2020 has been a great year to be an edtech unicorn—and a terrifying one to be a startup.

While Covid-19 lockdowns propelled a surge of interest in online education, the benefits were anything but evenly distributed. A few big edtech players have pulled even farther away from the pack, while many smaller ones have struggled.

Opinion

Ted Mo Chen is a TechNode contributor and Beijing-based edtech entrepreneur.

However, with tech giants from other sectors now expanding into edtech, the winners of the pandemic boom need to remain on high alert.

Acquisition costs plunged

While China hunkered down, its edtech sector surged. In 2019, Chinese edtech was already leading the world in both number of companies registered and invested capital. This market looked just like any other fast-growing vertical: a few much-praised unicorns burning money for market share, like Yuanfudao and Zuoyebang, and a smattering of early-stage start-ups trying more experimental models.

But as the numbers of daily active users (DAU) of educational apps shot up (in Chinese) right after the Spring Festival following nationwide Covid-19 stay-at-home orders—a staggering 46% increase from the 2019 daily average—customer acquisition costs for consumer edtech plunged. Per my own experience as a marketer at an A-round edtech startup and multiple confirmations (in Chinese) from others, costs fell to half of pre-pandemic levels from February till early April. This was a windfall rarely seen in any industry.

For the longest time in e-learning, digital ad-buy was nothing short of trench warfare, sustained largely by venture financing. Sales costs bled many mid- and lower-tier players dry as they struggled to find product-market fit. A 50% drop in the cost of user acquisition meant that cash flow turned from negative to positive virtually overnight—a matter of survival for some companies.

Now that almost all players could comfortably afford advertising, online customers were offered a cornucopia of trial courses. During early pandemic months, an average Douyin-watching mom couldn’t scroll for more than three minutes before hitting an e-learning landing page. It was a great time for edtech startups offering subjects that were considered “niche” or too time-consuming pre-pandemic. Liu Pai, founder of an essay-writing instruction startup targeting elementary-age children, said Kuaishou offered teachers like him “traffic boosts” (in Chinese), increasing his impressions for nearly no cost and allowing him to gain 20,000 followers in two weeks.

Refloated costs crush aspirants

If the period from February through April felt like a round of musical chairs, May was when the music stopped. As Chinese society celebrated a return to near normalcy, many younger startups found themselves left standing as the game carried on.

With summer approaching, edtech giants scrambled to sign up students for vacation classes, dumping tens of millions of yuan a day. Meanwhile, parents’ screen time plummeted, sparking ever higher bids for their attention. A combination of the two trends quickly pushed ad-buy pricing back up to pre-pandemic levels.

Edtech entrepreneurs suffered a rude awakening. Covid-19 helped lower cost per acquisition for a time—but a couple months of discounted trials didn’t turn parents into loyal users.

In the entire first half of 2020, the K-12 e-learning sector ended up spending 71% more (in Chinese) on online marketing than it had for the same period in 2019, according to monitoring service QuestMobile. In other words, however much edtech outfits saved on ad costs during those three magical months, they more than made up for it with lavish expenditures in the remaining months of the half-year.

Small fry who once dreamed of continuing to soar high as Covid ebbed now found themselves outspent by industry giants, challenged (in Chinese) by brick-and-mortar training centers moving online and, alas, bleeding money again.

Only a very few early-stage companies broke out from the pack during the pandemic. Among those that managed was Palfish (banyu), founded in 2015. The company was one of the first to purchase copyrighted children’s books from western publishers, and to digitize them into multimedia formats. It then successfully morphed into an English training service that enjoyed commendable conversion. Now very possibly a billion-dollar company after raising hundreds of millions of dollars in three Series C funding tranches, Palfish’s development fits a “unicorn takes all” theory on 2020 edtech.

Unicorns take all

Ultimately, it was the billion-dollar companies who were able to consolidate gains from the disruption set off by the pandemic.

In April, Sequoia and Softbank helped Zuoyebang raise a $750 million Series E. Meanwhile, the valuation of Yuanfudao, its arch-rival of 8 years, rose to an eye-popping $15.5 billion after the company raised a total of $3.2 billion in March and October. Prominent backers like Hillhouse Capital and Tencent competed for a leading role in a round that made it the most valued edtech provider in the world.

