According to iResearch, China’s online education market is projected to grow to $40 billion in 2019 from $23.5 billion in 2016. Riding this wave are China’s leading Internet giants Baidu, Alibaba Group Holding, and Tencent, who have invested heavily in online education. A beneficiary of this interest is Yuanfudao, which early this year became the first Chinese Billion Dollar Unicorn in the sector.

Yuanfudao’s Journey

Beijing-based Yuanfudao was founded in 2012 by former NetEase employees Yong Li, Li Xin, and Shuai Ke. Formerly known as Yuantiku and Fenbi.com, it provides an online tutoring platform targeting primary and secondary school students in China who want to improve their test scores. It connects students with tutors who livestream through the platform.

It initially offered several programs like vocational exam training platform Fenbi, question database Yuantiku, and question search Xiaoyuansouti that together have over 160 million of student users. The company has a paying user base of over 1 million. Its online tutoring courses range from primary school English, Mathematical Olympiad to all-subject courses in secondary school.

Chinese parents place a premium on education and spend an average of about $580 per year on their child’s private or buke classes, with some parents spending close to $12,149 a year. For them, Yuanfudao’s online courses with fees ranging from RMB 3 to RMB 399 ($0.45 to $60), offer a convenient and affordable alternative. Its live streaming service to provide one-on-one tutoring is priced at RMB 39 ($5.86) an hour. Available on PC, tablet, and mobile, the app allows a teacher to teach up to 1,000 students simultaneously. There is strong demand for one-to-one online tutoring from test takers in tier-3 and tier-4 cities where good quality teachers are in short supply.

Yuanfudao has been investing top dollar in building up its teacher talent pool. In 2016, it hired about 100 new teachers for an annual salary ranging from $30,000 to $50,000.

Although lucrative, competition is stiff in the education market is China. Yuanfudao’s core differentiation is the data from its huge user base, using which it builds courses to cater to diverse needs. It competes against private education giant New Oriental Education & Technology Group, online learning platform Zuoyebang, homework assisting platform Xueba100, online K12 learning platform 17zuoye, private tutor marketplace Enjoy Learning, and English language learning startup ABC360 as well as online tutoring unicorn VIPKid.

Yuanfudao’s Financials

Yuanfudao recorded revenue of RMB 120 million ($18 million) in 2016. About 16,741 online courses were completed last year with a total attendance of 21.48 million. Details of its profitability are not available but Yuanfudao is the most profitable of its programs and following a $40 million Series D investment by Tencent in 2016, it started focusing heavily on it.

Yuanfudao has raised over $244 million in funding so far from investors including Tencent, Matrix Partners China, IDG Capital Partners, China Media Capital, and Warburg Pincus. It last raised $120 million in May 2017 at a valuation of $1 billion.

According to a report from China’s Internet Education Research Institute, only 5% of mainland online education firms earned a profit in 2015. More than 30 out of 110 well-known Chinese online education start-ups including Tizi.com, nahao.com, and fenbi.com were forced to shut down due to their unprofitable business models and inability to raise funds.

Yuanfudao needs to focus more on its profitability to justify its high funding and valuation. As it stands, the funding to revenue ratio is very poor.