09-24-2021, 02:41 PM
- Regulators cracked down on Chinese ride-hailing app Didi, then after-school tutoring companies, this summer.
- In both cases, investment funds poured in billions of dollars for a strategy of cash burning to subsidize exponential user growth and build up a dominant market leader.
- Now, investors need to consider national policies far more than just industry developments, Ming Liao, founding partner of Beijing-based Prospect Avenue Capital.
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BEIJING — As overseas investors reel from Beijing’s regulatory crackdown, the rapid fallout in an industry like after-school tutoring can be a guide to what went wrong, and where future opportunities lie in China.
Before China cracked down on tutoring schools this summer, major investment firms like SoftBank were pouring billions of dollars into Chinese education companies, many of which were publicly traded in the U.S. or on their way to listing there.
The strategy was one of burning cash to fund exponential user growth, with hopes of profit in the future. For the strategy to work, investors aimed for a “winner takes all” approach that they’d used with other Chinese start-ups such as coffee chain Luckin Coffee and ride-hailing company Didi.
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