A quick look shows both companies committed to the same primary offering: large-class livestreams, in which students enjoy quality instruction by acclaimed, metropolitan-based teachers, along with detailed after-class tutoring via Wechat. The easily scalable offering was pioneered by Genshuixue (NYSE: GSX) in late 2017, swiftly earning industry-wide envy for its profitability. A gross margin in the high seventies sent the company from Beijing to NYSE with merely an angel investment and an A round on its fundraising record.

The huge potential of the exam-oriented training market allowed GSX share prices to triple amid the pandemic. In early August, the company saw its valuation momentarily surpass that of offline conglomerate New Oriental (NYSE: EDU) to become the second largest Chinese K-12 education provider by market cap—despite multiple rounds of accusations that the company was inflating revenue figures and student counts and an ongoing investigation by the US Securities and Exchange Commission. In the latest development, GSX shares crashed more than 30% on Oct. 21 following rumors of a bleak Q3 forecast and a downgrade by Credit Suisse, which noted rising competition.

The early childhood market has also converged on a favored model, defined by the investor darling (in Chinese) Yuanfudao’s four-year-old blockbuster app Zebra AI. The app uses bright, saturated 2D cartoons, fairy-tale-style storytelling, and repetitive iteration of key bits of knowledge to hold the attention of small children. Owing to aggressive ad-buy during the pandemic peak and a high annual subscription rate, the interactive learning brand is well on track to quintuple (in Chinese) its 2019 revenue of RMB 1 billion ($149.2 million).

The industry has bestowed Zebra AI with its highest honor: extensive cloning. Success with younger children is also notable for its potential to lower acquisition costs for the company’s products for older students. (But do note that few of these companies publish academically rigorous research to support the efficacy of their approaches, as their western counterparts proudly do.)

Customers get smarter

The breakout success of a few products indicates that customers have become more discerning during Covid lockdown. Parents stuck at home sent edtech companies an overflow of leads, but it also gave the parents time to tell the great from the mediocre.

Investors didn’t miss this trend. Meta-analysis by data aggregator CVsource on edtech funding shows a clear preference (in Chinese) for companies which already have bestseller offerings. Of the 38 deals made public in the first half of 2020, the top 10 captured 90% of total funds raised. And despite a significant 57% drop in number of deals closed, deal size aggregate increased by 10.5% year-on-year, reaching RMB 89.7 billion—the highest level in five years.

There’s no denying the Matthew Effect at work here: The well-doers keep getting the better end of the deals. The unicorns, not the upstarts, won the pandemic edtech boomlet.

Bytedance is seriously competing

Big fish eat little fish—but bigger fish eat the likes of Palfish. Despite emerging triumphant from the pandemic, the unicorns had little time to gloat.

Covid times enticed Bytedance, whose previous educational offers largely failed to dominate, to elbow its way onto the edtech playing field for another try. It already offers more than 20 products catering to learners from infants to seniors.

Chen Lin, a Bytedance senior vice president, spooked edtech in July by vowing that the parent company of Douyin and Tiktok “won’t demand profits from its educational services for the next three years.” If Bytedance’s product proves competitive, rivals will need to ask their investors to fund that many more years of trench warfare ad buy.

More worrisome still is that the platform giant competes with a home team advantage, since the company grants a 20% ad buy discount (in Chinese) to its self-incubated programs, according to a LatePost source.

It’s not unjustified to fear that the internet conglomerate might limit ads for its vertical advertisers, like the way Amazon restricts ads from some of its merchant competitors. The company does have a track record here: it cleared out all Alibaba and JD links  from its livestream ecommerce earlier this August. “Should Bytedance cut off ads of one particular [edtech] brand, their user growth would be crippled by at least half—that’s the harsh reality,” commented one investor (in Chinese). These days, even frontrunners like Yuanfudao will find themselves tasked with a mission impossible: to compete with but not irritate an emerging edtech Goliath.

What now?

If the dizzying episode of the Covid-19 traffic bonanza taught us anything, it’s that building an education business is a Long March, never a quick sprint. 

For those still starting up, the post-pandemic landscape seems grimmer, but it could also serve as a prompt to pivot, avoiding head-on homogeneous competition. For example, they could switch focus to advanced individualized learning through data processing or upgrade 2D content to VR or AR formats.

For existing unicorns, while it sure felt great toasting record-setting ad-buy deals and rubbing shoulders with their Bytedance client managers, it’s time to go light on the champagne.

Ted Mo Chen

Ted Mo Chen is a TechNode contributor and Beijing-based edtech entrepreneur. He focuses on industries that inform and inspire customers. Ted holds a B.Phil. from Peking University.