The Rise And Fall Of Ed-tech Giant BYJU’S!
Kakali Das
Two years ago, Byju’s boasted a staggering valuation of $22 billion, positioning itself as the premier edutech startup, not only in India but globally.
With high-profile brand ambassadors including Shahrukh Khan and Lionel Messi, it left an indelible mark on the industry. Byju’s extended its influence by sponsoring prominent events such as the Indian cricket team and the FIFA World Cup in Qatar. Founder Byju Raveendran emerged as the blue-eyed boy within the Indian startup ecosystem.
Fast forward to today, just two years later, the valuation of BYJU’s has plummeted by 99%, prompting a group of shareholders to convene for a meeting aimed at ousting Byju Raveendran, along with his wife and brother, from the board. Simultaneously, another faction of shareholders has taken the unprecedented step of lodging a complaint with the National Company Law Tribunal (NCLT), alleging mismanagement and oppressive practices.
What led to the downfall of this once-flourishing startup, which was once the darling of investors?
To delve into the origins of it, it’s essential to explore Byju Raveendran’s background. Born to school teachers – a physics teacher and a mathematics teacher – in the village of Azhikode, Kannur, Kerala, he displayed remarkable intelligence from an early age. Graduating with an engineering degree, he began tutoring mathematics to friends aspiring to excel in the CAT exam for MBA admissions.
Although he didn’t harbour personal aspirations to take the CAT exam, his adept guidance led to remarkable success for those he assisted. Through word-of-mouth praise, what began as aiding friends and acquaintances swiftly evolved into a full-time occupation. His exceptional teaching skills attracted increasing numbers of students, eventually necessitating the use of entire auditoriums to accommodate his growing following.
In 2011, he embarked on establishing a company called Think & Learn Private Limited. Initially catering to students preparing for board examinations, particularly those in the 8th to 10th grades aiming for entrance exams thereafter, the company gradually broadened its scope to include NEET, CAT, and IAS preparations, alongside GRE and GMAT. His brilliance and remarkable success rate became the talk of the town as word spread rapidly.
By 2018, his edutech firm boasted an impressive 15,000,000 subscribers, propelling it to unicorn status around much fanfare.
The pinnacle of success occurred between 2015 and 2021, with the initial investment from Aarin Capital, led by Mohandas Pai, in 2013 marking a significant milestone. Word began circulating within Manipal University, where Pai had investments, about students flocking to a particular class. Upon inquiry, it was revealed that the class was conducted by none other than Byju Raveendran himself. Consequently, Byju Raveendran secured his first investment from Mohandas Pai.
In 2016, another substantial investment arrived, this time from Mark Zuckerberg. BYJU’s had already received several rounds of funding, but the significant one, following support from Sequoia Capital, Aarin Capital, and Sofina Group, came from Mark Zuckerberg and Priscilla Chan’s firm, the Chan Zuckerberg Initiative, providing a staggering $50,000,000 in funding. As a result, the start-up’s valuation reached $462,000,000 by the conclusion of this round.
The next significant milestone was reaching a valuation of $10 billion, achieved in the middle of 2020. This elevated the company to the top spot among favoured start-ups for foreign investors, particularly catching the attention of Markie investors. Consequently, Byju’s became India’s second most valued startup, trailing only behind Paytm.
Within a mere nine years of its inception, a US firm named Bond made an undisclosed investment, propelling the edutech startup to a staggering valuation of $10.5 billion. As the pandemic unfolded, a flurry of investments poured in, fuelled by the rapid shift to online education. During this period, BYJU’s emerged as the frontrunner in mastering edutech as a system, capitalizing on the surge in demand as students across the country transitioned to online learning.
By 2019, the company boasted 35,000,000 registered students, with 2.8 million among them being paid subscribers. These figures witnessed significant expansion during the Covid-19 pandemic, as an increasing number of students turned to online classes.
Let me walk you through how those numbers surged. From the onset of the pandemic, the figures nearly doubled within the first year, reaching 4.2 million. By 2022, the registered users skyrocketed to 115 million. This milestone coincided with significant fundraising efforts. But what exactly did they allocate the substantial funds for?
First and foremost, a significant portion of the funds was allocated towards marketing efforts. Between FY 16 and FY 22, spanning just 7 years, the company dedicated ₹8,029 Crore (approximately $1 billion) solely to advertising. Remarkably, this constituted roughly 69% of its operating revenue during that period.
In 2017, the company’s marketing line-up, which featured Shahrukh Khan, incurred an annual fee of ₹4 Crore per year.
