India’s most valuable tech startup defaulted on a $1.2 billion loan—and then sued its lenders. We explain this bizarre biz story unfolding in the US.
Researched by: Nirmal Bhansali & Anannya Parekh
Byju’s: A quick intro
The basic deets: In 2008, Divya Gokulnath met Byju Raveendran at a GRE prep class he was running. Within a year, she shelved her grad school plans and married Raveendran. In 2011, the couple co-founded Byju’s parent company Think & Learn. By 2019, Byju’s had 35 million registered students and 2.8 million paid subscribers. Those numbers doubled in the first year of the pandemic—and grew by 80% in 2022. At that time, the company was making 80% of its revenue from preloaded tablets and memory cards.
The multibillion dollar decacorn: Byju’s soon became the blue-eyed startup for marquee foreign investors—Blackstone, UBS and Abu Dhabi sovereign fund ADQ—who poured in $2 billion during the pandemic. 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.
Buying spree: Since the pandemic ended, Byju’s has been on a buying spree—spending $2.6 billion on acquiring other ed-tech companies. Of the Think & Learn empire, the following companies are most relevant to our story:
Byju’s Alpha: This is Byju’s holding company in the US—which controls its US acquisitions. These include the US-based kids learning platform Epic and coding platform Tynker. The money raised from US investors is channelled into Alpha—and distributed among the many subsidiaries.
Great Learning: This is a Singapore-based company—which caters to professionals looking to upskill. Great Learning in turn has acquired a number of other companies in the area—such as Northwest Executive Education.
Aakash Institute: This was Byju’s most expensive acquisition—with a price tag of $1 billion. And it marks Byju’s expansion into offline learning. Aakash has 320 centres across India and is the only subsidiary that is doing very well. Its revenues increased 3X increase over the last two years—and is expected to reach Rs 40 billion (4,000 crore) mark in FY24.
A string of bad omens
Accounting problems: 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. The numbers were finally released 18 months later in September 2022. The reported revenues were dramatically lower. 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 raid: Byju’s miseries were recently compounded by an Enforcement Directorate raid on its premises and Ravindran’s residence—on suspicion of violating foreign exchange regulations.
The valuation nosedive: One of Byju’s key investors, BlackRock slashed the valuation of the company by nearly 50% in April—a steep drop from $22 billion to little over $11 billion. And then pared it down to $8.2 billion in May. That’s still higher than the valuation of $5.97 billion—arrived at by an independent analyst for another investor Prosus.
Lawsuit #1: Suing Byju’s
Where it began: In recent years, Indian startups—having burned through their investors moolah—have looked to debt funding to raise capital. The reason: you don’t have to give up equity when you take a loan.
This was also true of Byju’s—which took out a whopping $1.2 billion loan in November, 2021—to pay for its shopping spree. This was a Term Loan B (TLB)—which is very attractive for spendthrift startups because they don’t have to pay monthly instalments. Instead, most of the owed amount—loan plus interest—is paid when it matures. Those were the happy days when interest rates were low. Ironic quote to note: At the time, the MD of Morgan Stanley grandly declared:
The historic success of Byju’s TLB, as the largest unrated TLB from India and Asia as well as one of the largest unrated TLB globally in history, reflects the strong credit story of the company as one of the largest and fastest growing global edtech platforms…
Fast forward to 2023: The thing about TLBs is that they can be traded in the market.
As news of Byju’s mounting losses became public, the original lenders sacked the loan at a hefty discount toward the end of 2022:
- In December, the new lenders demanded immediate repayment of a significant chunk of the loan.
- In March, Byju’s offered to pay a higher interest rate on the loan—but that didn’t resolve the stalemate.
- In April, the lenders upped their demands: $200 million repaid asap plus a higher interest rate.
- And in early May, the company raised another $250 million in debt—which many assumed would go toward paying off part of its debt.
- But by May 19, everything falls apart—and the lenders go to court.
The lawsuit: was filed against the US holding company Byju’s Alpha. The filing accused Byju’s of not complying with two key requirements of the loan:
- A global credit-rating agency like S&P or Moody’s was supposed to rate the debt within two to three quarters. That didn’t happen.
- Byju’s was supposed to file its financial statements for FY 2022 within the deadline—to avoid the shitshow that occurred with the FY2021 numbers. That hasn’t happened to date.
The lenders also accused Byju’s of hiding $500 million—of the $1.2 billion loan. In his court testimony, a top manager at Byju’s Alpha “admitted to transferring half a billion dollars out of the company”—though the company said it had every right to do so to protect the funds from “predatory lenders.”
What they want: Control of Byju’s Alpha which will be run by a person appointed by them. Why this is a big deal: Byju’s will likely lose control of its two US acquisitions: Osmo (bought for $120 million) and Epic (bought for $500 million). According to Morning Context, the Singapore-based Great Learning is at risk as well—since it appears to have guaranteed the $1.2 billion loan that is now under dispute.
Lawsuit #2: Byju’s strikes back!
In any astonishingly aggressive move, the company responded by first defaulting on an interest payment of $40 million on June 5. And it filed a counter lawsuit against the lenders—accusing them of “distressed debt” investing. These lenders buy the debt of “a good company with a bad balance sheet”—at a discount. They have only two aims. One, use their clout to shape the restructuring of the company—and gain equity. Two, recoup their money. If the company can’t be saved, then its assets will have to be liquidated—and lenders are always paid before investors. Basically, Byju’s is accusing the lenders of using the pretext of contract violations to grab its companies.
FYI: At least one of the lenders is a $7-billion hedge fund that specialises in distress debt investing—having scooped up bonds of tottering companies like Swiss bank Credit Suisse and China’s largest real estate developer, Evergrande.
Point to note: Byju’s has offered to make the missed interest payment if the lenders withdraw their demand for an immediate repayment of the entire loan.
The bottomline: ‘Raise and burn’ strategy of startups has not served them well. And yet Byju’s remains upbeat and is talking up the planned IPO of its only profitable venture Aakash Institute. The more things go downhill, fewer lessons are learned.
ArcWeb has a good breakdown of the Byju’s lawsuits—and Finshots explains the loan in the clearest terms. Economic Times lays out the timeline of the current mess. Bloomberg News has the latest negotiations between the two sides. Harvard Business School has a good explanation of distressed debt investing.