China’s expected clampdown on the Edtech sector

Out of the many diktats of the Chinese Govt., the latest one says – If you’re an educator, you shouldn’t be making profits.

The troubling news that the Chinese government may force domestic tutoring-focused companies or Edtech platforms to go nonprofit has left many big investors scarred. The value of companies like New Oriental Education & Technology Group and TAL Education is on the verge of collapsing in light of the news. New Oriental’s Hong Kong-listed shares fell 44.22% and NYSE-shares of TAL fell 51.75% in pre-market trading.

However, this news may not come as a big surprise. China has been clamouring down on many sectors now in a bid to exert more control. With its top priority of boosting a declining birth rate, making education non-profit can definitely fuel population growth. The news is also a follow-up to prior regulatory action in the edtech sector from earlier in the year.

With the huge success of edtech startups in China, this news impacts not only public companies but also a host of private, venture-backed companies. GLOBAL investors like Tiger Global Management, GIC, Warburg Pincus, SoftBank’s Vision Fund and Temasek Holdings have invested billions of dollars into the US$100 billion private tutoring and online education sector.

Yuanfudao, a live tutoring, online Q&A arm and a math-problem-checking startup was valued at US$ 15.5 billion last year and Zuoyebang which offers online courses, live lessons and homework help for kindergarten to 12th-grade students had raised $1.6 billion in a single round last year. It is hard to uncertain the impact that these harsh curbs could have on venture-backed edtech startups.  But it will surely wipe out an enormous chunk of the billions of dollars that private equity and venture capital funds have staked on the edtech market.

As Beijing published a plethora of regulations on Saturday that together threaten to upend the sector, the foreign investors might see themselves deep underwater in the coming months. The backers also won’t have a way to exit if they need to cash out, as the startups will no longer have the ability to go public.

Some of the major education companies in China said that they would comply with the new rules and support the decisions of the party. TAL said that it would “fully implement the party’s education policy and cultivate people’s talents with all-around development of morality, intelligence and physical health”.

The Chinese Govt. believes that – “the out-of-school education industry has been severely hijacked by capital and has broken the nature of education as welfare,” as per an article posted on the site of the Ministry of Education.

China’s online education sector had been expected to generate 491 billion yuan in revenue by 2024. Edtech platforms had attracted about 103 billion yuan of capital in 2020 alone. The five biggest companies accounted for 80 per cent of the total funding raised. The IPO plans of many highly valued startups have come crashing down, shrinking their valuations.

It is still unclear how China’s clampdown will turn out. Thinking optimistically, it is unlikely that the govt. will annihilate a billion-dollar industry that plays an essential role in building China’s economy and grooming its workforce. For the time being, it is best for investors to keep looking for opportunities to rebuild their positions while treading cautiously.

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Komal writes about the startup ecosystem on VCBay. She is an Economics Hons. graduate from Miranda House, Delhi University, and is passionate about the world of entrepreneurship and finance.


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