Grade A to Grade F: The unravelling of Byju's $22-b edtech empire

Today, the valuation of Byju's is down to $1 billion, and the company is struggling to remain relevant.

But what led to the slide, and how did an edtech start-up armed with good intentions and star power in Shah Rukh Khan manage to go down the path of infamy?

Blame the system

First, blame the system. Start-ups exist because of valuations and shut down if valuations go down. Byju's, too, was part of the trap. It first raised investment from Ranjan Pai, the Manipal Education and Medical Group chairman. Raveendran garnered $9 million in 2012 for a 26 per cent stake in Byju's following an unplanned meeting with Pai at a holiday resort in Manipal.

A year later, Byju's raised another $2.31 million from the same investor at a nearly $30 million valuation. Pai's fund, Arin Capital, exited the start-up after a few years with returns that exceeded his initial investment at least 10 times over.

Personalised learning

Three years later, Byju's launched its much-publicised app, the Learning App, which offered a personal mentor to all those who enrolled for an annual fee of around ₹21,000.

Since then, Byju's rise has been rapid, even catching the attention of Meta co-founder Mark Zuckerberg, who, along with five others, invested $50 million into the company in September 2016. In a Facebook post, Zuckerberg pointed out that Byju's personalised learning tilted the scale in its favour.

"I'm optimistic about personalised learning and the difference it can make for students everywhere. A survey found that 80 per cent of the parents said the app (a mix of video lessons and interactive tools) improved their children's learning dramatically," Zuckerberg said in the post.

Investors' favourite

Following the fresh investment, others jumped in. The start-up's valuation increased from a mere $30 million in 2013 and crossed over to $600 million within four years, with a Series A round of funding. It looked like every investor wanted to be included in Byju's.

The valuation of the company kept climbing. By December 2018, Byju's had been valued at over $3 billion. Within the next four months, the valuation had nearly doubled to $5.5 billion, and then there was no stopping the march.

A month before COVID broke out, in February 2020, the valuation had climbed to $8.8 billion. During the pandemic, when students were confined to their homes, Byju's valuation peaked at $22 billion, by October 2022.

According to Traxcn, which tracks start-ups, Byju's has had 28 rounds of funding with over $5 billion raised from them. Today, the founders and the family own 18.75 per cent, investors own nearly 65 per cent of the stake, and the others, including individuals, own the rest.

Out of the $7.1 billion raised by edtech start-ups till date, $5 billion has gone to a single entity, Byju's. The rest has gone to over 1,400 firms. It shows the enormous heft Byju commanded just a few months ago.

It also indicates that most investors jumped onto Byju's bandwagon, hoping to cash in with huge valuations at the time of exit.

Aakash acquisition

The craze for investing in Byju's was such that the investors even allowed the digital education firm to buy, in 2021, offline behemonth, Aakash Institute, which trains students to appear for competitive exams like IITs and NEET.

While both businesses are the same in essence, Byju's mopped up vast valuations because of its app and digital reach, which Aakash could not do because of its different business model.

Even today, Aakash, whose acquisition cost Byju $1 billion, commands a lesser valuation than the start-up despite its vast debt-and-mortar presence. Over the past few years, Byju has been struggling to pay back the debt it had raised to buy Aakaash.

The debt structure was complicated. As part of the acquisition deal, Byju's had to pay more than ₹1,500 crore in dues to the private equity firm Blackstone. The final tranche of payments to Blackstone was reportedly stuck due to RBI's pricing guidelines, which limited the Indian entity from paying an overseas investor more than the entity's fair market value.

Back-to-school challenges

Additionally, Byju's faced challenges such as delayed financials and issues surrounding accounting practices. Also, the pandemic was waning, students were back in classrooms and the online education model became shaky.

The company also encountered allegations of predatory practices and a funding crunch, further complicating the acquisition process. It showed that neither the investors nor the founders bothered to do enough homework before giving the nod to buy Aakash.

