Edtech’s venture-backed globalization pauses at China

Edtech investors based in the U.S. are increasingly going global, but recent regulatory crackdowns in China, which instructed local K-12 tutoring startups to go nonprofit, have led to a chill among check-writers looking at the country.

When I first started reporting on edtech over a year ago, U.S.-based investors often cited China as validation of the opportunity for direct-to-consumer businesses in the K-12 world. The success of Chinese edtech was used to predict the surge of U.S.-based consumer edtech, which saw parent adoption surge during the pandemic.

On Saturday, the Chinese government rolled out legislation aimed at easing the financial burden of education services on families, at the cost of venture-backed startups.

On Saturday, however, the Chinese government rolled out legislation aimed at easing the financial burden of education services on families, at the cost of venture-backed startups. The reactions were mixed: One founder told me they doubled their personal stake in every publicly traded Chinese edtech startup, considering the present issues a blip in the timeline, but another told me that they were glad they sold their investments in China just last month.

And everyone seems to be looking to India as the next geographic testing ground.

“We didn’t think we were smart enough”

Reuters reported last week that China is barring for-profit tutoring platforms on core school subjects. The country has also introduced time caps and tutoring curfews, and notably, forbade the platforms from raising capital through IPOs as well as advertising their programs. The news sent Chinese edtech stocks tumbling — NYSE-listed TAL Education’s shares, for instance, closed at $4.47 per share on Monday, down nearly 80% from $20.52 per share last Thursday before the news broke.

Owl Ventures, which has one of the largest edtech-focused funds at $585 million, has been actively investing globally over the past few years. Investor Ian Chiu said last October that he views K-12 tutoring in China as “the biggest market right now in education.”

“There’s a massive population, high willingness to spend no matter what city you live in,” Chiu said at the time. He then announced Lele Ketang, a K-12 tutoring startup, as the firm’s first investment in the country.

Months later, he noticed volatility among the stocks of both U.S. companies and Chinese edtech companies. Chiu said that Owl Ventures invested in Lele Ketang in 2018, but announced it only this year — a lag that shows the deal wasn’t made during this tense time. It is unclear how Lele Ketang will be impacted by the new regulations, which also stipulate that no new after-school tutoring companies can be founded and existing after-school tutoring companies must become nonprofits.

Still, it doesn’t look like Owl is rushing to throw millions more into the country. It has made two investments in China to date, and is focusing on India, Europe, Latin America and Africa for future investments.

VC fund Emerge Education, which has 80% of its investments in Europe and the rest in the United States, says that it may look at China more closely in two to three years, but not right now. One of its investments, Lingumi, which offers courses in China, won’t be affected by the proposed regulations. Emerge Education founder Jan Lynn-Matern said Lingumi could in fact stand to benefit from the changes, as it provides machine-based tutoring as opposed to the now controversial 1:1 tutoring.

Learn Capital is in a different boat. The firm has a stake in VIPKid, a startup poised to be negatively impacted by the new rules. The Tencent-backed startup has reportedly already shelved its U.S. public market listing even after hiring bankers. Learn did not respond to requests for comment.

Reach Capital has not invested in China due to investment risk, per partner Jennifer Carolan. She added that there is a lack of alignment in terms of values in edtech, as companies there are more focused on summative assessment and tutoring, and Reach believes those services are declining and not representative of the AI-powered future of education.

GSV Ventures’ managing partner Deborah Quazzo said her firm, which has bet on edtech unicorns like MasterClass, Guild Education and ClassDojo, has made a “concerted decision” to not invest in China.

“We didn’t think we were smart enough to navigate, and that has proved to definitely be true,” she said. Instead, GSV is looking elsewhere.

Quazzo said GSV’s next fund, which is currently being raised, could end up being half-international, and the majority of it will be dedicated to India-based startups. GSV’s Fund II made 22 investments in the United States, seven in India, and one each in South Africa, Croatia, Jordan and Indonesia — a stark departure from its first fund, which had one international investment.

The energy for India edtech is palpable. Bangalore-based Byju’s is one of the most valuable edtech startups in the world, and it’s a mass consolidator, too. Quazzo noted that, culturally, India prioritizes education similarly to China, and the nation’s rising GDP per capita could make for a massive market down the road.

Conversations with other investors — as well as quick scans of portfolio pages — show that Quazzo isn’t alone in having all eyes on India. One report estimates that India’s edtech industry will hit $30 billion in the next decade, and another estimates that Indian edtech raised $2.2 billion in 2020.

Applyboard co-founder Martin Basiri believes the overall cultural focus on education in China will enable top edtech startups to prosper there over the long term, regardless of the circumstances today.

“All parents care about their children’s education, but Chinese parents make education a cornerstone of their family life … it’s a fundamental part of their culture,” he said. “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.”