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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