Less than a year and a half ago, Edtech company Byju’s was India’s most valuable startup, with a valuation of $22bn, or Rs 1.8 lakh crores. Recently, Byju’s defaulted on its loan of $1.2bn (around Rs10,000 crores) in the USA. It’s auditor Deloitte resigned, citing concerns with the Byju’s financials, which the company has delayed providing for over an year. Three independent directors of the company also resigned. These directors represented various investors from different funds and venture capital firms. There are lawsuits from the lenders. The company has missed scheduled payments and broken financial covenants, but has chosen to filed counter lawsuits against the lenders instead. Government agencies are investigating the company. Many vendors are owed money. There have been multiple rounds of layoffs. Management remains elusive and cagey about information. The last set of Byju financials are from the year ended March-2021, even as other Indian companies now have financials out for year end March-2023. Even for year ended March-2021, Byju’s showed a staggering net loss of over Rs4,000crores. Essentially, Bjyu’s ticks every red flag of a company in big trouble.
This is the company that was cited as the poster child of India’s startup eco-system. The promoter was celebrated, winning multiple ‘Entrepreneur of the year’ awards. Byju’s took on a hyper-aggressive growth strategy. It raised massive amounts of capital (close to Rs50,000crores) and spent large amounts on marketing. Byju’s has had Bollywood superstar brand ambassadors, was the title sponsor of the Indian cricket team and was also a co-sponsor of the FIFA World cup.
It may sound preposterous to say this for such a high-profile company, but it will be extremely difficult for Byju’s to make it. There will be huge losses for investors. It will also be extremely difficult for the employees, as tens of thousands will lose their jobs. Many customers who bought courses from Byju’s may also suffer. Given Byju’s high-visibility there will be contagion effects, perhaps unfair, on other Indian startups. Funding will get difficult. Valuations will be marked down.
There are lessons in this. We must learn them if we want India’s startup eco-system and entrepreneurship to thrive. Even though we need more financial details, here are some obvious mistakes done by the company and its stakeholders:
- Not getting the fundamental product right – The company essentially offers an online educational product, using video based learning (and some offline teaching too now). During Covid, such products boomed. However, post-Covid, demand for proper, intensive, on-the-ground education is back. Online education is a great concept and has a place. It just can’t grow at a breakneck pace as it did in Covid. Byju’s and its investors assumed and pushed for huge growth rates. They tried to attain this by raising and spending money. Rather, they should have reevaluated the product and adjusted growth expectations. Educational brands take a long time to build. Some of the world’s top institutions have been around for centuries. It at least takes a few decades. You can’t do it in a few quarters. Neither can you see education as a pure maximize-financial-return product.
- Greed isn’t always good – Greed is good, said Gordon Gecko in the iconic movie Wall Street. However, there can be too much greed. Byju’s could have grown at a modest pace. It would still be a good, valuable company. However, over seventy investors, comprising of the smartest brains and the who’s who of the investing world, pumped billions of dollars in Byju’s trying to inflate a balloon beyond its capacity. There were multiple funding rounds. Each round valued the company higher. Previous investors felt their investment had increased in value. In reality, it was nothing but some (not so) smart and greedy people playing passing the parcel, waiting for the next sucker.
- Toxic Debt – Byju’s overvaluation was stupid, but still may not have jeopardized the company. However, Byju’s made a rookie mistake. Despite having huge cashflow losses, it took on a $1.2 billion loan abroad. Loans come with strict terms and conditions. Byju’s couldn’t even meet the basic ones – providing financials on time. Lenders probably have guarantees and share pledges. Hence, in the event of a default, lenders can take over and can totally wipe out the equity investors. Yes, those 70 odd super smart investors could have that $22bn valuation marked down to zero. Byju’s has chosen to skip its interest payments and take its lenders to court, again a terrible idea. Lenders may finally have all the power anyway. Meanwhile, the company is showing the world what it does to people who give it money. There’s also news of Byju’s taking on more loans from elsewhere. The hole is only being dug deeper.
- Integrity, Ethics and Corporate Governance – When a company raises money from investors, the least it can do is keep the investors informed on what it is doing with that money. It is baffling how Byju’s got away with not publishing financials for so long, with such sophisticated investors involved. Was the love for Byju’s (and greed for its growing valuation) so much that the investors ignored the most basic requirements? Anyway, it is a terrible look on Indian companies when a high-profile Indian company can’t be bothered to prepare its financials.
- Pre-mature celebration – This one is on all of us. We love India. We want to see India win. Hence, when a start-up attains mega-valuations, we love to celebrate it. However, business success is not about raising money and getting valuations. That’s just a measure of the future performance expectations. Neither is marketing spend an achievement (oh look at their logo on Team India jerseys!). The only business achievements that finally matter are a great product, happy customers and excellent profitability. Anything else is hype and drama.
One sincerely hopes Byju’s was an exception in the Indian start-up space. However, the greed of 2021 and 2022 is bound to result in a few more mishaps down the road. Going forward, let us be careful in how we build our startups and entrepreneurship culture. Let’s not make great hype followed by great crashes. Let’s make great businesses.