When Oppo ended its sponsorship deal with the Indian cricket team, BYJU’s seized the opportunity and stepped in. This move was initiated in 2019, with the firm paying the BCCI approximately ₹4.6 crore per year for each bilateral match in India, and ₹1.56 crore for each international match.
In addition to lavish marketing campaigns, sponsorship deals included backing the Indian cricket team and the Qatar World Cup, with costs estimated at around $30 to $40 million. Furthermore, signing football legend Lionel Messi for a three-year contract amounted to an annual expenditure of $5 to $7 million.
And let’s not forget about the significant acquisitions. BYJU’s allocated funds towards purchasing other companies within the edutech space, totalling $2.6 million. Notably, the acquisition of Aakash Educational, a chain of physical coaching centers, amounted to close to $1 billion.
Another notable acquisition was WhiteHat Jr., which stirred controversy, costing $300 million. Additionally, the acquisition of Toppr amounted to $150 million, while the US-based Osmo and the reading platform Epic were acquired for $500 million and $120 million, respectively.
Despite raising substantial funds, the company also secured a massive loan of $1.2 billion from a group of overseas investors. However, this wasn’t a conventional bank loan; rather, it was structured as a Term Loan B. Under this arrangement, the company paid interest regularly and the total principal at the end of the term, without monthly repayments. Notably, the interest rate was relatively low at 5.5%, compared to typical loan rates.
So, while it appeared to be a favourable loan, the company was spending extensively, coupled with the burden of this massive loan, even as it experienced tremendous growth during the pandemic. And then, when the pandemic ended, the music stopped…
What happened in 2022? The Downfall !
The downfall began with a wave of complaints from disgruntled parents, who alleged that the company’s aggressive sales tactics had misled them.
They claimed that BYJU’s preyed on the insecurities of Indian parents, insinuating that their children would fail to succeed if they don’t sign up. Through relentless cold calls and persuasive sales pitches, they coerced parents into believing that their children’s success hinged solely on subscribing to BYJU’s.
In fact, BBC reported on this issue, interviewing parents who claimed that the services promised included one-on-one tutoring and the assignment of a mentor to monitor their child’s progress. However, none of these promises were fulfilled, leading parents to demand refunds.
Context News reported that BYJU’s employed door-to-door agents, who targeted households of low-income families and pressured parents into purchasing courses, often leading them into debt. Allegedly, these salespeople made disparaging remarks such as, “Your daughter will be poor like you if you don’t enrol her in this course, so you should be ashamed of yourself for hindering her success in life.“
As a result, parents were coerced into enrolling in these courses. The National Protection of Child Rights intervened and conducted an investigation into the company, alleging that it purchased data, including phone numbers of parents with young children, to pressure them into purchasing courses. In response, BYJU’s pledged to cease exploiting families, particularly those from low-income backgrounds, into buying its courses.
In numerous cases filed in consumer courts across the country, BYJU’s was directed to compensate customers for disputes concerning refunds and deficiencies in services.
In its report, BBC also highlights that sales executives faced immense pressure to meet highly unrealistic sales targets, often working 12 to 15 hours a day in an effort to persuade more people to sign up for these courses.
The second group of dissatisfied individuals comprised investors who were displeased with the management of this large company. They expressed concern over the absence of a full-time CFO, considering the company’s magnitude.
Worries escalated when physical classrooms began to reopen and the company’s finances started to decline. The absence of a CFO worsened the situation, leading to defaults and delayed submission of financial statements for the years 2020 to 2021, despite the government-sanctioned extension granted due to the pandemic.
BYJU’s faced challenges in releasing its audited accounts for three consecutive years. When the accounts were eventually released, the numbers revealed significant problems. Independent auditor Deloitte Haskins and Sells resigned in 2023 after refusing to sign off on the company’s financials, citing concerns about their integrity.
In April 2023, the company appointed Ajay Goel as CFO, who joined from the Vedanta Group. However, Goel resigned after just six months, coinciding with a mounting array of problems for the company.
Subsequently, there was a significant drop in revenue for BYJU’s. Upon the release of its original financial statements, glaring issues emerged, revealing a loss of 45 billion rupees in their books.
BYJU’s attributed the issue to accounting practices, although many noted the substantial portion of their funds allocated to extensive marketing expenditures.
Finshots alleged that BYJU’s had categorized certain operating expenses, such as salaries and marketing, as asset-building activities aimed at enhancing its Profit and Loss Statement (PNL), leading to further complications.
For instance, as per Finshots, in March 2020, although BYJU’s total salary expenses amounted to approximately ₹900 crore, the company reported just over ₹500 crore as intangible assets on its balance sheet. The remaining ₹420 crore was listed as salaries in the profit and loss account. This attempt to capitalize on the expense backfired, worsening the company’s situation.
