Just 5% of China’s online education companies made a profit in 2015

Photo by Rex Pe

China’s online education market was white hot in 2015. According to Tech in Asia data, more than 90 different Chinese edtech startups raised funding during the year, with at least 19 of them raising rounds of more than US$20 million and a handful raising upwards of US$100 million. China’s online education companies were numerous and raising money like mad in 2015. But according to a new report from China’s Internet Education Research Institute, there’s one thing that China’s edtech startups weren’t in 2015: profitable.

The report, which was released late last week, found that China’s online education market reached nearly RMB 40 billion (US$6 billion) in 2015, a massive upswing from its RMB 28 billion (US$4.2 billion) value the previous year. But massive crowding in the marketplace – the report estimates that China has about 9,500 different edtech companies, although that includes everything from unfunded startups to longtime established players – has meant that very few companies are actually making any money. Just five percent of China’s online education firms profited in 2015, according to the report.

Specifically, the researchers surveyed 400 Chinese online education companies, of which more than 70 percent reported operating losses, 13 percent reported breaking even, and 16 percent reported profits. Those numbers may be more reflective of outcomes for larger firms that have at least raised a round or two of venture funding. But given the number of new edtech startups that ultimately fail, researchers estimate that in the market as a whole, the number of companies that profited in 2015 is probably more like 5 percent, with 10 percent breaking even, 70 percent posting losses, and the remaining 15 percent having gone out of business.

If you think that’s grim, try this on for size: the report estimates that within a couple years, 80 percent of these companies will have gone out of business.

The reason for all of this trouble, the report suggests, is that education is a relatively slow-to-develop industry, and it requires both patience and a massive up-front investment to do things like develop curricula, build all the relevant technology, and market services to students, teachers, and parents (who all respond differently, often necessitating several different sorts of marketing campaigns). Most online education companies will need to be able to sustain losses for at least 3-5 years before becoming profitable, the report says. Of course, many won’t be able to attract enough funding to build that kind of runway, hence the massive projected death rate.