Private equity investment in China’s online education sector has reached more than RMB 38.8 billion this year so far, 2.5 times that of the same period in 2019.
A panel of industry experts shared their insights on the booming sector, including Nelson Zhao, founder of VM Capital and former general manager of New Oriental Education’s investment arm; Yu Dachuan, founder and president of VIPThink, which offers live online math courses in small groups; and Ariel Zeng, founder and CEO of ViaX Online Education, which helps Chinese students apply to international universities.
A multi-trillion yuan market is yet to consolidate
China’s education market will reach RMB 7.56 trillion (USD 1.15 trillion) in 2020, with RMB 4.81 trillion (USD 736 billion) coming from the state-backed public sector and RMB 2.75 trillion (USD 421 billion) coming from the private sector, representing an increase of 9% year-on-year, VM Capital’s Nelson Zhao shared during the panel discussion, citing Frost & Sullivan.
He added that the private sector can grow to RMB 7 trillion in about ten years, at a compound annualized growth rate of 10%.
The major growth drivers behind China’s massive education market include the world’s largest student population, a growing middle class with increasing willingness to pay, technological advancement, capital inflow, and government support, Zhao said.
While the market is large, leaders in the private sector together generate about RMB 200 billion (USD 31 billion) in combined revenue, only accounting for around 10% of the market, indicating the sector is still fragmented, Zhao said, without specifying which companies are leaders in the vertical.
Currently, consumers in China’s urban centers are overloaded with a wide array of education services without clear ways of determining each platform’s quality, while in smaller cities and rural areas, there is still a shortage of options, said Zhao. He said companies need to find their niche market to survive.
Managing user acquisition
For Yu Dachuan, founder and president of VIPThink, the best way to acquire users is not through advertisement, but through word-of-mouth recommendations. The founder said he dismissed the company’s advertisement team, yet the company’s client retention rate and the referral rate are both above 80%.
“Serving an old customer well is better than developing ten new clients,” Yu said. Advertisements would only burn cash without yielding a meaningful payoff, the founder believes.
This year, VIPThink closed its USD 180 million Series C round led by SoftBank and acquired Magic Ears, which offers online English courses in small groups. The company’s livestreaming courses are now attended by around 250,000 students in more than 300 cities in 50 countries.
While the penetration rate of online education was relatively low before the COVID-19 outbreak in China, adoption rapidly increased when schools were shut. However, the penetration rate has decreased since the viral outbreak has largely been brought under control in China, according to VM Capital’s Zhao.
He predicted online education’s penetration rate will go from the current 30–40% to surpass 50% in five to ten years. Moving forward, an exclusively online or offline model might not be viable as most educations firms will adopt a hybrid approach, he added.
China’s education market is broad, with many sub-sectors. The market’s surge in traffic and investor interest as a result of COVID-19 was mainly related to K-12 education in China. But for overseas academic study, things are different, said Ariel Zeng, founder and CEO of ViaX Online Education.
While there might not be a drastic drop in the number of students who go overseas to study, there will be a decrease. As a result, education service providers need to adapt their strategies to incorporate elements of international education, allowing students who do not want to physically go abroad to still enjoy some benefits of overseas education within their home country, she said.