The coronavirus outbreak in China has delayed the opening of the school spring term across the country. But rather than letting their Children watch TV, parents are required to supervise them while they take online classes instead.
The rebound in online education has reignited the attention from investors it seems. On February 18, Whale English Elite Education announced the completion a Rmb100 million ($14 million) Series B fundraising. Sino-Ocean Capital led the fundraising, while Hike Capital and Fresh Capital participated in the round. China TH Capital was the financial advisor on the deal.
This is the tenth investment in Chinese online education to complete in the past month, and a clear sign of a change in sentiment triggered by the impact of the coronavirus outbreak. Although a growing sector, investors had started to shy away from it as supply started to outweigh demand.
And not everyone is convinced the recent surge will change the underlying dynamic. “Investors are still trying to find the investment logic,” Sun Jian, managing director of Huaxing Growth Capital Fund told FinanceAsia. “But I am more concerned about the [future] recession of online education after the boom during this virus outbreak.”
I’M BORED, SIR
Online education has been hailed as a perfect solution to supplementing existing models of teaching. In the past ten years, it has grown into a multi-billion-dollar business with around 200 million users in China alone, according to the China Internet Information Center.
However, 2019 proved a tough year for the sector. According to iResearch, user growth rate dropped to 10.6% in September 2019, the lowest since 2017, a mark of the challenges online education companies face maintaining engagement.
At the same time, the cost of consumer acquisition for online education platforms increased. Sun said online education platforms in China invested a total of Rmb5 billion ($713 million) on advertising in the summer of 2019 to promote their offerings.
Investors started getting jittery at the misbalance between higher operating costs and lower penetration rates. Investment volumes into the sector decreased consecutively from July 2019 to September, shrinking from Rmb1.95 billion to only Rmb200 million, according to iResearch.
But with the outbreak of the coronavirus during Chinese New Year, the Chinese government delayed the start of school and subsequently promoted the use of online education to fill the gap. Previously, Chinese teachers working in state-run schools were not allowed to join online education platforms, however, many are doing just that as part of the new government push.
As an investor, Sun sees this shift in policy as broadly positive for the online education sector in China – potentially providing a wealth of highly skilled teachers to the frontline. A major headache for these platforms has been the inability to source teachers to match the surge in student numbers. As such many platforms reduced hiring standards just to hit demand.
“A poorer online teaching experience will affect users’ willingness to stay on these platforms, and user retention will decrease afterwards,” said Sun. “Online education platforms which don’t perform well during the virus outbreak may not survive.”
This has led some investors to assume that while online education is here to stay, only those services with the highest quality of teaching will make it through. “The leading online education platforms will get bigger in 2020 while other smaller platforms will struggle to survive,” said Jiang Kaiyang, vice president of China TH Capital.
