EXCLUSIVE

The Asian Money Fueling US Edtech Investments

The Asian Money Fueling US Edtech Investments

You Can’t Make Movies Without China.” So states a recent Wall Street Journal report on the tens of billions of dollars that Chinese companies have poured on U.S. film and production studios. The trend is not unique to Hollywood; other American businesses—from appliance makers to luxury resorts—are similarly entangled with Asian money.

The U.S. education industry has not become so dependent (yet). But the dollars are trickling in. Last month ST Unitas, South Korea’s largest education business, acquired Princeton Review, the iconic U.S. test-prep provider. Yet education ministries across Asia recognize they need more than test-takers; they need students who can ideate, create and compete in a global economy. The “cultivation of students’ entrepreneurship and innovation capabilities and practical skills” was a priority in China’s 5-Year Plan for 2016-2020.

To adapt, many companies are investing domestically, particularly in China, where edtech companies raised more than $1.2 billion in 2016, according to Goldman Sachs. That’s more than three times the $380 million tally in 2014. It also surpasses the $1 billion that U.S. edtech startups raised last year.

Increasingly, Asian companies are also investing abroad to find fresh ideas and tools to bring to their local markets. “Investors, particularly in China, are looking across the Pacific to check out innovative tools and models that they haven’t explored or implemented back home,” observes Victor Hu, Global Head of Education Technology and Services at Goldman Sachs’ investment banking division.

Last year, at least 10 U.S.-based education startups raised capital from Asia. They’re not alone: Venture capital firms, too, are attracting eyeballs and wallets. Nearly every major U.S. edtech investor, including Fresco Capital, GSV Acceleration, Learn Capital, Owl Ventures, Reach Capital and Rethink Education, now count Asian limited partners among investors in their newest funds.

“In the majority of deals we review, there is interest from at least one Asian investor,” says Esteban Sosnik, a partner at Reach Capital.

Funding Deals for U.S. Edtech Companies With Asia-Based Investors

U.S.-Based Company Funding Round (Series) Year Participating Asian Investors
Authess $2.2 million (Seed) 2017 EduLab
Brightwheel $10 million (A) 2017 GGV Capital
ClassWallet $1.5 million (A) 2016 Sinovation Ventures
EnglishCentral $1.3 million (N/A) 2016 Kirihara Shoten K.K.
Enuma $4 million (A) 2015 TAL Education, Softbank Ventures Korea
Epic! $1.4 million (Seed) 2014 WI Harper Group
GotIt! $9 million (A) 2016 Fosun Group
Kaymbu $2 million (Seed) 2016 Sinovation Ventures
Knewton $52 million (F) 2016 TAL Education
KnowRe $6.8 million (A) 2014 SoftBank Ventures Korea, KTB Ventures
Listenwise $600K (Seed) 2016 EduLab
Minerva Project $70 million (B)
2014 TAL Education, Yongjin Group, ZhenFund
One Month $1.9 million (Seed) 2015 Sinovation Ventures
Ready4 $8 million (A) 2016 TAL Education, Yongjin Group, ZhenFund
Securly $3 million (Seed) 2013 Sinovation Ventures, ZhenFund
Swing Education $7.8 million (A) 2016 Sinovation Ventures
Volley Labs $2.3 million (Seed) 2016 TAL Education
Wonder Workshop $20 million (B) 2016 Sinovation Ventures, WI Harper Group
Source: EdSurge, Crunchbase

Where Business Booms

For decades, education businesses in Asia have thrived in the supplemental market, where parents pay for after-school services. For most students in this region, the school day is a two-act affair: there’s the state-run school, followed by the tutoring center. (The latter are better known as cram schools that go by “hagwon” in South Korea and “juku” in Japan.) Demand for these services run fierce; individual tutors report making as much as $8 million a year. (Tutoring often also operates hand-in-hand with overseas college admissions consulting businesses.)

The masochistic obsession with studying has deep roots. China boasts the longest continuous history of standardized testing, dating back to the imperial examinations starting in its second dynasty, in 206 BC. That history is not lost on investors. “Asian consumers and businesses alike are culturally prone to seeing education as an investment and not an expenditure,” Alison Baum, Managing Partner at Fresco Capital, wrote in an email to EdSurge. “As a result, existing education companies have built multi-million revenue businesses in the [business-to-consumer] market.”

An emerging giant in China is the TAL Education Group, which began as a solo tutoring operation in 2003 and has since grown into a publicly-traded empire, boasting $620 million in revenue in 2015 from a network of over 300 brick-and-mortar tutoring centers. Yet the company has grander ambitions. “One of our visions for the next 10 years is to transform from a tutoring company to an education company,” says Winnie Xie, TAL’s head of international investment and business development, “and that means going from an offline business to an online, blended model enabled by technology.”

Online tutoring services currently account for less than 5 percent of TAL’s revenues. But expect that to double soon as the company invests more in its online offerings. TAL has already directly funded a handful of U.S. edtech startups, including Enuma, Knewton, Minerva Project, Ready4 and Volley.

The technologies built by these companies span a wide gamut of buzzwords (adaptive learning, artificial intelligence, gamification) but will be integrated with TAL’s online offerings. In the past couple of years the company has hired hundreds of software engineers, from the likes of Chinese internet giants Alibaba, Baidu and Tencent, to make that happen.

