China's ITutorGroup Targets $2 Billion Valuation Ahead of IPO

(Bloomberg) -- Asian parents can be notoriously demanding academically, but few more so than Eric Yang’s. Dropping out of a doctorate program at the University of California at Los Angeles was never an option, even when his startup side hustle was raking in money.

“My father just said: ‘Why don’t you get your Ph.D. first, then you can do whatever you want,”’ said Yang, 49, who comes from a family of doctors.

In the end, both endeavors served him well. Two decades and a little-used doctorate in chemistry later, Yang now runs one of China’s biggest online-education startups, iTutorGroup. Learning English via the web is big business in China. It’s on track to be a 52 billion yuan ($8.2 billion) industry by 2019, thanks to booming interest by Chinese seeking to learn the language for work and travel abroad, according to iResearch.

ITutorGroup is raising as much as $300 million at a valuation of about $2 billion, which would make it the world’s biggest education technology startup, according to CB Insights. Yang is aiming for a public listing next year, most likely in Hong Kong or the U.S.

“The fact that iTutorGroup has gotten to the point where they’ve actually got their business model turned positive has made us more interested in engaging with them,” said Andrew Downe, head of Macquarie Bank’s commodities & global markets group, an investor in the startup.

Investors are taking notice of the potential in Chinese education. New Oriental Education & Technology Group, a pioneer in the field, has seen its shares more than triple in the past three years, pushing its market value to about $14 billion.

After leaving academia, Yang initially opened a brick-and-mortar language consultancy with his brother. It moved online when the SARS virus hit Asia, as students sought to avoid classrooms for fear of contagion. Now, Yang’s company runs a host of brands. TutorABC, vipabc, vipJr and tutorJr form the core of the business, teaching English to students in China, Taiwan and Japan. TutorMing teaches Mandarin and LiveH2H sells the company’s custom-built video conferencing software as a variety of services.

ITutorGroup had more than $350 million in cash receipts last year, including sales for multiyear contracts, people with knowledge of the matter said, asking not to be identified because the number isn’t public. Yang declined to confirm the figure, but said the startup is cash-flow positive with gross margins of 82 percent.

ITutorGroup’s key challenges are keeping the quality of lessons high, doing it cheaply enough to turn a profit and fending off rivals seeking to snatch up teachers and students. Traditional schools and online rivals such as 51Talk, Dada ABC and VIPKid are all on hiring sprees.

Yang seeks talent from a wide pool. Where some services demand university graduates from North America, iTutorGroup accepts people with good English, a bachelor’s degree and a TEFL or TESOL certificate — subject to interviews and a trial lessons. In total, iTutorGroup employs more than 20,000 teachers in about 80 countries working with 200,000-plus students.

“I’m getting about 15 pounds ($21) per 45 minutes, which is easily what I get managing a cafe,” said Claire Giner from Cornwall, U.K. A former high school teacher turned beachside cafe manager, she supplements her low-season income with extra lessons.

When it comes to attracting and retaining students, iTutorGroup has other ways to keep its edge. Every subscriber has 128 tags, ranging from their hobbies to the way they pay their bills. Learners in their early 20s from poorer cities with pricey packages are more likely to refund within 30 days, so they’re lavished with extra attention in the beginning. If a student complains twice, their “karma” score rises and the next lesson becomes a private session. And those who attend more than 16 lessons per month have a 90 percent renewal rate, so laggards are gently nagged to attend sessions until they hit that bar. Most people sign up for lengthy contracts; a 12-month package typically costs 16,000 yuan.

“The company is pretty much run by algorithms,” Yang said, predicting the sector would reach “hyper-growth” in three years as more tech-savvy parents enter the school system. “This was never about just moving classes online, we need to redesign education using technology and that’s what we’ve been doing for the past 20 years.”

To contact Bloomberg News staff for this story: David Ramli in Beijing at dramli1@bloomberg.net.

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Reed Stevenson, Peter Elstrom

©2018 Bloomberg L.P.

With assistance from David Ramli