Trapped amidst a whirlwind of financial constraints, loan repayment challenges, and governance issues, Byju's finds itself teetering on the brink, where an involuntary and unwelcome transformation in its scale and structure becomes imperative for its survival.
In June, the real estate circles in Bengaluru were abuzz with rumors of Byju's deferring rent payments. Was India's most valuable edtech company contemplating vacating large office spaces? Byju's corporate entity, Think & Learn Pvt. Ltd, had leased three properties, with the largest being Kalyani Tech Park in Brookefield, spanning over half a million square feet and incurring a monthly rent of Rs 3 crore.
By the end of July, Byju's had vacated most of its space in Brookefield, instructing its employees to work from home or alternative offices. A prominent property consultant executive confirmed that Byju's had been struggling with rental payments even before this move. "It was expected," he remarked.
However, overdue rents were not the initial red flag. Byju's had also been defaulting on essential payments such as employees' provident fund contributions. Furthermore, it had considerably reduced its workforce, shrinking from 58,292 employees in March 2022 to 24,787 by May 2023, as reported by PrivateCircle Research, a private market intelligence platform.
The situation deteriorated when Byju's statutory auditor resigned, followed by the departure of three board members representing its investors. G.V. Ravishankar (of Peak XV Partners), Vivian Wu (The Chan Zuckerberg Initiative), and Russell Andrew Dreisenstock (Prosus NV) resigned from the board, citing "differences" with Founder Byju Raveendran. Consequently, the board was left with only Raveendran, his wife Divya Gokulnath, and his brother Riju Ravindran.
Deloitte Haskins & Sells, the appointed auditor for a five-year term until 2025, has expressed its inability to determine when Byju's intends to finalize its 2021-22 financial accounts or address the issues raised concerning the 2020-21 accounts.
Multiple sources with proximity to investors and the auditor, who requested anonymity, disclosed that the company's promoters were unresponsive to emails regarding their financial results. According to one source, "The promoters continually assured investors and the auditor that 'action is being taken' or that 'we will return with a plan.'"
Today, skeptics who had questioned Byju's $22-billion valuation (which was the basis for its last two funding rounds) appear vindicated. The company's global aspirations are faltering, and its domestic business is encountering difficulties. Byju's is also grappling with a term loan predicament. This crisis does not augur well for India's startup ecosystem, but it does offer valuable lessons.
Byju's, renowned for its interactive learning approach spanning from kindergarten to Class 12, has yet to address investor inquiries. Securing fresh funds is paramount, but potential lenders are unlikely to extend substantial financial support to Byju's when they remain uninformed about its activities throughout the previous fiscal years. (The company has not submitted audited financial reports for FY22 and FY23.)
Byju’s welcomed its inaugural Chief Financial Officer (CFO), Ajay Goel, into its ranks in April 2023. While regulations do not mandate unlisted companies like Byju’s to appoint a CFO, it is considered a hallmark of good corporate governance. It is rather uncommon for a company of Byju’s stature not to have a CFO, particularly given its substantial capital raising and significant acquisitions.
Satish Meena, Principal Analyst at Datum Intel, remarks, "No one possesses insight into the authentic figures, and this lack of clarity is unsettling for potential investors."
Even if Byju’s secures a new investor, the funding is likely to involve a complex, heavily structured arrangement at a considerably reduced valuation compared to Byju’s peak.
Byju’s has faced criticism for its opacity and its accumulating debt. An anonymous investment banker highlights that Byju’s would initially need to utilize any fresh capital to alleviate its debt load. This raises questions about investor interest, as investors typically seek to inject capital for business growth. Additionally, determining the valuation of the company presents a challenge. The banker suggests, "A modest sum of $200-300 million won't suffice; it would need to be a substantial round, possibly around a billion. Structuring a deal of that magnitude is no small feat."
Taking on debt
Investors harbor significant concerns regarding Byju’s operations, extending beyond the absence of audited financial reports for the past two years. Byju’s faces a range of corporate governance issues that experts argue it has frequently disregarded.
In June, when Dutch technology investor Prosus reduced Byju’s valuation to $5.1 billion, it stated, “Byju’s has witnessed substantial growth since our initial investment in 2018. However, its reporting and governance structures failed to evolve adequately for a company of its magnitude over time. Despite persistent efforts from our Director, the executive leadership at Byju’s consistently overlooked guidance and suggestions regarding strategic, operational, legal, and corporate governance aspects. Our Director's decision to step down from the Byju’s board was made when it became evident that he could not fulfill his fiduciary responsibility to uphold the long-term interests of the company and its stakeholders.”
Over the years, Byju’s has faced allegations of misleading practices, governance concerns, and aggressive marketing of its educational offerings. However, it has largely brushed off criticism as it embarked on an acquisition spree, commencing in 2020-21 when interest rates were nearly negligible in the US market.
Byju’s embarked on an acquisition spree, encompassing Singapore-based higher education firm Great Learning, the offline tuition chain Aakash Educational Services, and WhiteHat Jr, a platform teaching kids coding. The company also made acquisitions in the US, including the digital reading platform Epic, primarily focused on children. Byju’s invested approximately $3 billion in these acquisitions, with a significant emphasis on the K-12 segment. During this period, it successfully secured around $3.5 billion in equity capital.
This strategic approach proved advantageous for Byju’s, particularly with China implementing stricter regulations in the edtech sector. The regulatory changes prompted investors to redirect their funds toward India, positioning Byju’s favorably. However, experts emphasize that while making acquisitions is essential, effectively managing these acquired companies is equally critical.
Founder Byju Raveendran's strategy appeared to center on acquiring revenue through these acquisitions and raising equity based on the enhanced valuations. Insiders within the company acknowledge that Raveendran held significant influence with investors, and acquisitions were often made for their ostensible value, overlooking the unique potential of Aakash Educational Services. Byju’s also heavily invested in marketing, including sponsoring the Indian cricket team.
Then, the COVID-19 pandemic and associated lockdowns struck. These disruptions, beginning in March 2020, led to the suspension of physical classes in schools and colleges, causing a surge in online education. Byju’s initially reaped the benefits of its substantial investments. For instance, WhiteHat Jr, which generated approximately Rs 1 crore in monthly revenue before the pandemic, saw its revenues soar to Rs 10 crore per month, equivalent to Rs 120 crore annually. This performance prompted Byju’s to acquire the company for a substantial $300 million, despite being a loss-making entity with revenue projections 19 times its purchase price.
However, once the pandemic subsided, monthly revenue figures for WhiteHat Jr dropped to Rs 50 lakh, accompanied by a monthly cash burn of Rs 100 crore.
