China’s Online Tutor Startup VIPKid Is Seeking $500 Million at $6 Billion Valuation

China’s online English tutor VIPKid is seeking to raise between $400 million to $500 million at a pre-money valuation of $6 billion, according to people familiar with the matter.

If successful, the financing would nearly double the education startup’s value from $3.5 billion just a year ago, after it said it raised about $500 million. The company’s backers include Coatue Management, Tencent, Sequoia Capital and Sinovation Ventures.

The Takeaway
Chinese online tutor startup VIPKid is seeking as much as $500 million as revenue hit 2.2 billion yuan and net losses hit 1.5 billion yuan. It predicts it will turn profitable by 2022.

A spokeswoman for VIPKid didn’t respond to a request for comment.

Online education is a hot investment area in China thanks to a growing middle class whose parents are anxious to improve their children’s chances to succeed. Venture capitalists and China’s internet giants have backed companies in the sector vying for a slice of a market projected to grow to about $79 billion by 2022, according to a report by data provider iResearch. An estimated 144 million people took online courses last year, according to the China Internet Network Information Center, a government body.

Founded by Cindy Mi in 2013, VIPKid connects Chinese children with mostly American tutors, including many U.S. and Canadian teachers seeking to earn extra income through the platform. The company says it has signed up 630,000 students and 60,000 teachers. In August, Ms. Mi shared a stage in Dallas with former First Lady Laura Bush and the local mayor for a regional conference of teachers. Texas has about 7,000 teachers on VIPKid.

Financial data reviewed by The Information shows revenue has been growing strongly, but so have losses.

For the fiscal year ending March 2018, VIPKid’s revenue grew to 2.2 billion yuan ($330 million) from 376 million yuan in the previous year, according to the data. At the same time, net losses widened to 1.5 billion yuan in fiscal 2018 up from 459 million yuan the previous year.

Both revenue and losses appear to be on track to continue at the same pace. In the first ten months of 2018, the company’s revenue grew to 3 billion yuan, with net losses already at 2.2 billion yuan.  

Much of VIPKid’s costs come from recruiting new students by reaching out to their parents, which is still done largely through phone sales and offline recruiting events at venues such as schools. In fiscal 2018, the company spent 1.2 billion yuan acquiring new users, up from 345 million yuan the previous year. The company estimates that new user acquisition costs will grow to 2.1 billion yuan in fiscal 2019.

Still, VIPKid has told the investors that it will turn profitable by 2022 when it predicts it will have 3 million paying students.  

In November, the government announced online education would be regulated the same way as brick-and-mortar tutoring services, including a requirement to post all teachers’ credentials. They would also be barred from pre-selling courses for more than three-months in advance. Some companies have been bundling packages of up to two years in advance.

Tutoring in China is a crowded market, with veterans like New York-listed New Oriental Education and Technology Group competing against a crop of newcomers such as TAL Education Group or online education startups like iTutor Group and VIPKid.

In November, The Information reported that China’s social network and gaming giant Tencent would invest a further $250 million in online education startup Yuanfudao at a valuation of $2.8 billion, while SoftBank was also eying investments in the sector.

Yunan Zhang is a reporter covering tech in Asia, from ByteDance and Didi Chuxing to early startups and venture capital. She writes a bi-weekly column for Chinese readers. She is based in Hong Kong and can be found on Twitter at @Yunanzhang_.