China's Tencent to Invest in Educational Startup VIPKid -- Update

Date : 09/19/2019 @ 7:18AM
Source : Dow Jones News
Stock : Tencent Holding Ltd. (PC) (TCEHY)
Quote : 41.81  -0.275 (-0.65%) @ 8:31PM
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China's Tencent to Invest in Educational Startup VIPKid -- Update

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By Julie Steinberg in London and Shan Li in Beijing 

Chinese technology giant Tencent Holdings Ltd. is set to invest $150 million in VIPKid, according to people familiar with the matter, pushing a funding round closer to completion even amid concerns among some current and prospective investors over the Chinese online education company's business model.

Fast-growing VIPKid, based in Beijing, is backed by investors including venture-capital firm Sequoia Capital and retired basketball star Kobe Bryant. Through the service, some 70,000 teachers living in the U.S., Canada and elsewhere give online English lessons to more than 600,000 children, aged four to 15 and living primarily in China.

Tencent, one of China's largest tech giants and one of the world's most active tech investors, had initially balked at the investment, concerned by VIPKid's financials as well as new Chinese regulations governing online education, one of the people said. Still, it is moving forward with the deal, the people said.

Reuters reported earlier that Tencent had concerns over a potential investment.

VIPKid had originally targeted raising as much as $500 million in the funding round, and has been eyeing a valuation of $4.5 billion, said people familiar with the fundraising, up from $3.5 billion last year.

But the round has taken longer than anticipated, prompting VIPKid to recently hire China Renaissance, an investment bank, to help scout out potential investors, said people familiar with the matter.

A VIPKid spokesman said the company is pleased with the round and believes it will meet its goals, adding: "We envision a global classroom that empowers students and teachers."

VIPKid is soliciting funds against a challenging backdrop, including the high cost of acquiring and retaining teachers and students. It is also facing a lawsuit filed in July in California by a teacher who says she should be treated as an employee, not an independent contractor. VIPKid said the claim was without merit.

Chinese e-commerce titan Alibaba Group Holding Ltd. and U.S. private-equity firm KKR & Co. passed on the round, said people familiar with the matter. U.S. hedge-fund firm Coatue Management LLC, which co-led a previous round, has tried in recent months to unload part of its stake in VIPKid, some of the people added. A person familiar with Coatue's thinking said the firm isn't currently selling its stake.

Some analysts say the education tech industry is poised for consolidation, with larger companies now able to distribute products from smaller players. Ping An Insurance (Group) Co. of China Ltd. in July acquired iTutorGroup, a VIPKid competitor, in a deal that valued iTutorGroup at around $5 billion, people familiar with the matter say.

China's new rules require online teachers to be certified, a costly and lengthy process, and also mandate that some of the data that online education companies collect be stored in China. The Chinese Ministry of Education said the rules protect students by ensuring teachers are qualified to teach.

VIPKid could also struggle to attract and retain talent as concerns rise among U.S. lawmakers and officials about the company's collection of teachers' Social Security numbers, bank-account information and home addresses, all of which are stored in China.

VIPKid has long collected such data for paychecks and background checks, and there is no evidence to suggest it is being misused.

The company's privacy policy doesn't specifically say it stores Social Security numbers and bank-account details in China, but the company confirmed that it does, adding that VIPKid complies with all U.S. and Chinese laws, takes data security seriously and works with the most respected global providers of data storage on the cloud.

Even so, U.S. lawmakers and officials at the State Department and National Security Council have raised concerns about data privacy in China in recent years as the country pushes for data to be kept on the mainland.

"It's very concerning that VIPKid and other Chinese-based online education platforms may not be clearly and unambiguously letting American teachers know that the companies are storing teachers' personal information in China," Sen. Marco Rubio (R., Fla.), a member of the Senate Intelligence Committee, said in a statement.

A spokesperson for the State Department said that, for Chinese companies in general, the U.S. "is concerned about Chinese data localization laws and regulations that may require U.S. firms to store data in China."

"Storing data locally runs contrary to the norms of a free and open internet, and may compromise intellectual property or personally identifiable information," the State Department spokesperson said. "These measures are another example of China's unfair trade practices...that we would like China to end immediately."

The handling of sensitive U.S. data took on greater importance after the government disclosed in 2015 that hackers suspected of being connected to China stole more than 21 million Social Security numbers from the Office of Personnel Management.

Earlier this year, American national-security officials ordered a Chinese company, Beijing Kunlun Tech Co., to sell gay-dating app Grindr to prevent personal data from being exploited by Beijing. The company also agreed to stop Grindr's operations in China, to keep its headquarters in the U.S. and to refrain from sending sensitive personal data to China. In July, Kunlun said it planned to list Grindr on a foreign stock market after U.S. authorities dropped their objections to an IPO.

U.S. officials last year blocked the sale of MoneyGram International Inc. to Chinese company Ant Financial Services Group over national-security concerns regarding Americans' sensitive data.

The Wall Street Journal reported earlier this year on a clampdown by VIPKid on how Western teachers treat sensitive topics such as Taiwan and the Tiananmen Square crackdown. The company said at the time it was hewing to parents' preferences about what information is taught to their children.

Xiao Xiao and Lekai Liu contributed to this article.

Write to Julie Steinberg at julie.steinberg@wsj.com and Shan Li at shan.li@wsj.com

 

(END) Dow Jones Newswires

September 19, 2019 02:03 ET (06:03 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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