Hou Jianbin, the founder and CEO of one of the world's largest education technology unicorns, knows what it takes for a kid from the Chinese backwaters to make it. He grew up in a rural town in northern China in the 1990s. Hou's life changed when — against daunting odds that make Harvard admission look like a cakewalk — he was accepted into the mega-selective Peking University in 2001, where he majored in computer science and management. Now helming Zuoyebang, a $10 billion ed tech company, Hou positions himself as a champion for education equality in China, attempting to rebalance China's highly unequal education system.
"Knowledge can change someone's life, and I am the beneficiary of it," Hou said in a 2018 interview with Xinhua News Agency. "With the power of technology, excellent teachers can bring quality education within reach through online education." Hou's right about the power of his firm's tech and the need to give every kid in China a fighting chance. But Zuoyebang also requires huge marketing expenditures and aggressive salesmanship to acquire the number of users needed to power its killer AI-driven apps. In sinking ever more VC capital toward that end, Zuoyebang has incurred the wrath of regulators. Hou has certainly profited from the anxiety of underserved families living outside China's showcase cities. But given the pressure to scale and win his industry, can Hou stick to his stated mission of changing their lives?
China's ed tech equation: anxiety = opportunity
Buoyed by the pandemic, China's ed tech industry is enjoying explosive growth, both domestically and globally. Zuoyebang is one of the industry's two goliaths; according to BigOne Lab, a Beijing-based analytics firm, Zuoyebang makes up 18% of China's K-12 online tutoring market. (The other mega-firm is Yuanfudao, with 21% of the market.) Equipped with deep learning technology that helps solve questions for students in real time through image and voice recognition and its livestreaming class offerings, Zuoyebang claims to have amassed over 170 million monthly active users, 70% of all K-12 students in the country. Of those, 70% come from so-called "third-tier cities" or below. These are places far away from, and light-years behind, major metropolises like Beijing and Shanghai. Their educational resources are threadbare, yet their populations often need to beat higher score cutoffs than first-tier kids on the dreaded gaokao, China's nationwide college entrance examination. Tech elites have largely ignored this market, but it's where Hou comes from. Yuanfudao, by comparison, claims 57% of its users are in rural China.
This anxiety over inequality and the life-or-death nature of the gaokao has created the capital boom that Hou's ridden to fame. China is home to one of the world's largest learning technology markets, spurred by its 240 million K-12 students and eager families willing to shell out an average of 11% of annual family expenses for their children's future success. About two-thirds of the world's total venture capital investments went to Chinese companies in 2020, according to HolonIQ, a market intelligence firm. And the funding was heavily concentrated in just two companies: Yuanfudao and Zuoyebang.
Zuoyebang's killer app — and Achilles' heel
Zuoyebang, which announced a $1.6 billion funding round in late December, believes its advantage is performing Chinese character recognition better and faster than any competitor. Chinese ed tech is a crowded space, and every major player allows students to get answers to questions by submitting photos of their paper-based work. The key to improving the accuracy of the answer search is a giant question database and optimal optical character recognition technology, both of which Zuoyebang aces.
In a 2018 Q&A with Sequoia Capital, one of Zuoyebang's recurring investors, Hou said Zuoyebang beat competitors by delivering answers within one second, when it took similar tools eight seconds to do the same. And Zuoyebang prides itself on having what it claims is China's largest question database, totaling 300 million questions, and a higher-than 97% accuracy rate in its responses. In 2018, when Zuoyebang's problem-solving accuracy rate was 90%, Hou said it was at least 10 percentage points ahead of others. "China's tech industry is oversaturated with competition," Hou said. "In this environment, you can only win by offering users a different product experience."
Winning this question-search battle depends on amassing a huge data set. Hou set an audacious goal for his new company in 2015: Zuoyebang needed to grab at least half of all new daily users in the ed tech market, no matter how much money it took to reach that goal. "We established our dominance in the space after sticking to the strategy for less than eight months," he said in a speech during a 2019 annual company executive forum.
It worked. Within months, Zuoyebang's user base had reached 70 million, or a third of China's K-12 population, Hou revealed at an education conference. The more students used Zuoyebang, the more data the app collected about its users, helping the company jumpstart all the other tools and apps rolled out in the years since. That includes the more profitable online tutoring market with the backing of venture capital. Thanks to its large database, which allows it to convert organic traffic from those who use its photo search and problem-solving tool to its paid classes, Zuoyebang boasts the lowest customer acquisition cost among its competitors, which is less than half of the industry average.
