Dragon Fire, Tiger Rising – Why India May Be the Next Edtech Investment Hub After China’s Clampdown

“Small companies may have a bit of an advantage when compared to larger companies for a couple of key reasons; they’re not as easily noticed, and their size gives them faster agility.”

Martin McLaughlin, University Counselor and Teacher at Shanghai LiaoYuan Bilingual School

Already home to some major edtech unicorns and a digital landscape burgeoning with startups, India may rise as the next central hub for educational technology investments following China’s recent clampdown on its tech and education sectors.

And while Chinese startups and edtech firms saw major losses with the start of summer, Indian edtech startups have secured major wins and began pushes to expand across broader markets. In light of recent events, there is a lot of money and opportunity at stake, which may impact the investment and learning environments in India, China, and globally.

So with the dragon’s fire raging, may the tiger rise as the next hub for global edtech?

We spoke with an expert knowledgeable on international business and education to learn what this might mean for students, investors, and businesses across micro and macro levels moving forward.

Martin McLaughlin, University Counselor and Teacher at Shanghai LiaoYuan Bilingual School

Martin McLaughlin is a university counselor and teacher at Shanghai LiaoYuan Bilingual School, a specialized bilingual school that provides IB (international baccalaureate) continuum education for K-12 students and their families in Shanghai.

McLaughlin has extensive experience in education and university counseling connecting Chinese and international learning communities, backed by a deep understanding of how education markets interplay with Chinese and American cultures to impact learning opportunities for students.

McLaughlin holds master’s degrees in international studies from Johns Hopkins and Nanjing University, as well as bachelor’s degrees in economics, Chinese, and international studies from the University of Wisconsin, Milwaukee. He has extensive research and work experience in East Asia with a primary emphasis on China and has spoken at conferences across the country, including the American Chamber of Commerce in Shanghai’s April 2021 Education Fair.

Investors are pouring billions of dollars into the industry both in the U.S. and abroad, with the global market projected to grow at 17 percent annually to $252 billion in 2020.

While the United States was leading global investment into education technology from 2010 through to 2015, after that, the situation changed. From 2015 to 2020, China took over as a global leader in investment to the point that in 2018, China was out-investing the U.S. three-to-one. The total investment that year globally was around $8 billion—and China spent between $4 and $5 billion, accounting for more than half of global spending.

Over the past few years, China’s investments have been larger than those in the U.S. market. This has been reflected in the size of the individual investments that are going into companies. For example, the largest investment in a U.S. company in 2020 was $130 million into Coursera, and the largest investment in China this year was $1 billion into Yuanfudao.

But following the most recent surge in edtech investments and expansion plans, some firms have come under fire from Chinese authorities, with the course of their development now drastically altered.

Meanwhile, the desire and space for educational advancement, paired with the greatest decline in India’s GDP growth and foreign direct investment over six years in 2019, have spurred the government to take action to address the socioeconomic threat presented by these conditions. In addition to actively courting foreign investment opportunities, the Indian government also aimed to open avenues for the growth of the information technology sector through measures such as its “Start-up India” program, with the intent of creating incentives to enable start-ups to commercialize and grow.

Over the past year, edtech has seen a windfall in investment. China’s tech industry alone pulled in more than $10 billion of venture funding last year from tech giants including Alibaba Group Holding Ltd., Tencent Holdings Ltd., and SoftBank Group Corp. But edtech’s boom came to a sudden halt when these companies’ activities came under the scrutiny of Chinese authorities this past spring.

In May 2021, China’s market regulators announced that it fined online education startups Yuanfudao and Zuoyebang 2.5 million yuan ($388,754) each for misleading consumers. According to Chinese regulators, the edtech companies were using misleading pricing and false advertising, respectively. Both companies accepted the penalty and stated that they would be conducting self-reviews on their products moving forward.

The fines came after President Xi Jinping suggested in March that the surge in after-school tutoring via digital platforms was increasing the already immense pressure on China’s students. The personal interest of the country’s leader in the issue resulted in warnings via state-owned media towards the edtech sector and penalties designed to curb predatory practices profiting off of the nation’s high value of academic achievement.

As of July 2021, the country’s education ministry has created a new, dedicated division to oversee all private education platforms. The move arguably threatens the growth of the edtech industry in the country as companies within the sector emerge from their nascent stages of development.

On the ground, technology and education companies in China have had to respond to the government’s recent rollout of new regulations.