Limited Partner, Global Reach

In addition to making direct investments, TAL is also a limited partner in Reach Capital. (Reach, in turn, has invested in 26 US-based edtech startups, including EdSurge).

This approach, says Goldman Sachs’ Victor Hu, offers “an efficient, relatively inexpensive way for overseas investors to access the U.S. market.” Smart investing demands a knowledge of local markets, and limited partners count on venture firms to identify, screen and support the most promising opportunities. (Investing as a limited partner may also be a safer bet, as one can mitigate the risk across a portfolio—rather than betting on individual startups.)

That’s the strategy for EduLab, the parent company of JIEM, a Japanese research and assessment provider. (It offers services in Japan that are the equivalent to what the Education Testing Services, or ETS, provides in the U.S.) The group was founded in 2015 to help Japan’s local education industry—a markedly insular, protected market—“learn from the most dynamic changes happening in the education business,” says Norihisa Wada, EduLab’s Chief Marketing Officer.

EduLab has invested in several U.S. investment funds: Fresco Capital, headquartered in Hong Kong and Menlo Park, Calif., and the Boston-based edtech accelerator, LearnLaunch. By investing through these groups, “I don’t have to go through the whole deal flow and that saves me time,” says Wada. Of utmost importance, he adds, is that “we know who’s operating these funds and that we feel comfortable they understand our needs.”

The strategy has helped EduLab source bigger deals. Two of its direct investments are graduates from the LearnLaunch program: Listenwise, a listening comprehension service that uses public radio programs as source materials, and Authess, a digital, performance-based assessment tool. (Other investments outside of the LearnLaunch community include CodeMonkey and language-learning tools, ELSA and SpeakingPal.)

Wada also admires the speed at which the U.S. edtech ecosystem forces startups to continuously test and iterate on their solutions, even when they’re not fully polished. That’s different from the Japanese culture, he says, where businesses spend years ensuring that new products are “perfect and everlasting”—only to discover that markets and consumer behaviors change quickly.

“These days time is crucial, and you don’t want to wait three years to see what works,” states Wada. “That is the reason why I look to the U.S. market.”

Disrupting Tradition

Local market needs drive international investment decisions. Japan, which will host the 2020 Summer Olympics, has made it a priority to boost their citizen’s language skills. That’s one of the factors behind EduLab’s deal with Listenwise. Similarly for TAL, investment decisions are made with an eye on a company’s “chemistry with the Chinese market,” says Winnie Xie.

Not every product will be imported immediately, however. In the Minerva Project, TAL is much more interested in the technology that allows the company to run online, asynchronous seminars (dubbed “The Active Learning Forum”) than launching new universities.

Investing is also a learning opportunity, adds Wada, who wants to know “which parts of a startup technology’s success can happen regardless of cultural or language factors, and can be applied across the world.”

The Asian market continues to be an attractive market for consumer-oriented education technology builders. Asian households spend upwards of 15 percent of their income for supplemental education services, versus the measly 2 percent spent by American counterparts, according to Michael Milken, a financier and philanthropist.

The tides for also changing for what they want to buy. In China, families are looking beyond tutoring and test prep “for things that they think are critical for their children’s futures, such as STEM and robotics,” observes Angela Bao, Senior Investment Manager at Sinovation Ventures, a venture firm founded in 2009 by Google’s former chief in China. It has invested roughly $42 million across 40 U.S. startups, of which a quarter are in edtech. (Sinovation also funds companies in other technology sectors including robotics and Big Data.) More deals are on the way, as it just closed on two new funds—one each for U.S. and Chinese companies—totalling $675 million.

Big Funding Rounds to Chinese Edtech Companies, 2016-Present

Company Funding (USD) Year
Babytree $437 million 2016
Makeblock $30 million 2017
VIPKID $100 million 2016
Xingshuai Teach $46 million 2016
Xuebajun $100 million 2017
Xuele $200 million 2016
Yuanfudao $40 million 2016
Zhihu $100 million 2017
Zuoyebang $60 million 2016
Source: Goldman Sachs

Companies that once thrived on English and tutoring services are looking to diversify their offerings. Sinovation’s portfolio of U.S. edtech startups include Wonder Workshop, which develops robot toys that teach kids how to code. The San Mateo, Calif.-based company is gaining traction in China through local companies that create specialized curriculum and market, distribute and train users in the product.

Across Asia, investors and companies are “looking for more diverse products that can inspire new innovations in the local edtech ecosystems,” says Bao. Or, at the very least, spark similar ideas. After all, every major U.S. tech company has a Chinese analog: for every Amazon there’s an Alibaba; for every Google, a Baidu.

“I see the same thing happening in the edtech space,” predicts Victor Hu of Goldman Sachs. Will there be a business that looks like Age of Learning or Pluralsight, two U.S. edtech companies with global footprints that each raised more than $100 million of venture capital? His prediction: “Yes there will be.”

Tony Wan (@tonywan) is Managing Editor at EdSurge. He was named to Forbes’ “30 Under 30” list in Education in 2014.

Sarah K. Lee contributed to the report.

Disclosure: Learn Capital, Catamount Ventures (a sister of Owl Ventures), and Reach Capital are investors in EdSurge.

STAY UP TO DATE ON EDTECH.
News, research, and opportunities - sent weekly.