The Party crashes the party
Zuoyebang's relentless focus on user acquisition makes business sense, particularly if its AI requires a massive data set, but it has also put it at odds with a ruling Party that wants ed tech to spend more money on education itself. Zuoyebang, along with its competitors, has recently come under regulatory scrutiny as the Chinese government rolled out antitrust regulations aimed at reining in big tech. The online education sector has gotten particular attention. On Jan. 18, the Central Commission for Discipline Inspection, the Chinese Communist Party's powerful anti-corruption body, published a scathing piece criticizing an online-tutoring market in "capital turmoil." Instead of investing in education, the commission pointed out, ed tech firms have relentlessly invested in marketing. In the first half of 2020, according to QuestMobile, the total marketing investment of the three top K-12 online education companies surged 71% compared to the same period in 2019. Zuoyebang's investment in advertising, though lower than its competitors, amounted to $34 million in June alone.
The Party has called for heightened regulations and supervision to ensure "the online education sector's healthy development, prevent a messy capital bloodbath, and encourage the sector to refocus on education itself."
Some Zuoyebang users think there's more sizzle than steak. On Black Cat, a Sina-backed consumer review platform, Zuoyebang has received nearly 570 complaints, with anonymous users complaining about its misleading advertising practices and that it bombards users with non-stop promotional calls.
These criticisms, fair or not, are ironic. "Use your knowledge as the radius, and operate steadily within the circle," Hou has said, repeatedly stressing the importance of steadiness and sticking to what you're good at. But the cutthroat tech industry that prioritizes speed and scale is in inherent conflict with the type of long-term investments educators in China deeply prize. "Chinese ed tech companies are competing on all fronts," Maria Spies, founder and co-CEO of HolonIQ told Protocol. "But ... learners' experience initially, and outcomes eventually, will be the most important market competition factor."
Trouble, or at least squabbling, in paradise
At the operational level, Hou tries to infuse his personal values into his company, but many of them don't scale or translate into worker satisfaction. A highly-educated "study master" with an ascetic lifestyle to match, Hou has told Chinese media that he doesn't have any social media or gaming apps on his phone, something almost unthinkable for a Chinese man under 40. Hou also likes to tell Chinese media how in 2012, he went on a business trip to the gambling mecca of Macau with his colleagues. The hotel they stayed in was above Asia's biggest casino. Hou was the only person who didn't spend a penny there. "Things that require only luck are boring," he explained.
According to LatePost, when Hou was at Baidu, he expected his direct reports to be on constant standby. Now at Zuoyebang, he makes sure he is accessible to his staff 24 hours a day.
Each executive is also required to set an annual goal, which must be a major breakthrough, such as running a full or half marathon once per year. The company also mandates each new employee to run 10 kilometers, which has earned Zuoyebang the nickname of "running factory." "There is nothing in running itself," Hou said in a separate interview with NetEase. "What matters is that you set a challenging goal and are able to exceed that goal through hard work."
Self-reflective and self-critical, Hou also encourages his employees to ruthlessly criticize each other when problems arise in a sort of Chinese version of hedge fund titan Ray Dalio's so-called radical honesty. "The thing I can't stand is that people can't accept criticism after they make mistakes," Hou told LatePost.
This may work to motivate true believers, but after six years of rapid growth, Zuoyebang's staff has grown from dozens to over 35,000 — and not every employee buys into the company's exacting culture. On Maimai, a Linkedin and Glassdoor-like platform where Chinese tech workers trade industry information and gossip, swarms of former and current Zuoyebang employees have complained about the company's long work hours, ugly company infighting and messy management. "The management of Zuoyebang are simply *** through and through," one anonymous user wrote. "They just have no sense of responsibility."
Hou declined to speak to Protocol for this story. Zuoyebang did not respond to Protocol inquiries about customer, employee or regulatory issues.
It's clear that Hou wants Zuoyebang to see itself as an educator, not just another tech company. Everyone at Zuoyebang addresses each other as "teacher" instead of their official title. "Teacher Hou" once said Zuoyebang is both a technology company and an education company. The question is whether it can continue to be both, or whether it will have to choose.
