Among the six edtech unicorns listed by US-based CBInsights in 2019, five were from China. Online education has been booming since 2009 in the country, with 209 funding deals in 2017 and over 200 in the first 11 months of 2018. Beijing and Shanghai have the highest concentration of edtechs in the world.
China's population of 1.4bn is expected to grow significantly due to the new two-children policy that was introduced in 2015. The government will continue to increase the proportion of its GDP spent on education every year.
Jumping on the edtech bandwagon in 2015 was 20-year-old Qu Feixuan who started an online private tutoring business Xuebacoming. The second-year Shanghainese undergrad had obtained initial funding of RMB 200,000 from Shanghai Juntai Partner that supports college students with entrepreneurship potential.
Qu's personalized tutoring business model leveraged the reputations of top students at top Chinese universities to attract primary and secondary school students as customers. To secure a foothold in a competitive market like Shanghai, Xuebacoming managed to scale quickly, with a register of 940,000 students and 20,000 tutors by 2018.
By December 2016, Xuebacoming – Xueba literally means “straight-A student" in Chinese – had won Series A funding from Shenzhen-based VC Guojin Capital, which counts Smarter Eye and Wizard Game among its better known bets.
Xuebacoming folded up in late 2018, hurt by claims for unpaid wages and student refunds and insufficient cashflow. It turned out that the company had also been running tutoring services “illegally” all this while, because of a basic mistake. Qu's registered company, Shanghai Chazi Information Technology, did not include education and training as part of its business activities, according to records from the Market Supervision and Administration of Jing'an District in Shanghai.
Qu joins a long line of inexperienced founders who failed after racing to launch a new business idea in a booming market. She saw the opportunity to disrupt the traditional one-to-one tutoring sector but didn't have the necessary expertise to implement her business model successfully.
Besides Xuebacoming, at least two other well-known edtech startups ceased operations in 2018.
High marketing costs
Like many one-to-one tutoring providers, Xuebacoming adopted an advance-charging model. Parents were required to pay a deposit of RMB 7,000–8,000, or even over RMB 10,000, to book more than 100 hours of tutoring services, stretching as long as one semester or even a whole year.
In addition, payments for long booking periods are against the law. Training agencies are not allowed to “charge an amount covering a service period of over three months,” according to the Opinions of the General Office of the State Council on Regulating the Development of Off-Campus Training Institutions that was released in August 2018.
Tutors and other employees of Xuebacoming filed an arbitration request to the local authorities in Shanghai for total wages owed of over RMB 5m. Parents and students also claimed refunds worth RMB 20m.
Xuebacoming’s woes also sparked doubts about the online one-to-one tutoring model. Unlike class or group-based courses, the personal tutoring model doesn't enjoy economies-of-scale marketing benefits of leveraging the reputation of a renowned or “celeb” teacher to run classes for large groups. Instead of spreading the marketing costs over 100 students, the revenue generated by one private tutor cannot sustain the high cost of promoting individual tuition that traditionally depends on free word-of-mouth recommendations.
The average acquisition cost is estimated to be RMB 2,000 per student recruited, including advertisements, free demo lessons and telemarketing. But the one-to-one tuition service charge can be as low as RMB 110–150 per lesson, with 60% payable to the tutor and about 35% used for marketing, office rental, administration and technical support. The high marketing costs of acquiring customers will be magnified into bigger losses as the business expands with more tutors added to the platform. Not all tutors will provide profitable services if the number of students signed up with each tutor is below the break-even point.
Media hype, poor management
Xuebacoming promised to provide “strictly-selected, high quality tutors who graduated from top institutions like Tsinghua University, Peking University, Fudan University and Shanghai Jiao Tong University. The “Xueba” (top students) was highlighted in an article by founder Qu in March 2016. But company employees revealed that the tutor criteria stipulated undergrads or graduates from the 151 universities listed in “Project 985” and “Project 211” that were not normally categorized as top universities in China.
Also, while Xuebacoming provided inexperienced tutors with on-the-job training, it fell short of professional teaching standards. Lei Qin, a mother who asked for refunds, said that she canceled the tutoring services for her kids because the tutoring quality was poor. “The course materials were all prepared by the tutors themselves. Compared with other training agencies, the tutor's content preparation doesn’t suit her children,” she complained.
The tutors said they didn't have a choice. “Lessons provided by Xuebacoming were low quality with out-of-date content and boring styles. We could not use them. That’s why we prepared materials by ourselves,” said one part-time tutor at Xuebacoming.
Media hype had also helped to make Xuebacoming a popular tutoring platform. Qu was touted “the most gorgeous CEO born after 1995” in media reports about the Series A funding when she was still an undergraduate at Dongbei University of Finance & Economics in Dalian.
The management and compliance issues at Xuebacoming could have been rectified by qualified professionals and education advisors. The investors of Xuebacoming could also have insisted on appointing at least one qualified business lawyer or accountant to the company's Board of directors. Guojin Capital is an experienced VC with RMB 3bn invested via 12 funds in over 100 companies with a total market value of RMB 20bn.
Qu, as founder, owns over 57% of the company's shares. The court session on Xuebacoming's bankruptcy and proposed liquidation is scheduled to begin in April 2020. With hindsight, lessons can be learnt from Qu's lack of business experience as more startups are created to tap lucrative markets. Investors also have a vital supporting role to play as stakeholders and business advisors to less experienced entrepreneurs. As they say, “the devil is in the execution.”