China online education player Zhangmen targets US listing

Genesis Capital is the largest shareholder, with 15.8%, having led Zhangmen’s $120 million Series D round with Warburg Pincus in 2017 and re-upped in a $350 million Series E two years later. The Series E was led by China Investment Corporation, CMC Group, and CICC Capital. Warburg Pincus, CMC, SoftBank Vision Fund 2, and China Renaissance own 10.5%, 6.3%, 5.8%, and 5.5%, respectively.

Other investors in Zhangmen include Qingsong Fund, Shunwei Capital, Fortune Venture Capital, StarVC, Haitong International Securities, and Sofina, AVCJ Research’s records show. Qingsong, a VC firm led by Tencent co-founder Xiaosong Liu, provided RMB20 million ($3.1 million) in seed funding in 2014, not long after Zhangmen was established. It completed a partial exit last year with an 80x return.

Online K-12 education providers in China saw a surge in demand after schools were suspended last year in response to COVID-19. Expectations of continued robust growth enabled market leaders to raise substantial funding. Much of this has focused on large-class platforms such as Yuanfudao and Zuoyebang. In the online K-12 space, Yuanfudao, Zuoyebang, US-listed GSX TechEdu, and online units under TAL Education Group and New Oriental Education & Technology control about 80% of the market.

Consolidation has also been driven by rising customer acquisition costs. Online platforms spent massively in 2020 on marketing, offering free gifts and heavily discounted course fees in the hope of creating stickiness and converting customers to regular price courses. Various smaller operators have gone out of business, while larger players are incurring heavy losses.

Zhangmen is loss-making, but the company claims in its prospectus that the personalized and small-class business model is working. Net revenue rose 50.6% year-on-year to RMB4.02 billion ($613.3 million) in 2020, while the net loss narrowed to RMB1.01 billion from RMB1.5 billion. Sales and marketing expenses as a percentage of net revenue fell from 81.4% in 2019 to 64.1% in 2020.

Citing a Frost & Sullivan report, Zhangmen claims to have been the largest online K-12 one-on-one after-school tutoring service provider in China by gross billings since 2017, with a 31.9% market share in 2020, more than the rest of the top 10 players combined. The retention rate for its flagship product, Zhangmen One-on-One, was over 80%, with more than half the gross billings for first-time paid student enrollments generated by referrals.

A small-class product was introduced in the third quarter of 2020 and Zhangmen ended the year as the third-largest operator in this segment. Classes typically have no more than 25 students who are grouped based on geographical location and then assigned teachers familiar with the curriculum and examination requirements in their specific areas.

Zhangmen has digitalized and centralized key operations and functions, including student acquisition and conversion, curriculum development, and teacher management. The aim is to realize efficiencies with scale, while offering consistency across different products. In the first quarter of 2021, 69% of students enrolled in the Zhangmen Kids program had continued to Zhangmen One-to-One.

Paid student enrollments for one-on-one tuition reached 544,813 in 2020, up 43.2% year-on-year. The first quarter 2021 total was 133,601, up 52.2%. In the small class segment, there were 294,397 enrollments in the first quarter, compared to 91,260 in the third quarter of 2020.

Gross billings for online K-12 after-school education in China came to RMB85.5 billion in 2020 and are expected to hit RMB414 billion in 2025. Over the same period, the one-to-one segment is projected to grow from RMB14.7 billion to RMB51.5 billion and the small-class segment from RMB2.5 billion to RMB81 billion.

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• Topics
• Greater China
• Technology
• Consumer
• IPO
• China
• Education
• Warburg Pincus Asia
• China Media Capital
• CIC
• CICC
• Softbank
• Sofina
• Qingsong Fund
• Shunwei Capital Partners