The extensive shopping spree undertaken by BYJU’s, acquiring numerous smaller companies, ultimately paved the way for the downfall of its empire. Notably, WhiteHat Jr., and Osmo contributed to nearly 45% of the losses in FY22. Among these acquisitions, Aakash Educational, known for its physical classes, remained the sole asset performing adequately.
However, WhiteHat Jr., proved to be a particularly detrimental acquisition, as the coding platform faced significant issues with misleading marketing practices.
Next, BYJU’s faced complications with its cricket sponsorship deal with BCCI. Despite renewing the sponsorship in 2022 with a 10% increase, the company found itself unable to fulfil its financial obligations. Attempting to extricate itself from the deal prematurely, BYJU’s encountered resistance from BCCI, leading to a legal dispute. In November, BCCI filed a claim of ₹160 crore in unpaid dues against BYJU’s in the National Company Law Tribunal.
Subsequently, the creditors who extended a massive loan of 1.2 billion dollars became displeased. Originally, BYJU’s had approximately 5 or 6 years to repay the amount. However, as the company’s deteriorating financial state became public knowledge, the original lenders began trading the loan on the market, as permitted. By September 2022, the loan was being traded at a 30% discount to its face value.
In May 2023, the lenders initiated legal action against BYJU’s in the US. Subsequently, in June, BYJU’s countersued the lenders, alleging predatory behavior. Despite BYJU’s offer to repay the entire amount, these legal battles persist and remain unresolved.
In January 2024, 80% of the lenders involved in the 1.2 billion dollar loan filed for insolvency against the company at NCLT Bangalore. They asserted that the company’s issues were self-inflicted by its management and alleged that BYJU’s management neither intended nor possessed the capability to fulfil the terms of the loans.
Following the lenders’ actions, disgruntled employees voiced their grievances. In 2022, the company had already laid off over 2500 employees. Further job cuts occurred in June 2023, resulting in the termination of an additional 500 to 1000 employees.
Reports indicate that BYJU’s struggled to meet salary payments and fulfil the Full and Final settlement demands of the employees who were laid off. Consequently, the company commenced selling its assets to alleviate financial pressures.
BYJU’s attempted to sell Great Learning and Epic, aiming for approximately $600 million, but encountered challenges in finding a buyer. Additionally, the company recently postponed a 3-year deal with Lionel Messi, just a year after signing the agreement.
The enforcement directorate is now involved, focusing on an investigation involving Raveendran regarding foreign exchange violations totalling close to ₹9300 crore. Last week, it issued a lookout notice against Raveendran, prohibiting him from traveling outside the country.
The agency is investigating foreign investments, remittances, and overseas investments that allegedly resulted in losses for the Exchequer.
In April 2023, the ED conducted raids or searches at the office premises and Raveendran’s home. Bloomberg reported that during the search, he was in Dubai and reportedly broke down and cried while defending his company to investors.
Things have been increasingly dire—in November 2023, BYJU’s Raveendran reportedly took a loan against his homes and property to cover employee salaries. Two houses and a villa under construction in Bangalore were offered as collateral to borrow $12 million for this purpose.
A recent report suggests that the company has vacated its office in Bangalore, for which it was paying ₹4 crore in monthly rent, as part of efforts to reduce losses.
The final blow came two days ago when a consortium of investors holding a 30% stake in the company called for an extraordinary general meeting with the goal of ousting the founders from the board of directors. This includes Byju Raveendran himself, his wife Divya Gokulnath (a co-founder), and his brother Riju Raveendran.
By the end of the day, investors have voted to remove BYJU and his family from the board of the company they founded. However, this decision will be pending implementation for some time, as per the Karnataka High Court. Byju Raveendran will have the opportunity to present his arguments before the court before any action is taken.
Time For Some Reflection
The recent upheavals with start-ups like PAYTM and BYJU’S prompt us to reflect on the state of India’s startup ecosystem. Observers closely attuned to the industry often note that venture capitalists tend to follow each other, with money chasing money.
While the Indian market holds immense allure for overseas investment due to its size and potential for disruption, the influx of capital into rapidly growing startups brings significant pressure to expand their market share. This influx, coupled with mounting pressure, may incentivize startup founders to cut corners, flout regulations, and bypass due process.
However, it’s crucial to remember that these startups impact real people—employees, students, parents, and investors. The repercussions extend beyond individual companies, affecting the broader entrepreneurial landscape. As investor confidence wanes, other entrepreneurs may face challenges in raising funds, casting a shadow over the entire startup sector.
27-02-2024
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