Online education firm Hujiang has laid off an unconfirmed number of employees amid other cost-cutting measures as it adjusts to tumultuous conditions in the capital market.
Rumors about massive layoffs first appeared on Chinese professional networking service Maimai over the weekend and began to circulate online (in Chinese) more widely on Wednesday. Around 1,000 employees were allegedly downsized across business units and corporate functions.
Maimai users added that its management team would also leave due to an unmet condition from a prior “bet-on agreement” or value adjustment mechanism, a common practice in Chinese private equity world where investors are entitled to an agreed-upon action, usually the right to adjust value, if a certain condition is met.
Hujiang responded (in Chinese) the same day, saying online rumors of a 95% reduction in workforce were untrue, and the reported “bet-on” agreement does not exist. It warned that it would take legal action against rumormongers.
However, the statement did confirm that Hujiang was “reorganizing and combining some of its loss-making businesses” as it looks to withstand risks and connect with capital markets. The company would not confirm the number of employees it laid off, but said that the restructuring was necessary to increase cost efficiency and would benefit shareholders, users, and employees over the long term.
The reduction comes eight months after the Shanghai-based edtech firm filed its IPO paperwork for the Hong Kong stock exchange in July, and updated its prospectus four months later following the listing hearing. Hujiang said in a WeChat statement that its IPO was still an ongoing process and that it would go public in a right time, despite “huge fluctuations in capital markets since the second half of last year.”
The Chinese online education market has been known for its high customer acquisition costs, forcing startups into cash-burning activities to gain users. Online tutoring startup Vipkid was reportedly looking to raise up to $500 million funding earlier this year, following a $500 million Series D+ in June. The Tencent-backed startup was rumored to have lost $330 million in the first ten months of 2018, and expects to achieve profitability by March 2022, according to Chinese media.
Hujiang, backed by Baidu and a Shanghai government capital fund, earned revenues of RMB 550 million (around $82 million) in 2017, with 73.3% compound annual growth rate (CAGR) from 2015 to 2017. However, it witnessed consecutive losses totaling more than RMB 1.2 billion during the same period, according to the company prospectus.