(Bloomberg) -- China’s VIPKid is finalizing a deal to raise about $500 million at a valuation of more than $3 billion, according to people familiar with the matter, a price tag that could make it the world’s largest online education startup.
The Beijing-based service, which links mainly North American tutors with Chinese children, is putting the finishing touches on a deal, said the people, who declined to be named because the matter is private. Its targeted valuation is pre-money or prior to closing, they added. A successful transaction would roughly double its valuation in less than a year.
Getting foreign teachers to tutor students over the internet is big business in China, thanks to an increasingly affluent middle class and job market that prizes both education and English-language proficiency. But a surfeit of experienced teachers and affordable lessons in brick and mortar schools has pushed students into digital classrooms. The online English-tutoring market is on track to hit 52 billion yuan ($8 billion) by 2019, according to iResearch.
That’s attracting investors: iTutorGroup is raising as much as $300 million at a valuation of about $2 billion and preparing for an IPO next year. Leading players such as New Oriental Education & Technology Group Inc. and TAL Education Group have gone public in the U.S. and seen their shares soar. Other companies competing in the space include DadaABC and 51Talk.
VIPKid reported a near six-fold jump in ‘cash sales’ to 3.54 billion yuan in 2017, including multi-year contracts, based on presentation materials for investors obtained by Bloomberg News. Chief Executive Officer Cindy Mi told Bloomberg in September her company should rake in revenue of 5 billion yuan or about $750 million in 2017. A VIPKid spokesman declined to comment on the fundraising but said the company’s cash sales for the fiscal year ended March was about 5 billion yuan.
Companies like VIPKid that get paid for a block of services upfront often have much higher cash sales than revenue because the latter refers to services rendered. A spokesman said the company’s fiscal 2017 GAAP revenue was 2.177 billion yuan ($344 million), a more than five-fold increase compared to the previous year.
VIPKid had 296,363 students and 38,724 teachers as of 2017 -- a sharp rise from the 3,305 students and 404 educators it had just two years earlier, according to its investor materials. By 2019, it’s projecting a near 10-fold rise in students to 2.4 million, and more than 280,000 teachers.
Competition in the nascent space is raging fiercely across the country; ads from rival services featuring celebrities are plastered across subway tunnels and ad panels in residential lifts.
That rapid expansion is also fueling higher costs with losses at the startup growing from 312 million yuan in 2016 to 1.162 billion yuan in 2017. According to the presentation, losses this year could rise to almost 1.8 billion yuan, even as revenue triples, before narrowing in 2019.
©2018 Bloomberg L.P.
With assistance from David Ramli, Lulu Yilun Chen