China-based ed-tech closed 257 deals and raised around $9.75 billion in 2020
Under the long shadow cast by the capital winter since mid-2018 triggered by the deleveraging of financial markets and overall economic downturn, and as the educational policy has become more stringent leading to more potential investment risks, in 2020, the number of financing deals has shrunk by 17% compared to 2019.
According to statistics from Duojing Capital, there were 257 (excluding IPOs and M&A) financing deals closed by China-based EdTech ventures, a year-on-year decrease of nearly 17% and a record low in the past five years. But the total amount of financing has soared to around $9.75 billion, which was primarily due to several large-sum transactions in the second half of the year. This week, JMDedu will help our overseas readers deep dive into the education market by spotting out the sub-sectors with noticeable change last year. Most of the Chinese data in this piece are compiled by Duojing Capital and BE capital.
Overview: the number of deals dropped sharply, over 60% were early-stage financing
Besides the deleveraging of financial markets and overall economic downturn, another issue that makes investing difficult is the tightening regulations and policies, as well as the complex demand in different sub-sectors. Also impacted by the COVID-19 epidemic, the number of financing deals in the education market has hit a five-year low in 2020.
Moreover, capitals are gathered in leading companies that more than 90% of the funds are invested in top firms on different tracks. This means that small and medium-sized enterprises are facing a more intense competition.
And according to the open data, over 60% of the deals were closed at the very early financing stage. Although this is a relatively large percentage, it is a drop in the bucket compared to hundreds of thousands of education and training institutions across the country.
Overall, the financing amount of a single deal in the education industry has gradually increased. In 2020, 71 deals were closed reaching the level of tens of millions yuan (accounting for 50%) and 41 deals at the level of more than 100 million yuan(accounting for 28%).
Deep dive: breaking down the investment by sub-sectors
Within 2020’s Chinese education sector, four sectors saw a concentration of investments: competency-based education (76 deals), educational informatization(67 deals), vocational education(41 deals), and K-12 learning (27 deals), then followed by early childhood education(21 deals) and international education(10 deals), and another 25 deals with the sub-sectors undisclosed.
Looking at specific sub-sectors, financing of early childhood education continued to slump during the past few years, which was primarily due to that China’s authority has tightened the regulation of this industry since 2018. Meanwhile, China’s universal two-child policy seems to fail to yield major gains, and the decline in the new-born population has led to a simultaneous decrease in the potential consumer base of the early childhood education track. Last year, art education for kids, software and hardware, as well as childcare centers became hot spots.
Competency-based education is still encouraged by the government that physical and aesthetic education tests should be included in the Graduation Examination of Junior High School and Senior High School. In this track, STEAM and art education providers were still favored by capitals. According to Duojing Capital, the market size of the competency-based education track will reach 250 billion. Plus, as the 2022 Winter Olympics will be held in Beijing, people have gradually shown more interest in winter sports.
In 2020, there were 27 financing deals in the K-12 track, which shrank by nearly 50% compared to 2019. But the total amount exceeded RMB50 billion($7.7 billion), and the top 5 deals in 2020 were all closed by K-12 players. Impacted by the COVID-19 epidemic, K-12 education service providers saved themselves by moving online, which has further promoted online education’s penetration rate and attracted capital attention.
But for K-12 companies, the opponents are more likely to come from outside the track. On the one hand, internet giants like Alibaba, ByteDance, and Tencent have no traffic flow shortage, which is a crucial sticking point in online education. On the other hand, the giants are vying for the education market to enrich their content ecosystem.
As for international education, investors become more rational about investment due to a less optimistic industry prospect and regulatory risks.
Trends in the Chinese education market
Besides the OMO trend, which has gained the spotlight during last year, we could also keep an eye on the market out of metro cities. In 2019, the market scale of the K-12 sector exceeded RMB 600 billion, and the market scale of online K-12 education was about RMB 53.5 billion, with a penetration rate of about 10%. It is estimated that by 2024, the K12 market will exceed one trillion, with a compound growth rate of 13.6% from 2019 to 2024, and the online K-12 market scale is expected to reach 300 billion. Increasing penetration rates in low-tier cities and rural areas, where most Chinese population live, and increasing demand for high-quality education resources spurred the continued development of the industry.
Vocational education has also been a highlight for both the government and the market throughout the year. And amid the economic downturn and employment pressure, people have urgent demand on improving personal employability so that online vocational education institutions are ushering in new opportunities.
And last but not least, agriculture education, which has been stressed in the №1 document released by China’s central authorities last Sunday, will also gather support from the whole country. Especially, online education for rural learners will be facilitated.
Overall, despite some negative signals proliferating and gaining pace in the capital market, as COVID-19 retreats, the education market will see a certain rebound in 2021.