Why Asia’s EdTech Venture Capital Deals Will Remain Globally Dominant

Global venture capital investments in the EdTech sector are skyrocketing this year as COVID-19 forces learning online, but Asia is well positioned to defend its leadership position

Private capital deal activity in the global education technology (EdTech) industry is booming this year, but Asia is attracting outsized investor interest. The global pandemic is forcing the rapid digitalization of the education sector, as classrooms and courses of all kinds transition online – driving the surge in demand for EdTech solutions around the world. Venture capital investors have reacted quickly, fueling the emerging sector’s rapid growth. Indeed, Preqin Pro data shows venture capital-backed EdTech aggregate deal value in H1 2020 has increased 166% compared to the same period last year. Furthermore, as the number of deals rose to 219 (compared to 164 in H1 2019) average deal value more than tripled to $32mn.

A closer look at this year’s headline deal figures reveals a series of blockbuster EdTech venture capital transactions in Asia. In fact, the three largest deals of the year so far have all been in this part of the world. In March, as global COVID-19 lockdowns intensified, Beijing-headquartered online education company Yuanfudao closed a $1bn financing round led by Tencent Holdings and private equity firm Hillhouse Capital Group, lifting the company’s valuation to $7.8bn. And in June Zuoyebang, a Chinese mobile application platform developer targeting primary and secondary school students, raised $750mn in Series E funding led by Tiger Global and Hong Kong-headquartered private equity firm FountainVest Partners.

Last week, Bangaluru, India-headquartered Byju’s latest fundraise, gave a big boost to Q3 2020 aggregate deal value. The K-12-focused EdTech company secured a staggering $500mn in commitments fronted by global technology investor Silver Lake with participation from existing investors Tiger Global, General Atlantic, and Owl Ventures. The round also reportedly brought the ‘decacorn’ company up to a valuation of almost $11bn, retaining its widely cited title of the world’s most valuable EdTech start-up and India’s second-most valuable start-up.

The three largest deals highlight significant global investor demand for companies tapping into the digital transformation and evolution of learning in Asia this year. But more impressive perhaps, is Asia’s meteoric rise and continued dominance in the EdTech industry in recent years. In fact, over the past five years Asia has captured 67% of the aggregate deal value transacted globally and 54% of the number of deals annually on average, according to Preqin Pro data.

Why Does Asia Have an Advantage in EdTech?
The education sector has developed significantly across Asia in recent years, turning an early disadvantage to an advantage. In the 1970s, Asia contained more than two-thirds of out-of-school children globally, a persistent shortfall in providing access to basic education that lasted decades. Today, it is estimated that nine out of 10 children in the region are enrolled in primary school and seven of the 10 top performing education systems in the world are in East Asia and the Pacific – an impressive milestone for economic development. In part, this success has been aided by increasing public investment (as a % of GDP) in education across the region since the mid-2000s, as well as concerted supranational coordination to address access to education through comprehensive programs like the United Nations Sustainable Development Goals.

However, as the region continues its course of world beating economic growth, needs are evolving with rising household incomes and populations, putting pressure on the education sector to adapt and expand. In 2014, analysis by EY-Parthenon showed that Asia accounted for around 40% of $1.30tn global private education spend, fueled primarily by increasing household wealth. According to a study by JLL in 2018, the private education market in Asia-Pacific alone was estimated to be worth more than $370bn, with K-12 and tertiary education the largest sub-segments. In addition, by 2030 Asia could account for two-thirds of global tertiary education enrolments as employees in the region seek to upskill away from low-value manufacturing employment into higher-value-add knowledge and service-oriented industries.

Asia-Pacific’s education market is forecasted to expand at a CAGR of 6.6% over the 2018-2023 period. Behind this growth is families’ rising spending capabilities and demand for quality education, which requires new innovative solutions and substantial private investment to be met. The region is home to around half of the world’s two billion youths (children aged 0-14), and population growth rates that far outpace Western economies, based on World Bank 2019 population data. This presents a unique regional opportunity for EdTech players to disrupt education in ways simply not possible in other parts of the world.

