Experts say that many online education startups in China may be forced to close down this year due to lack of profits.
Over the last two years, a spate of massive open online courses (MOOCs) have been created in China, but haven't seen the success they expected. Therefore, venture capital is steering away from the industry.
More than 30 out of the 110 best-known Chinese education startups have shut down, reports Celia Chen of the South China Morning Post, including Tizi.com, nahao.com, and fenbi.com.
Existing startups are having trouble maintaining profits, and new startups have been forced to deal with a slowdown of the Chinese venture capital industry.
According to China's Internet Education Research Institute, only 5% of China's online education companies earned a profit last year. Despite these grim statistics, venture capital in 2015 dove into the online education market with enthusiasm. 19 out of 90 companies raised rounds of more than US $20 million, with some raising more than US $100 million.
China has the second-largest economy in the world, and the online education market is expanding rapidly: the sector reached sales of almost 119.2 billion yuan in 2015 and is expected to grow to 204.6 billion yuan by 2018.
Ronald Wan, chief executive at Partners Capital International in Hong Kong, said that the main difficulty these startups face is the creation of a business model that results in profit. He said:
The online education market is promising and the ideas are always fantastic, but how to transfer the ideas into a profitable business model is difficult for entrepreneurs.
China's Internet Education Research Institute reports that education companies develop slowly, and profitable startups require patience and a large up-front investment for developing the curriculum, technology, and marketing. Most of the companies in the industry have three to five years of losses before they make a profit.
Tong Zhe, chief executive of Beijing-based online educational platform Wanmen University, said:
A lot of our peers have gone out of business because they failed to raise funds, and venture capitalists are now more picky when it comes to online education projects. And now we are more cautious and prudent in using our money.
Tuck Lye Koh, chief executive and co-founder at ShunWei Capital, agreed. He said:
Investors are more rational and are taking more time to think through an investment.
The slowing pace of investment seems to span all industries in mainland China. Investment in technology startups fell 28% from US $2.5 billion to US $1.8 billion between the first quarter of 2015 and the first quarter of 2016. 2015 seemed to be a peak for investment, but the rate fell due to stock market troubles, according to Tong.
Online education has interested a wide variety of students in China, especially those seeking engineering and computer science courses.
Some of the companies that have recently grown in China's MOOC market include Udemy (which received $60 million from Naspers Ventures), and the China Online Education Group (51Talk), which is expanding into the US.