Byju’s is too big to be let to fail; it needs a rejig to remain relevant

Over the past few weeks, the promoters of India’s largest edutech business, Byju’s, have engaged with the media to clarify the company’s accounting practices, which have come under intense scrutiny following the announcement of the company’s FY21 results.

At a $22-billion valuation, Byju’s is India’s highest-valued start-up. According to estimates, the privately-held company has more than 115 million registered students and about 53,000 employees, the largest for a start-up. Some of its marquee investors include the Chan Zuckerberg Initiative, set up by Facebook founder Mark Zuckerberg and his wife Priscilla Chan, as well as China’s Tencent and US hedge fund Tiger Global.

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The asset base in terms of funding and valuation of Byju’s is comparable to some of the premier institutions worldwide, but without the heft they carry.

Delayed results

The spotlight turned on the edutech major when it declared its audited annual results for FY21 (April 2020-March 2021) on September 14, 2022, about 18 months later than scheduled. As per the results, its revenues from operations for FY21 were readjusted to ₹2,280 crore, while its losses grew around 15 times to ₹4,588 crore, compared with ₹262 crore in the previous fiscal. The start-up had earlier projected revenues of about ₹4,400 crore as per the unaudited results of Byju’s parent, the Bengaluru-based Think and Learn Pvt Ltd.

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One of the reasons for the delay in declaring the results was a series of objections raised by its auditors — Deloitte, Haskins & Sells — regarding internal financial control and financial reporting. Hence, the earnings had to be recomputed completely. It even piqued the interest of Karti Chidambaram, an MP representing the Tamil Nadu constituency of Sivaganga, who recently wrote a letter to the Indian Institute of Chartered Accountants (ICAI) requesting an investigation into Byju’s finances.

The auditors noted that although parents were purchasing multi-year subscriptions, Byju’s previously booked most of its sales from selling preloaded tablets upfront. 

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If the company sold a three-year course, the entire payment was recorded in the first year, when it should have been spread out over three years. As a result of the implementation of the corrections, the anticipated revenue decreased by 48 per cent. In FY21, 81 per cent of Byju’s revenue came from selling edutech items such as tablets, SD cards, tech-enabled devices and laptops. In his letter to the ICAI, Karti Chidambaram argued that classifying hardware goods as edutech constitutes a clear misinterpretation of the facts.

Promoters’ defence

Soon after the results were announced, the promoters swung to their defence, holding media interactions and taking to social media. They claimed that the news coverage of the company’s results was “sensationalised” since the focus was more on the company’s losses than on the fact that Byju’s had narrowed its losses by half in FY22. 

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It is evident that the promoters have not addressed the company’s financial concerns adequately, as they were more involved in expanding the firm and maintaining operations. In Byju’s defence, one can argue that investors drive promoters to generate new revenue sources to boost the company’s worth and, in this case, valuation. 

One main criticism against the investors is that they don’t have skin in the game but are focused on valuation. A higher valuation allows them to exit the company, selling their stake at a premium to the next investor.

Hence, the rush for acquisition. Byju’s has so far acquired 20 firms, including Aakash Educational Services for $1 billion in January 2021. It has spent around $2.88 billion to purchase 20 companies and invest in two others. In turn, it has raised $5.2 billion from 59 investors in 25 fundraising rounds. Nearly 90 per cent of the costs came from promotional activities, including sponsoring the Indian cricket team, which must have come at a very high valuation.

Optimistic about future

Byju’s leadership team maintains that the start-up will turn profitable sooner than later. In fact, by March 2023 itself. It said it has shed 2,500 employees as they were redundant because of acquisitions but plans to double the faculty by another 10,000.

The company is also redesigning its sales methodology to emphasise inside sales through video calling platforms, improving customer experience and saving operating costs. Multiple inside sales centres will be established around India, from which Byju’s sales representatives will contact inbound leads via phone calls, email, and Zoom meetings. Inside sales will increase client happiness and reduce expenses. 

One would imagine that an 11-year-old firm would have already taken these steps, but the fact that it wants to revamp its sales model demonstrates that it wants to delve deeper and cast a larger net to capture as many consumers as possible.

But the bigger question is, with schools and colleges reopening across the country, the total market for digital tuition will only shrink. Byju’s is tweaking its model and has started opening up physical classes, which would go against its business model. Its competition will only increase because there are well-entrenched players in the market whose main USP is training students in physical classes.

Facing competition

These institutions may have far fewer resources than Byju’s but have a better image backed by outstanding results, which the start-up lacks. In future, Byju’s will need a complete rethink its strategy if it has to save itself from becoming irrelevant as the start-up’s key teaching aid —  the preloaded tablets —  can, at best, be an additional tool for the students.

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But, with a large funding base of over $5 billion in the start-up, investors may not let Byju’s fail. What remains to be seen is how long a rope they will give the promoters to become relevant again in the marketplace.