India’s most valuable tech startup has been mired in a swamp of self-made miseries. It has now been forced to vacate its massive headquarters in Bangalore—which may be the first sign of financial discipline. This is a quick update on the Byju’s debacle.
Editor’s note: We have extensively covered Byju’s troubles in two previous Big Stories. We looked at its origin story and dodgy accounting practices and laid out the legal tamasha around its gargantuan $1.2 billion loan.
Researched by: Nirmal Bhansali
Some quick background
Byju’s rise: By 2019, the ed-tech company had 35 million registered students and 2.8 million paid subscribers. But its fortunes soared during the pandemic when marquee foreign investors—Blackstone, UBS and Abu Dhabi sovereign fund ADQ—poured in $2 billion. In March 2022, the company was valued at $22 billion after a funding round of $800 million. And its marketing profile has grown ever more lavish—with ambassadors like Lionel Messi and Shah Rukh Khan.
The spending spree: Since the pandemic ended, Byju’s has been on a buying spree—spending $2.6 billion on acquiring other ed-tech companies. These include other test prep companies like Aakash Educational Services and a Singapore-based higher ed company. The most controversial of these has been White Hat Jr—a coding platform for kids. It has also gone back to Raveendran’s roots—opening hundreds of in-person tuition centres—but for kids between the grades of 4 to 10.
Where we are: The fairytale, however, has come to an end over the past year. Today, Byju’s fortunes hang in balance—either steps away from ruin or poised for a hard-fought recovery. The latter will require a serious commitment to fixing both its work culture and business practices. There are encouraging signs Byju’s may be willing to do what it takes.
Problem #1: The accounting crisis
The background: All looked rosy until 2022—when the independent auditor Deloitte refused to sign off on the company’s financials—citing problems with the way it was reporting its revenue in its FY2020/21 statement. When the numbers were finally released—18 months later in September 2022—losses had multiplied almost 17X—jumping from Rs 2.6 billion (260 crore) in FY2020 to Rs 45.88 billion (4,588 crore) in FY2021. And the company still hasn’t released its numbers for the fiscal year ending 2022.
The great resignations: Things got even uglier in June when Deloitte resigned as Byju’s auditor—saying it still hadn’t received financial statements for FY2022. Experts said Deloitte’s exit was “a very powerful signal” of issues with corporate governance.
Boosting that signal: The simultaneous exit of three external board members quit—indicating a rift between investors and owners. The directors represented Peak XV (formerly Sequoia), Chan Zuckerberg Initiative, and Prosus Ventures—the investment arm of technology giant Naspers:
The reality is that we’ve been thinking about this for a while,” said Naspers’ [Bob] van Dijk. “The amount of information we got [from Byju’s] made it really difficult.” Prosus has said it had made an accounting judgement last year that it “no longer exerts significant influence over the financial and operating policies” of Byju’s.
The Byju’s fix: Management tried to bluster its way out of this PR nightmare. It argued that the accounting issues were a result of its rapid expansion in the United States. The company, however, promptly appointed a new auditor—BDO—for five years. And it now has a new Chief Financial Officer Ajay Goel—who has committed to closing the audit of FY 2022 and FY 2023 by September and December, respectively.
Most importantly: Founder Byju Raveendran finally acknowledged making serious mistakes in a shareholder call. He also announced the formation of a Board Advisory Committee (BAC) to “guide and advise” the company. Earlier this month, former Infosys CFO Mohandas Pai—one of its early investors—and BharatPe Chairman Rajnish Kumar joined the committee. One worrying point to note: The board now consists of Byju Raveendran, his wife and co-founder Divya Gokulnath and brother Riju Raveendran. There are no independent directors as yet.
Where we are now: While setting up a BAC is an encouraging move, its members seem more inclined to act like apologists for the founders. For example, Pai pointed out “In any company where there is a delay in submission of accounts, the board has equal responsibility as management.” This is entirely true—as is the fact that VCs have long been turning a blind eye to gross financial mismanagement around the world (See: FTX). But it isn’t clear whether this committee will do a better job of keeping an eye on the henhouse.
What is inarguable: Byju’s valuation has tanked since the resignations. Prosus slashed the valuation of the company to $5.1 billion—a drop of 75% from $22 billion valuation last year. That’s not a vote of confidence from a key investor.
Problem #2: The $1.2 billion loan
The background: Byju’s took out a whopping $1.2 billion loan in November, 2021—to pay for its shopping spree. But as news of Byju’s mounting losses became public, the original US lenders sacked the loan at a hefty discount toward the end of 2022. The new owners of Byju’s debt demanded immediate repayment of a significant chunk of the loan. Negotiations fell apart—and both sides sued each other.
The lenders accused Byju’s of not meeting the requirements of the loan—and asked to take control of its US holdings. OTOH, Byju’s responded by first defaulting on an interest payment of $40 million and a counter lawsuit. It accused them of “distressed debt” investing—i.e using the pretext of contract violations to grab its companies.
A big breakthrough: In late June, the lenders’ lawsuit was thrown out by a Delaware court. The judge rejected the demand to give their representative charge of Byju’s US company Alpha. But she also directed the company not to make any substantive changes. Yesterday, lenders who own more than 85% of the $1.2 billion loan agreed to amend the terms of the agreement—and cease all litigation. If the new terms are signed and sealed by August 3, they will also drop their demand for accelerated repayment of money owed. This may be the single best bit of news for Byju’s.
Problem #3: Unhappy employees
The great layoffs: In 2021, as the pandemic came to an end, Raveendran set up Byju’s Tuition Centre (BTC)—a chain of 302 offline coaching centres around the country. This return to his original roots as a tuition guru ought to have been a roaring success. But the vertical soon ran into trouble—mainly because Byju’s hired inexperienced and underpaid teachers. This in turn made parents unhappy—which reflected in BTC’s poor renewal rate—and rising losses.
According to a Morning Context calculation, it was running up a loss of Rs 340 crore for a year. And the company soon had to slash its workforce:
Thousands of employees have either left or been fired. The top leadership is gone. Centres are running empty most of the week. Classes are being cancelled. New enrolments are proving to be difficult. Renewals, even more. The business is bleeding money. It’s like a boat with a million holes.
FYI: Byju’s has also failed to make payments to their employees’ provident funds for nine months.
The video: A clip that leaked on LinkedIn this week confirmed reports of a toxic work environment—and rising employee anger over salary issues:
The video opened up a flood of ex-employee accounts of harassment and exploitation.
Where we are now: BTC employees were getting ready to stage angry protests this week—but were forestalled by an emergency town hall meeting. The leadership has promised not to undertake any further layoffs—and to address all concerns about delayed payments. This week, management made a company-wide commitment to postpone any future layoffs to the end of August.
The bottomline: For all its travails, Byju’s is in one of India’s fail-proof sectors—tuition. Even its unhappy investors acknowledge that its core offering—online classes for kids—is still “an attractive business that’s performing an important function in the Indian market.” That’s why Byju’s is back to raising money—looking for a $1 billion round. And the odds are greatly in its favour.
Reading list
Much of the good reporting on Byju’s is paywalled—either over at The Morning Context or Financial Times. BBC News has a good round up of Byju’s travails. Economic Times and Bloomberg News have the latest on that $1.2 billion loan. Vivek Kaul lays out the five lessons we can learn from Byju’s unravelling.
