[Investor Talk] EdTech investing in China with Veronica Zhou from Blue Elephant Capital

Today’s guest is Veronica Zhou, partner of Blue Elephant Capital, the first pure play education technology focused early stage investment fund in China. We began our conversation by segmenting the Chinese education market into 3 broad segments, namely to consumer (2C), to school (2S) and to business (2B). We then delved deeper into the complex sales system in the “to school” segment; how Covid-19 created the paradigm shift in online education. And lastly, we discussed Blue Elephant Capital’s investment approach and the key investment theses in the next 5 years.

Key highlights from our conversation

Chinese education market is divided into 3 broad segments 1) To Consumer (2C): to families and students 2) To school (2S): to schools, education bureaus, to government’s budget 3) To Business (2B): this includes 600,000 small and medium sized afterschool shops; about 20 large scale education companies such as TAL or New Oriental

Education spending continues to rise across China Families in the first-tier cities (e.g. Beijing, Shanghai, Shenzhen) in China spend on average 20 to 30% of their disposable income on their kids' education. This trend is observed to be growing over the last few years, and is also developing in the second-tier cities such as the provincial capitals and other more affluent cities in China. It is observed that in a certain city, once over 40% of students go to after school classes, a flipping point will be reached resulting in FOMO - suddenly everyone wants to go to the after-school classes and every parent feels obligated to send their kids there.

2S is the largest segment with government spending on public education expected to riseThe government spending on public education system in China is about RMB 5 trillion - just above 4% of GDP for China. In more advanced economies like Northern Europe, this ratio is about 8% of GDP. So, it is believed that the Chinese government spending on the public education system will continue to grow.

Covid-19 led an 85% increase in online education but this is believed to be temporaryThe first wave of online education start-ups came into existence around 2013. By 2019, data shows that about 15% of the consumer market is acceptive to online education. Covid-19 led an 85% hike in the online education market. But it is believed to be temporary as the majority of the education will still be conducted in physical campus and the majority of the school system will go back to its old track.

Key growth trends identified are 1) education of kids before 3 years old 2) after kindergarten market: OMO (online merges offline) 3) Screenless education for kids before 6 years old 4) Online education for vocational training 5) digitalisation of physical campus 6) The use of new media like TikTok for education purpose

Content at a glance with time-code

(01.20) Veronica’s background story and a brief introduction on Blue Elephant Capital (02.39) Overview of Chinese education market: how it segments to 2C, 2S and 2B; key trends within each segment (09.13) 2S: what areas of private investments are relevant for the 2S segments (11.25) The government’s procurement and purchasing decisions within 2S (16.25) Chinese online education before and after Covid-19 (26.06) Blue Elephant Capital’s investment approach (32.07) Key growth trends in EdTech in the next 3-5 years (38.06) The unicorn discussion

Episode linksBlue Elephant Capital: http://en.ibecapital.com/