Edtech Globalization and China: A Pause in Venture Funding

Shifting Global Investments in Edtech

U.S.-based investors in the educational technology (edtech) sector are expanding their reach internationally. However, recent regulatory actions in China have created uncertainty.

Specifically, new rules requiring K-12 tutoring companies in China to operate as nonprofits have dampened investor enthusiasm for the region.

China's Impact on Edtech Investment

Previously, China was frequently referenced by U.S. investors as a demonstration of the potential for direct-to-consumer edtech businesses within the K-12 space.

The achievements of Chinese edtech companies were often cited as a predictor for growth in the U.S. market, particularly as parent adoption of these services increased during the pandemic.

However, legislation enacted by the Chinese government on Saturday aims to reduce the financial strain of educational services on families, impacting venture capital-backed startups.

Responses to these changes have varied. Some founders have increased their personal investments in Chinese edtech companies, viewing the current challenges as temporary.

Conversely, others have expressed relief at having divested their Chinese holdings recently.

The Rise of India as a New Focus

Currently, there is a growing trend among investors to explore India as the next key market for testing and expanding edtech ventures.

This shift suggests a re-evaluation of geographic priorities within the global edtech investment landscape.

Investors are actively seeking new opportunities and assessing the potential for growth in emerging markets.

The focus on India highlights the dynamic nature of the edtech sector and the influence of regulatory environments on investment decisions.

Shifting Investment Strategies in EdTech Following Chinese Regulations

Recent reports from Reuters detail significant regulatory changes in China concerning for-profit tutoring services. These changes include restrictions on core subject tutoring, limitations on operating hours, and prohibitions against raising capital through initial public offerings (IPOs) or advertising. Consequently, shares of Chinese edtech companies have experienced substantial declines; for example, TAL Education saw its stock price fall to $4.47 on Monday, a nearly 80% decrease from its previous value of $20.52.

Owl Ventures, managing a substantial $585 million edtech fund, has been actively pursuing global investment opportunities. Investor Ian Chiu previously identified China’s K-12 tutoring sector as the “largest market right now in education” last October.

Chiu emphasized the presence of a “massive population” coupled with a “high willingness to spend” across all cities within China at that time. This led to the firm’s investment in Lele Ketang, a K-12 tutoring startup, which was publicly announced this year despite being finalized in 2018.

The timing of the announcement suggests a deliberate approach, distancing the investment from the period of increasing regulatory uncertainty. The impact of the new regulations – which mandate that existing tutoring companies transition to nonprofit status and prohibit the establishment of new for-profit entities – on Lele Ketang remains to be seen.

However, Owl Ventures appears to be moderating its investment pace in China, having made only two investments to date. The firm is now prioritizing opportunities in India, Europe, Latin America, and Africa for future capital deployment.

Emerge Education, with 80% of its portfolio concentrated in Europe and the remainder in the United States, is considering a potential reevaluation of the Chinese market in two to three years. Lingumi, one of its portfolio companies offering courses in China, is expected to remain unaffected by the new regulations due to its focus on machine-based tutoring rather than traditional one-on-one instruction.

Learn Capital finds itself in a different position, holding a stake in VIPKid, a company likely to be adversely affected by the regulatory changes. Reports indicate that VIPKid has already postponed its planned U.S. public market listing, despite having engaged investment banks. Learn Capital has not yet provided a response to inquiries regarding this matter.

Reach Capital has refrained from investing in China due to perceived investment risks. Partner Jennifer Carolan also cited a misalignment of values within the Chinese edtech landscape, noting a greater emphasis on summative assessment and tutoring services, which Reach believes are diminishing in relevance compared to the emerging AI-driven future of education.

Deborah Quazzo, managing partner at GSV Ventures – an investor in edtech companies such as MasterClass, Guild Education, and ClassDojo – stated that her firm has made a “concerted decision” to avoid investing in China.

“We didn’t think we were smart enough to navigate the complexities, and events have proven that assessment to be accurate,” she explained. GSV Ventures is now directing its attention towards alternative markets.

Quazzo indicated that GSV’s upcoming fund may allocate as much as half of its capital to international investments, with a significant portion focused on startups based in India. Fund II saw 22 investments in the U.S., seven in India, and one each in South Africa, Croatia, Jordan, and Indonesia – a notable shift from its first fund’s limited international exposure.

The potential of the Indian edtech market is generating considerable excitement. Bangalore-based Byju’s has emerged as one of the world’s most highly valued edtech startups and is actively pursuing consolidation within the industry. Quazzo highlighted the cultural prioritization of education in India, mirroring that of China, and the potential for substantial market growth driven by the nation’s increasing GDP per capita.

Investor sentiment, corroborated by portfolio reviews, confirms a growing focus on India. Industry estimates project that India’s edtech sector could reach $30 billion within the next decade, with Indian edtech companies having raised $2.2 billion in 2020 alone.

One investor commented that while Chinese parents highly value education, making it central to family life, the innovative momentum within China’s edtech sector is unlikely to be halted. He stated, “It is nearly impossible to stop the momentum of innovation seen within edtech and China over the last few years, especially when excellence in education is part of the community’s culture.”