“It appears many big names in the edtech industry including Yuanfudao, Zuoyebang, and New Oriental have promptly responded to the government’s new set of regulations by stating they will comply with the new rules,” said Martin McLaughlin, a Chinese country and education expert who serves as a university counselor and teacher at Shanghai LiaoYuan Bilingual School. “I’ve heard news that Wall Street English has completely suspended their operations, but that’s not representative of what I think most education companies will do. Strategists at these companies will have to make difficult decisions on what business units can continue to operate given the new regulations.”

While companies have borne varied impacts to their operations following the new regulations there then is the consideration of company size and survivability in the new environment.

“I spoke to a manager at a small size test prep center in Shanghai and he described the new regulations as brutal (惨), but was optimistic that their bread and butter—SAT, TOEFL, and IETLS business—could remain as they don’t fall in two big categories targeted by the regulations: school curriculum and foreign curriculum,” McLaughlin described. “Small companies may have a bit of an advantage when compared to larger companies for a couple of key reasons; they’re not as easily noticed, and their size gives them faster agility.”

Of course, 2020 was a challenging year in many regards, also hitting Indian startups. Although Indian startups saw a 10 percent decrease in overall funding as compared to 2019, it still saw total investment reach more than $11.5 billion, with the number of deals surpassing that of the year prior by 14 percent.

Of the startup ecosystem, edtech was a “dark horse” for investors in 2020, cataloging a 223.2 percent year-over-year rise in funding as remote learning and edtech solutions came into the spotlight, said Inc42 Plus, an Indian media platform covering entrepreneurs and startups.

Edtech startups are estimated to have raised more than $1.43 billion across 101 deals between January 1 and December 17, 2020, despite edtech being one of the least-funded startup segments in 2019 with only 46 deals.

Investments flowed predominantly into industry giants, such as BYJUS, Unacademy, and Vedantu. In a textbook case of event-driven growth, the coronavirus spurred massive growth in valuation and users of these services. For instance, BYJU hosted 45 million free users and 3.5 million paid subscribers from January 2015 to March 2020—this number skyrocketed to 70 million free users and 4.7 paid subscribers over the past year.

Of the overall edtech segment, DataLabs’ “The Future Of India’s $2 Bn Edtech Opportunity Report 2020” found that capital inflows into the online test preparation and online certification segments were higher than other educational tools and programs, accounting for 88 percent of the total funding in edtech startups.

And over 2021, Indian edtech companies have expanded across broader markets. For example, as of August 2021, Indian edtech company Unacademy was valued at $3.44 billion and raised $440 million in a recent financing round.

So, although many startups and businesses are still in stages of development and growth in India, the environment is overall very friendly for these companies and has a strong position to attract further investment in the future.

So what does this mean for investment opportunities, student learning, and household impact?

In terms of investments, with the new Chinese government campaign, several potential mega-IPOs have come to a halt. Tencent-backed VIPKid and Huohua Siwei have delayed U.S. listings despite dealings with banks over the past several months.

Alibaba-invested Zuoyebang is also expected to miss its goal to debut this year and Tencent-backed competitor Yuanfudao—valued at $15.5 billion— has also frozen IPO preparations and does not plan to proceed any time soon.

“Given the fact that the substance of China’s new education regulations will affect the Chinese education companies for years to come, I wouldn’t be surprised if some investment shifts to India,” McLaughlin noted. “Like the rest of the world, India’s Covid situation has caused a precipitous increase in online education. India has four edtech unicorns that are well-positioned to profit from the shift to online education. That said, there are some key differences between India and China when it comes to edtech, including median income and average household education expenditure.”

But while the restrictions in China may spur some investors to shy away, there may also be opportunities for larger market growth of edtech beyond offerings in traditional education segments.

“It is difficult to speculate on how the policy changes may impact technological innovation. Despite the new regulations, online learning is here to stay,” McLaughlin said. “The Chinese government has been very vocal on the importance of sports and physical health lately, so it’s possible we’ll see an increase in sports participation both inside and outside of schools. The government is using two standards for the health of students: myopia and obesity.”

“We may see more edtech companies focusing on subjects not taught in school curricula, or differentiated from them enough to stay on the right side of the law. I hope to see a shift towards education focused on promoting the overall wellbeing of students.”

And in terms of impacts to students and their families, it’s still a bit too early to tell.

“I haven’t seen any big changes yet,” McLaughlin said. “Despite the new regulations, students and families still have a strong incentive to take tutoring classes for subjects in schools, so I expect some of these activities to simply go underground.”

Moreover, McLaughlin noted that it will be interesting to see if household education expenditure is successfully curtailed as a result of these regulations, or if what used to get spent on school curriculum tutoring simply shifts to different subjects.