The talks make Yuanfudao, which was founded in 2012 and offers online courses and homework plans to students, a rare bright spot of activity in the deal-making world, which has largely dried up as the coronavirus pandemic has suspended most travel and business meetings.
Yuanfudao's focus on online learning puts it in one of the few sectors that have seen a surge in investor interest as the coronavirus and school closures force students in China to attend classes via the internet.
The round of financing is led by Tencent Holdings and private equity powerhouse Hillhouse Capital Group, the people said, declining to be named because the information isn't public.
Yuanfudao's fundraising round kicked off before the Lunar New Year holiday in late January when the company originally aimed to raise as much as $1 billion, according to the people. The talks are ongoing and the investment amounts have not been finalised, the people added.
A company spokeswoman told Reuters in an emailed statement the information about valuation and deal timing was "not accurate" but did not elaborate. Tencent and Hillhouse did not immediately respond to a request to comment.
The company sought to close the round sooner and opted not to spend time seeking more investors, including new ones who would have needed extra time to conduct offline due diligence due to the outbreak, the people said.
Tencent is an early investor in the firm while Hillhouse was in constant talks with the startup before this fundraising, one of the people said.
Online Chinese education apps like Yuanfudao's have seen a sharp rise in downloads and usage amid the outbreak and the sector has become even more popular globally, as the coronavirus spread to 178 countries, causing school shutdowns globally.
Between January and mid-March, Yuanfudao ranked first in in-app purchases on the Chinese app store's education category, according to mobile app performance tracker App Annie.
DingTalk, developed by Alibaba Group to help pupils communicate with teachers and watch online classes, became the most-downloaded free app at the Chinese app store over February, the App Annie data showed.
Yuanfudao was valued at $3 billion in a previous round of financing in 2018, according to its official site. The company, which says it has 400 million users, also counts Warburg Pincus, Matrix Partners China, and IDG Capital as its backers.
(Reporting by Yingzhi Yang in Beijing and Brenda Goh in Shanghai; Additional reporting by Julie Zhu in Hong Kong; Editing by Sam Holmes)
By Yingzhi Yang and Brenda Goh
