India’s most valuable tech startup is mired in a myriad self-made miseries—the latest of which is an Enforcement Directorate raid. The Byju’s story, however, is hardly unique. Its problems reflect a startup culture driven by reckless founders and see-no-evil VCs—that may well be coming to an unhappy end.
Researched by: Nirmal Bhansali & Anannya Parekh
Remind me about Byju’s…
Origin story: 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. At first, they offered courses for the IIM entrance exam—and later for K-12 school kids. The tech bit grew from online videos to tablets—preloaded with course material—and later, the first learning app in 2015. Byju’s has never looked back.
The growth curve: 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.
It 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.
Building an empire: 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 (more on this later). 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.
And these guys were raided because??
On Saturday, the Enforcement Directorate raided two offices of India’s largest edtech startup—and Raveendran’s residence. The company is accused of violating foreign exchange (FEMA) regulations. ED says Byju’s received Rs 280 billion (28,000 crore) in foreign investment—and invested Rs 97.54 billion (9,754 crore) overseas. But it hasn’t explained what’s wrong with these numbers—only that these transactions may not match what the company has officially declared.
Here’s what we have from an unnamed ED official:
A FEMA probe concentrates on the money coming and going out of the Indian jurisdiction. In order to ascertain the nature of these funds, and if there has been any augmentation and unexplained transaction, multiple transactions incurred by the company come under the probe. The same is the case with Byju’s — the probe is only to ascertain that they are explained. Once the investigation is completed, a show cause notice could be served, depending on its outcome.
That doesn’t sound too ominous…
The reason why the raid is getting all this attention is because Byju’s accounting is already viewed as dodgy.
The ‘revenue’ problem: Last year, 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. The reason: the company was reporting revenue from its multi-year products upfront—making it seem far more profitable:
[The] auditor pointed out that revenue can be recognised in the subscription business model only after the service is delivered. For example, if an educational course is sold for a two-year duration and the customer pays the entire amount upfront, the company can’t count the entire amount as revenue in the first year.
The company instead has to spread the revenue across those two years—until the entire service has been delivered to the customer.
Also this: Many of Byju’s customers bought their course on EMI—i.e by taking a loan. The lender would pay Byju’s the rest of the amount—after deducting interest. But Byju’s would record the entire sum as revenue—which is not okay.
The fallout: When Byju’s was forced to change its accounting methods, the picture was quite different—and a bit dismal. Its revenue of Rs 24.28 billion (2,428 crore) in FY2021 was almost 14% below its FY2020 numbers. And its 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 This was especially surprising since the company had repeatedly claimed that it expected to make a revenue of $1 billion (Rs 8,000 crore) that year.
The biggest blow: 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.
Key point to note: Byju’s has still not released its numbers for FY2022—ending March, 2022. Typically, the deadline was September 30, 2022.
I also remember some bad press around their courses…
Yes, Byju’s has been under fire for a variety of seemingly unethical practices—which include bullying low income parents into signing up their kids. For example, a woodshop worker said he was pressured into buying a Rs 36,000 course for his 11-year-old. A Context (Reuters Foundation) investigation revealed many such cases:
Twenty-two Byju’s customers, several from low-income homes, told Context how they had been aggressively targeted by salespeople, with some coerced into paying for courses, tricked into taking out loans and ultimately left out of pocket.
Most were parents who said Byju’s staff took advantage of a desire to provide the best education for their children, and encroached on their privacy by ambushing them in public, pressuring them at home, or secretly collecting their data.
In December, the National Commission for the Protection of Child Rights opened an investigation into Byju’s sales practices—though not much has come of it yet.
Point to note: The company recently clarified that its sales people no longer visit students’ homes to pitch to their parents—and conducts a test to determine whether parents can afford the service before signing them up.
Also, White Hat Jr: The coding platform bought by Byju’s is aimed at kids in the US—but has been attacked online for the quality of its courses and misleading marketing tactics. In November 2020, company’s founder Karan Bajaj became so agitated about the criticism that he filed a defamation lawsuit against two of its fiercest critics—one of whom is an investor. Unfortunately, it only drew attention to the aggressive campaign by Byju’s to take down any online criticism of its products. Bajaj has since dropped the lawsuit.
