into this in a separate post that will follow soon. But in a nutshell, here are three themes we are particularly passionate about:
- First, just like China, the U.S. economy is changing dynamically and a large proportion of the jobs for children that are in elementary school today will not exist upon their graduation from high school; soft skills like customer success are in growing demand, as AI is displacing repetitive tasks. On this, we are looking deep and hard into white- and blue-collar workforce development. We want to partner up with companies that run a scalable, high-quality teaching model that empowers future workers and professionals.
- Second, on K-12, we continue betting on outstanding software solutions that solve an acute pain point 10x better than their competitors. Our current portfolio of companies such as Abl Schools (master scheduling), Swing Education (substitute teacher management), ClassWallet (school funding management), and Securly (cloud-based web filtering) speak louder and clearer about our thesis than plain words. The heightened interest about school software solutions from enterprise buyers and funders is exciting.
- Finally, on early-age development and consumer-facing instruction products, we’d love to meet with entrepreneurs who have a functional product and want to explore the Chinese market. Sinovation’s existing 25+ education companies in China form a strong ecosystem with established channels and communities. Once a non-Chinese product finds a market fit, the founding team would not need to reinvent the sales wheel if they are interested in working with our existing companies. Some of our growth- and later-stage companies such as VIPKID, 7day, and Gaosi Education are actively looking for partnerships.
Ping us if you want to have a chat:
Special thanks to Lijun Zhang, Christine Lang, Henry Hwang, and Chris Evdemon for contributing research and thoughts.
Sinovation Ventures education investment team and select Chinese founders