E-learning set to 'take a big leap forward'

"The epidemic is directly driving China's online education industry to take a big leap forward. It has now become a large-scale education experiment," said Zhu Yongxin, deputy secretary-general of the National Committee of the Chinese People's Political Consultative Conference and vice-chairman of the Central Committee of the China Association for Promoting Democracy.

According to Yan Pengcheng, director of the Department of National Economy at the National Development and Reform Commission, the domestic consumption market has been showing an uptrend since the second half of last year, and online consumption, a key segment of it, has been developing rapidly.

"More efforts will be made to further foster new consumption models and formats, such as online education, 'New Retail', internet-based healthcare, digitalized tourism and smart sports, so as to promote the integration of online and offline channels," Yan said.

"China will also strive to increase the purchasing power of consumers, improve the consumption environment and create more consumption growth engines."

Buoyed by the government's policies, Zuoyebang, China's largest online education startup in terms of users, raised $1.6 billion in December in its series E-plus round of funding led by a slew of renowned investors that included Alibaba Group, Tiger Global, Softbank Vision Fund, Sequoia Capital China and FountainVest Partners.

The funding round followed that of Yuanfudao. The education startup raised $2.2 billion in two rounds in October. Such capital infusions are a huge contrast to less than $500 million that top education startups could barely muster a year ago.

"Education firms' funding rounds have become fewer, but the average amount of money raised in a single funding round has grown larger than expected," said Jiang Kaiyang, director of investment bank Taihecap.

"There is extreme differentiation in financing in the education sector. While leading education firms receive funding easily, smaller ones are facing difficulty."

In 2019, there were 580 cases of financing to the tune of 16 billion yuan. The number of financing cases shrunk to 305 but 50 billion yuan was invested by early December, he said. "The average amount in a funding round rose about six times."

Agreed Chai Mingyi, associate vice-president of New Oriental Education and Technology Group. "It reflected a change in attitude in the education sector where investors no longer chase short-term benefits. They prefer gradual investments for long-term value."

Concurred Shen Wei, executive investment director of US investment firm Warburg Pincus. "This year, we will continue to increase investments in some follow-up projects, which are select leading companies in the education field."

Shen said two aspects characterize the education industry this year: the number of larger fund infusions has risen; and leading companies receive funds more easily than in the past.

"Investors are concentrating on top companies in the field as they believe these companies have a competitive edge and will generate higher returns in the long term," he said.

For Warburg Pincus, investments in the education field "cannot blindly chase the speed", as such an approach may create unhealthy conditions and potential risks. Instead, patience is a virtue.

"It's not appropriate to use GMV, or gross merchandise volume, an indicator that the e-commerce sector usually uses to evaluate sales, to judge companies in the education industry," said Zhai Jia, managing director at Sequoia Capital China, a venture capital firm.

"Therefore, when we offer post-investment services to education companies, we pay more attention to the quality of their products and teaching and look more for the actual effect, experience and word-of-mouth on products."

Not just startups, even established players such as the Nasdaq-listed TAL Education Group are the apple of the investors' eye these days. TAL said it is raising around $3.3 billion through a private placement. Of the total, Silver Lake will contribute $2.3 billion for convertible notes while the rest $1 billion will be raised by issuing new class A common shares.

"The capital market supported online education companies as investors are optimistic about the development prospects of the sector, which is essentially their estimate of the scale of a company in the field," said Zhou Feng, CEO of Net-Ease Youdao, the education unit of NetEase Inc.

"It means that the online education sector is far from reaching the zero-sum stage. It is still an incremental market and has great room for growth," he said.

Zero-sum is a situation in which one person's gain is equivalent to another's loss, so that the net change in wealth or benefit is zero.

As the online education sector continues to boom in China, industry experts doubt if excessive advertising costs of acquiring a new user could prove a damper. They are afraid if the sector might prove the next fiasco after the bike-sharing industry's meltdown.

At present, the customer acquisition channels among online education institutions overlap a lot and their ads are placed in the same place, so the effect of advertising is relatively poor, said Liu Yaokun, head of education industry research at UBS Securities.

On a yearly basis, marketing costs of online education firms rose sharply in September and October, said a top executive of a leading online startup who sought anonymity.

"The cost of acquiring customers for low-priced courses may have risen by 20 percent to 30 percent during the second half of last year," the executive said.

Yu Minhong, chairman of New Oriental, said: "All online education companies are currently facing two difficulties－the decline in customer acquisition costs and the increase in continuation rates.

"A renewal rate of 80 percent is a 'lifeline' for online education startups. Chinese online education companies are still exploring how to balance customer acquisition costs so as to form a closed business loop," he said.