So is Byju’s a ‘bad apple' or is this a trend?
There have been a number of prominent startups in similar trouble for dubious bookkeeping. Two quick examples:
BharatPe: The fintech company’s founder was forced out under a cloud of fraud allegations—including misappropriation of company funds (see: our Big Story). According to The Ken, family-engineered fraud was chronic at the company:
Their transgressions, alleged employees, ranged from using Jain’s father’s business to procure Diwali gifts, to his brother-in-law Gupta—who was in charge of procuring merchandise, booking travel tickets, and printing QR codes—short-changing the company. For example, a former executive told The Ken that merchants were given BharatPe-branded cricket bats and balls in September 2020. ‘This was procured at Rs 300 ($4) but it was billed at Rs 900 ($12),’ alleges this former executive.
Zilingo: Last August, investors suspended the founder/CEO Ankiti Bose over allegations of financial irregularities. And the problems were eerily similar to Byju’s: for two years, the company failed to file annual financial statements—and its auditor KPMG LLP had not signed off on Zilingo’s FY2020 results at the time of her exit. Bose had also reported wildly varying revenue numbers for FY2021.
Point to note: When pushed on the discrepancies, Bose offered this justification:
Bose said in an interview with Bloomberg News in May that Zilingo has used aggressive methods for recognizing revenue, but that the calculations are standard practice for the industry and that all of its investors were fully aware of them. “These matters are well understood by all investors,” Bose said in the interview.
A ‘see no evil’ culture: The startup culture is driven by the valuation game—which leads to lax governance and due diligence.
In the case of BharatPe, one VC blamed the board—which has been rewarding bad behaviour: “As long as [Grover] was getting new investors at a higher valuation, the board ignored everything else. It all boils down to money.” None of them wanted to run the risk of losing Grover—who was seen as single-handedly driving BharatPe’s growth. And the investors were the same—“either blissfully unaware or, worse, content to stand idly by as long as the value of their investments grew.”
A “crazy growth” culture: A lot of the fudging happens because founders don’t want to break the bad news to their existing investors—and are under constant pressure to raise money from new investors. All of whom are obsessed with what Bose called “crazy growth”—which leads to bad things as an industry expert points out:
VCs raise money from LPs (Limited Partners) and give it to the start-ups. So, the pressure is always there for the start-up to grow at all costs. Typically, these financial irregularities start with a small manipulation that the founder thinks they can get rid of, once things get better. However, the pressure to grow is so much that it never gets better.
The ‘gold rush’ culture: For years, venture capitalists have been falling over themselves to throw money at the next hot startup. There is rarely any time to properly inspect the books—or put stronger controls in place. The consequences of this are painfully apparent all over the world—especially in the US where FTX recently collapsed due to severe financial mismanagement. Its founder Sam Bankman-Fried raised $2 billion from investors—without a list of employees or its bank accounts (more details here).
Noam Wasserman argues that much of this is a result of an investment climate where founders were king. Bankman-Fried’s investors were so worried about missing out on the next big tech thing, they allowed him to do whatever he wanted: “In FTX’s case, the founder was almost completely unchecked. In fact, the lack of oversight was seemingly so extreme that it makes Zuckerberg’s iron grip on Facebook look like a democracy.”
The bottomline: We leave you with this insight from finance professor Alexander Dyck:
Start-ups have many of the conditions most associated with fraud, Mr. Dyck said. They tend to employ novel business models, their founders often have significant control and their backers do not always enforce strict oversight. It is a situation that’s ripe for bending the rules when a downturn hits. “It’s not surprising we’re seeing a lot of frauds being committed in the last 18 months are coming to light right now,” he said.
Context has an excellent investigative report on the predatory sales practices of Byju’s. BBC News looks at workplace practices in the company. The Ken (splainer gift link) has the best breakdown of its dodgy financials. Forbes has a more positive profile of founder Divya Gokulnath—back in happier days. New York Times is very good on the end of “faking it” in Silicon Valley—thanks to the looming recession. Our Big Story on Ashneer Grover has more insights on why some Indian founders appear to get away with murder.