It took a white knight like Ranjan Pai to rescue Byju's Aakash acquisition. To clear off the debt, Pai paid $250 million to Davidson Kempner, a US-based investment firm, from whom the money was raised.

But this was just one of the problems Byju's has been facing.

Unaudited revenue

For the fiscal year ended March 2022, the company's revenue from its core business was $429.18 million, missing the unaudited $1.25 billion revenue it projected for the group a year ago. The EBITDA loss for the core business was $270.9 million.

Raveendran, however, put up a brave front. In a statement following the declaration of the results, he said: "The takeaways from a uniquely belligerent year, which included nine acquisitions, are life-long learnings. Byju's will continue toward sustainable and profitable growth in the coming years."

But these forecasts now seem a mirage more than ever. The company's auditors, Deloitte, which quit auditing its financials, pointed out that the edtech company had not provided "any communication" on the resolution of the audit report for the financial year, going as back as the financial year ending March 31, 2021, nor had it given the auditor an update on the status of readiness of the financial statements and the underlying books for the financial year ending March last year.

Investors bat for founder’s ouster

Investors haven't taken kindly to the mess that Byju's has created for itself. They now want the co-founders, including Raveendran's wife Divya Gokulnath and his brother, Riju, to exit the board, accusing them of financial irregularities, governance issues, and delayed financial filings.

Additionally, Byju has faced legal problems, including a lawsuit over a $1.2 billion loan and an investigation by the Enforcement Directorate for alleged Foreign Exchange Management Act (FEMA) violations.

On Friday (February 23), Byju's shareholders voted to oust Raveendran and reconstitute its board of directors over “mismanagement”. However, the Byju's management stood its ground, calling the resolutions “invalid” since they were passed in the absence of the founders at an extraordinary general meeting (EGM).

A group of four investors filed an oppression and mismanagement suit against the management of the company before the Bengaluru bench of the National Company Law Tribunal (NCLT), seeking the declaring of its founders, including Raveendran, as unfit to run the company.

What were investors doing?

What remains a puzzle is that while investors poured money into Byju's, they did not keep an eye on how the company was being run.

By 2013, Ravindranath had already charmed his way through the minds of thousands of students. According to a book titled Byju's, The Learning Trap, written by Pradeep K Saha, over 25,000 students turned up at Delhi's Indira Gandhi Indoor Stadium to listen to Byju Raveendran teach them maths. He was quoted as saying one has to do a 'maths concert' at one go to hold the attention of 25,000 students.

Raveendran was everywhere. Publications started covering him and his company extensively until the first signs of trouble surfaced. That was when Bengaluru-headquartered digital publication The Ken came out with an investigating piece stating how Byju's was trapping unsuspecting parents into buying subscriptions through loans from lending companies such as Capital Float and Bajaj Finserve.

A large number of parents, the article said, were unaware of the fact that their subscriptions were serviced by some of these lending companies, and more often than not, they fell into a debt trap if they stopped the course mid-way.

Most parents assumed that if they cancelled their subscription to the course, their EMIs would stop, too. But this was not the case. The EMIs continued unless they paid the entire amount plus the interest charged.

Toxic work culture

In his book, Saha pointed out the toxic work culture at Byju's. Apparently, senior managers harassed and shamed their juniors for not turning up much ahead of their reporting time, not to mention the sales targets, which were nearly impossible to achieve for anyone. While investors kept funding the company, and the valuations skyrocketed, so did the expectations from the employees.

Investors routinely ignored reports about how the employees were being treated, how the subscribers were being taken advantage of, and how Byju's, instead of investing in people and creating a better work environment for its employees, hired football legend Lionel Messi as its brand ambassador and, earlier, actor Shah Rukh Khan, for vast amounts of money.

Byju's failure is more than just the mismanagement of its founders; it is also about how the investors cared less about the company's operation. They should have asked tough questions to the management before increasing their investments. Perhaps that is why Byju's has come to such a pass.

As the moniker of the company's parent, Think and Learn Pvt Ltd, suggests, edtech founders might as well put that into practice if they didn’t want to fall from grace like the Byju’s.