By continuing to browse this website, you consent to our use of cookies, as well as to our Terms of Use and Privacy Policy which provide additional information about how we process your data. This website uses cookies to enhance your user experience. Please read our Cookies Policy for more information on how we use cookies, as well as instructions on how to disable cookies. You may disable cookies through your internet browser settings, however this may result in some parts of the website not working properly for you.

© VIPKID

INSIGHTS / THE BIG PICTURE

Why is it so hard for Chinese edtech startups to make money in an alluring market?

China · Jul 29, 2019 · By Wang Xiao'e

Parents’ willingness to pay and investors’ enthusiasm are not enough to ensure a profitable future for edtechs that still lack a viable business model

In China, spending on education accounts for more than  25% of household expenditures (in urban households, the percentage can be as high as 42.2%), compared with 2.3% in the US. It comes as no surprise, then, that the edtech sector is popular among Chinese investors.

Over 50% of global investment in edtech flowed into Chinese startups in 2018. In June of that year, English tutoring app VIPKID raised US$500m in its Series D+ funding, the single largest venture round ever for an edtech startup. During the first three months of 2019, Chinese edtechs secured 131 investment deals, raising over US$1.86bn in total with a year-on-year increase of 2.44%.

“The market demand is always there and continues growing,” said Zhang Lijun, partner and executive director at Sinovation Ventures, which has invested in around 30 edtech startups, including VIPKID.

Regulatory issues

Despite the enthusiasm, the Chinese edtech market faces several major challenges. “It’s hard to build stickiness into edtech apps and turn students into paid users. Some firms choose to earn commission through built-in games, advertising or interfaces to gaming or other paid sites,” said an anonymous edtech app manager.

In October 2018, parents were unhappy to discover that 17zuoye’s homework app for primary school students came with built-in games and interfaces to online gaming sites. Three months later, in January 2019, the government ordered homework app HDzuoye and tutoring app Namibox to shut down operations and pay fines for containing pornographic content.

The edtech app regulation alarm bell has sounded. On December 28, 2018, China’s Education Ministry issued a notice to ban “harmful” apps featuring pornographic and violent content, online gaming and advertising, from primary and secondary schools.

“Uncensored educational apps will not be allowed in schools," the authority stressed. "Teachers are also forbidden to recommend apps to students without the approval of local education authorities." The notice also explicitly prohibited apps used on campuses from charging students. The reason behind the prohibition has not explained.

And edtech apps are not only being targeted for controversial advertising practices. In order to reduce students’ screen time, the education authority in Zhejiang province issued a notice in February banning teachers from assigning homework on apps, asking them to revert to paper. More provinces, including Guangdong, Fujian and Hubei, are following suit. 

A survey by the Ministry of Education shows that around 45.7% of elementary school children in China suffer from myopia. Being glued to electronic devices like smartphones is considered a major contributing factor.

Although the bans make it harder for edtech startups to reach users via schools, the Education Ministry’s move does appear to have been welcomed by the sector. “Without strong regulation, the edtech market would easily be spoiled by irresponsible companies,” said Lyu Tao, vice president of 17zuoye.

17zuoye has promised it will obtain approval from education authorities before promoting app use in schools. The startup also said its products would contain only proper content and not charge students in any way.

Still, a sought-after market

Despite the recent crackdowns by the government, the edtech market continues to flourish. Startups are rushing to create education apps that have been making their way onto parents’ smartphones. By the end of 2018, the number of education apps in the Apple App Store had reached 200,000, with 220m users from China.

In the wake of the mobile internet boom, apps now play a growing role in K-12 education. Smartphone in hand, children can use apps to learn almost anything, from foreign languages to coding, from reading to piano. Other apps increase teachers’ efficiency by enabling them to assign homework and keep track of students’ progress via mobile platforms.

The government, when not censuring edtech apps, has been boosting the sector. Since China’s Education Ministry included artificial intelligence in the curriculum standards for high schools in January 2018, more schools and offline training institutions have reached out to children’s coding education startups, helping them increase brand visibility among K-12 students. Codemao, a Shenzhen-based coding edtech, works with public schools to publish IT textbooks that have been used in several provinces, including Guangdong and Hubei.

The role edtech startups can play in addressing bigger problems in education has also been recognized by the Chinese government. “The application of internet-based teaching products can help address education inequality between rural and urban areas by providing kids, especially those in remote and poverty-stricken areas, with access to quality and fresh educational resources at low cost,” said Tang Min, a counselor of the China State Council.

In 2017, Zhang Tong Jia Yuan, an app aimed at parents of kindergarteners in small cities and rural areas, spent RMB 10m on training its 1m teacher users and subsidizing their salaries. These moves might help often poverty-stricken areas attract and retain high caliber teachers who tend to choose bigger cities with higher salaries.

While schools hope that digital means will increase the efficiency of both teachers and students, too many apps can also be a burden on students and their parents.

Wang, the father of a third grader in Beijing, complained to a reporter from the overseas edition of the People's Daily that, upon request from his child’s teachers, he had installed multiple apps on his phone.

Wang was asked to check homework from different subjects, including math, Chinese and English, and to inquire about exam results. He also had to install two apps for receiving school notices. Logging onto these apps daily can be time consuming.

Problematic business models

Edtech apps reach target users – students – either directly or via schools. Many language tutoring apps, such as VIPKID, opt for the former model. To grow its base, VIPKID gives current users 10 free lessons for every customer referral.

The method has worked well; 70% of new users are acquired through referrals. But, at the same time, the company still has to pay its teachers US$7-9 for every free 25-minute lesson, which generates hefty costs. The six-year-old unicorn earns nearly RMB 7bn in annual revenue but has yet to break even.

One of VIPKID’s investors told the Financial Times: “The business model does not really make sense. They are subsidising people to get market size, which is typical of these companies.”

Many other edtech startups, including homework apps Zuoyehezi and 17zuoye, children’s reading app Koala Reading and Zhang Tong Jia Yuan, all seek users through schools by convincing administrators to recommend their products to students. Koala Reading used to only hire marketers with close relationships to governmental authorities, especially in education. The startup has since stopped allowing ads on its app.

According to Fu Yu, investment manager at Legend Star, which invested in Zuoyehezi, building relationships with schools is the most effective way for edtech startups to reach K-12 students. Zuoyehezi’s app is currently used by 40m students at around 100,000 schools.

Successful user accumulation, however, is only the first step. Edtech operators still have other business model problems to solve after acquiring enough market share. Many lure schools and their students to their apps by offering free services, with the goal of developing derivative paid products that directly target end-users in the future.

Investors in the edtech sector have mentally prepared for the problem of short-term profitability. Sinovation Ventures’s Zhang Lijun said it’s acceptable if education startups in which the VC has invested do not earn a profit for five to 10 years.

Education is an investment in a better tomorrow, which means edtech startups and investors have to bet on the future as well. Most of them are remaining patient. “The future of edtech is based on sufficient data about how children learn, including their behavior before, during and after classes. Currently, we value startups with the ability to acquire such data,” Fu said.

Edited by Bernice Tang and Wendy Lovinger

Tags