At the end of March, when there has been a surge in remote learning demand across the world since the coronavirus outbreak, China’s online education startup Yuanfudao announced it secured a $1 billion Series G funding round, marking the largest investment in the online education sector.
According to a statement, the Beijing-based startup is currently valued at a $7.8 billion post-money valuation, becoming the highest valued private edtech startup in China. It is also the second-biggest edtech unicorn across the world after Indian online learning platform Byju’s, whose current valuation is more than $8 billion.
Since founded in 2012, despite some useless efforts, it seems that Yuanfudao has always taken the right path whenever making a critical decision.
Two critical decisions
Since 2013, hundreds of startups and conglomerates such as Baidu, Alibaba and Tencent have started to enter the online education market.
However, earlier in 2012, Yuanfudao has already stepped into the sector by launching the education community Fenbi, which later separated from Yuanfudao as a vocational examination training provider in 2015, and Yuantiku, a bank of test questions. In October 2014, the company launched the Q&A app Yuansouti.
An industry insider pointed out that using the test question database to explore online education in 2012 was the first critical decision on Yuanfudao’s road to growth.
Since 2015, after more than two years’ efforts in monetization, Yuanfudao launched its online tutoring product Yuanfudao, which shares the same name with the company, and has focused on the K-12 online education, which was the second critical decision. Yuanfudao initially aimed at one-on-one tutoring, but then pivoted to group classes. A product matrix with Yuanfudao as the core and Yuantiku and Yuansouti as supporting tools, therefore, was initially formed.
During the past two years, Yuanfudao has continued to offer new products, such as arithmetic questions checking app Yuankousuan and English learning app Zebra AI, trying to connect them with its K-12 offerings.
As of today, Yuanfudao has developed a more complete product matrix with Yuanfudao and Zebra AI as its primary products to generate profits.
“The most critical decision is to select the K-12 field, " the above insider said.
On March 31, Yuanfudao announced a Series G funding round of $1 billion led by Hillhouse Capital, with participation from Tencent, Boyu Capital, and IDG Capital, pushing its valuation to $7.8 billion from the previous number of $3 billion after Series F round in 2018.
So far, Yuanfudao has raised a total of $1.5 billion from investors. The company said it has over 400 million users on its platforms. As of March, it also had 11 teaching and curriculum development centers across the country.
From 2014 to 2015, products that enable users to scan problems to get solutions within several seconds were popular among investors. Yuanfudao, Zuoyebang, and Xueba100 all started from this function to enter the online education business.
However, it is difficult for these companies to realize large-scale monetization based solely on these free tools. They have to think about how to make money by using the acquired traffic to survive in a highly competitive market.
It is verified that the three companies all chose the online education sector and respectively explored fields such as synchronous practice, online Q&A, one-on-one tutoring, as well as live classes.
"It is a fierce competition," an expert commented. Now, the battle of question scanning and solving apps has ended. These three products launched in the same period have differed from each other. Zuoyebang and Yuanfudao still compete with each other, but Xueba100 has already been left behind.
Besides the win in the above battlefield, Yuanfudao is also full steam ahead to expand K-12 online tutoring services, which raises a big question: Why is Yuanfudao able to attract so much investment even though there is a bunch of products focusing on K-12 online tutoring?
The secret weapon is that Yuanfudao has acquired much traffic in the previous growth stage. It has now formed a closed-loop for serving K-12 learning scenarios by providing a product ecosystem with K-12 learning as a focus, and other offerings, including Yuantiku, Zebra AI, as well as Yuankousuan, as assistance.
"The answer lies in the ecosystem," said the founder of an education company under a pseudonym of Lin Xu. "It’s very critical for Yuanfudao to form such a product matrix that enables it to deliver services to its traffic.”
He added, "The key is to lower customer acquisition cost. Currently, entrepreneurs are gaining new customers in various ways, and question scanning and solving tools are one of them."
Traffic acquisition battle
"Use Yuanfudao to take an online class. Use Yuantiku to do exercises. Use Yuansouti to solve a problem." Yuanfudao’s advertisements were overwhelming during the Spring Festival.
It’s a fact that online education startups have to face a high cost of acquiring customers. However, with the traffic ace Yuansouti, it seems that there is no need for Yuanfudao to worry about traffic and customer acquisition. But even so, Lin pointed out that Yuanfudao will not give the traffic to someone else, and it will definitely compete with other companies to attract more traffic.
Therefore, it has made many advertisements through online and offline channels and has also rapidly increased brand awareness through sponsorship.
With high-profile marketing tactics, Yuanfudao has seen a fast growth and a booming user base, which soared to 400 million at the end of 2019 from 160 million in the same period in 2018. It should be noted that the large-scale user increase gained through free live courses amid the coronavirus crisis did not count.
Such aggressive efforts in sales and marketing have made top giants nervous. Yuanfudao has faced with the dominant player TAL Education Group in the K-12 live course field.
In the unprecedented K-12 online school battle that happened in the 2019 summer holiday, the two companies started to confront each other. As of the end of that summer, Yuanfudao’s total investment in enrollment has exceeded 400 million yuan, and Xueersi Online School under TAL has spent 1 billion yuan in advertisements.
Yuanfudao has already become one of the biggest rivals of Xueersi Online School.
When to go public?
During the pandemic, Yuanfudao has kept up with the situation by donating money to the affected areas and providing free live lessons for primary and middle school students across China. However, it remains to be seen whether these free users can be retained and converted to paid users.
Earlier this year, an insider noted that Yuanfudao registered 3 to 4 billion yuan in revenue in 2019, and the startup aims to reach more than 10 billion yuan this year, which will represent a 200% year-over-year increase.
Li Xin, the co-founder of Yuanfudao, said in an interview that investors have always been interested in the company throughout 2019, but they believe that there’s little reason for Yuanfudao to accept new capital.
An education informatization product provider with the pseudonym of Chen Han said that whether to raise financing is related to the company's profitability. In his view, the landscape of current leading online education platforms is stable, and these companies can navigate difficulties, which will bring an influx of investment. "Capital also likes icing on the cake."
Yuanfudao declined to disclose how the fresh capital will be used. Insiders analyzed that due to the need to maintain high-speed growth and continue to expand the market share, the company will invest more in commercial advertisements and human resources.
Many experts believe that it would be only a matter of time for Yuanfudao to go public after raising eight rounds that total $1.5 billion. In addition to expanding businesses and grabbing more market share, the task for Yuanfudao is to operate in a fine and lean way before IPO.
An investor ever predicted that the online education sector could give birth to a giant worth hundreds of billions of dollars. Who will be the first to cross the line? The game has just begun, and the answer remains unknown.