Deal focus: VCs see profits as VIPKid goes young

China's online English language education leaders New Oriental and TAL went public in the US in 2006 and 2010, respectively, and have both charted increased profit nearly every year since then. Beijing-based counterpart 51Talk followed in their footsteps with a US float in 2016 but has yet to post a net gain. 

Investors will be keen to assess the nature of this divergence as IPO speculation begins to percolate around the segment's latest darling, VIPKid, following its $500 million Series D-plus round. For many, the essential takeaway is that 51Talk's core business has historically been adult education, while New Oriental and TAL have focused strongly on the K-12 space, where demand for native speakers means higher fees and pupil attention spans are surprisingly longer. 

"English tuition in China is a big market. When we started looking at this sector, we saw a lot of companies that taught adults, but we didn't think that think they were going to be very profitable business models because after a few months, adult students usually think it's too hard and quit," says Lu Lin, a partner at Northern Light Venture Capital. "With kids it's different because it's more interesting for them. Their parents want them to speak English and kids usually obey what parents ask."

Northern Light first invested VIPKid in 2015 alongside Sequoia Capital, Matrix Partners China, and Sinovation Ventures. Sequoia is co-leading the latest round with Tencent Holdings, Yunfeng Capital, and Coatue Management. It is said to be the largest educational technology funding round ever raised globally.

VIPKid, which connects North American teachers with a mostly Chinese K-12 user base, will use the fresh capital to expand its content offering, grow its network of instructors, and experiment with incorporating artificial intelligence into its business model. The current offering includes real-time one-to-one English immersion learning programs serving some 40,000 teachers and 300,000 children. 

M&A is considered possible but not critical to pre-IPO growth, as is the case for any major marketing blitz –  especially considering that more than 65% of enrollments are now coming from existing parent referrals. The combination of this self-sustainability and a growing VC war chest has afforded the company an uncommon optionality for its later-stage growth. While many competitors pursue scale by burning through easily won revenues, VIPKid appears set to plot a steadier course. 

"Since we invested in VIPKid has been cash flow has been positive, so people ask, why does the company keep raising new rounds," Lin explains. "A lot of education companies use their tuition fees to invest in things like new acquisitions or developing some other risky business model, and that can lead to problems because they can't cover the costs of their basic services. That's the reason VIPKid is raising venture capital – and that's why they have more choices for their expansion."   

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• Topics
• Greater China
• Expansion
• Technology
• Consumer
• China
• Education
• TMT
• Northern Light Venture Capital
• Sequoia Capital
• Tencent
• Yunfeng Capital