World-leading internet and mobile penetration in Asia has accelerated access to this market of potential users. Taken together, the recipe has led to rapid scale and customer acquisition for the largest EdTech players – including the three beneficiaries of the biggest deals this year. Yuanfudao, founded in 2012, claims to already have more than 400 million users across China. Five year old Zuoyebang has over 800 million registered users, of which more than 50 million are active daily. Byju, which has the most modest userbase of the bunch, announced a staggering 50 million subscribers on its platform this year, of which 3.5 million are paid. Notably, all three of these players amassed huge userbases while focusing solely on their domestic markets. 

The international venture capital market has taken note of EdTech’s exceptional potential in Asia. Investors are backing the sector’s rising superstars that are positioned to defend market share and expand beyond their local markets, and there is no shortage of capital to be deployed by regionally based fund managers. According to Preqin Pro data, private equity & venture capital funds focused on Asia-Pacific command a record $1.29tn in assets under management as of December 2019. Going forward, the sector will continue to benefit from an expanding capital base poised to tap into innovation in the region.

EdTech Competition Rising Globally
More companies are looking to tap an industry ripe for disruption, whose promise has been reinforced by the pandemic. In April, UNESCO estimated that 1.5 billion learners, 90% of the world’s student population, were confined to their homes as 190 countries shut down schools and universities. This not only encouraged the use of digital technologies in learning out of necessity to adapt, but proved to governments and learning institutions that these solutions offer viable tools that are likely here to stay.

This, as we have seen, has been a boon to investment in the sector this year. Beyond Asia, EdTech start-ups in Europe and North America have also received ample interest from investors. The three largest deals by California-headquartered Coursera, London-headquartered Moonbug, and California-based Yanka Industries (MasterClass) raised a combined $350mn, according to Preqin Pro. In July, Coursera raised $130m in Series F financing led by New Enterprise Associates (NEA) and joined by existing investors Kleiner Perkins, SEEK Group, Learn Capital, SuRo Capital, and G Squared. 

The same month, Moonbug, a global digital media company focused on educational content for children, locked in commitments of $120mn led by the likes of Goldman Sachs Growth Equity and Fertitta Capital. On the back of the raise, the company also announced its acquisition of two of the most-viewed YouTube channels for young children – CoComelon and Blippi. Lastly, celebrity-taught online class platform MasterClass raised $100m in Series E funding with participation from a consortium of investors led by Fidelity Management & Research Company in May – pushing the start-up's valuation to $800mn.

All the deals transacted this year show there is strong investor appetite for EdTech and the future potential of new learning models. A growing number of investors are keenly watching its evolution as new entrants emerge and technologies like artificial intelligence, Internet of Things, and 5G push the limits of what is currently possible. Going forward, the accelerated development of this sector will likely require more private capital support to continue redefining the way society accesses, distributes, and consumes learning internationally. 

That said, Preqin deals data also shows a clear sector advantage for Asia to continue shining above the rest of the world. Despite heightened attention from investors in EdTech this year, the three largest deals in the West accounted for only 16% of the total funds secured by Asia-Pacific’s largest trio alone. This disparity makes sense given the size and scale of operations already achieved by Asia’s EdTech giants in their local markets – as well as their future growth potential moving into new education segments or countries. Even Western competitors that market to a global userbase struggle to capture the same user engagement stats. Indeed, Coursera’s eight-year-old global online learning platform announced a record userbase of 65 million in June 2020 – paling in comparison to its domestically focused Asian counterparts. 

For EdTech companies in the West to achieve the same scale, players will need to plan an aggressive global growth strategy from day one. In addition, this expansion will need to be fueled by significant amounts of capital to compete effectively against Asia’s market-leaders. To overcome some of these hurdles, channel partnerships that smooth access to the region and customer acquisition, like those recently formed by Coursera and Moonbug, may become more important for non-Asian players to succeed.

If the past five years are any indication of what lies in store for the EdTech market, Asia has a strong and defensible head start in this fast-growing industry. This leading position will be hard for global investors to ignore in the years to come as they look to back companies with strong localized content offerings, slick technology platforms, and a large captive userbase.