Following the crisis at Byju's, the world's most valued edtech company, there has been a growing focus of investors and advisors on examining the revenue recognition practices of India's edtech start-ups in their portfolios.
They are particularly interested in how revenue is accounted for when bookings are finalised, such as whether a straight-line revenue recognition is employed (dividing revenue by the subscription period), how discounts and cancellations are accounted for, and the proportion of revenue derived from subscriptions versus the sale of hardware (if applicable), multiple industry insiders told Moneycontrol.
“Byju’s has not been able to provide monthly business updates to its lenders. The FY20-21 audit was delayed, and so is FY21-22. It has been recognising revenue very aggressively and most of it is for raising large sums without diluting much equity,” said an edtech founder, requesting anonymity.
“So there’s a sense that a majority of their problems are related to the way they recognise revenues. I was asked by one of our investors, who also is an investor in Byju’s, about how we recognise our revenue and whether we had aggressively showed it in the past while raising money,” the founder added.
In September 2022, Byju's finally released its FY20-21 results after a significant delay of approximately 18 months. The results revealed a marginal decline in Byju's revenue during the year, which came as a surprise to many considering that 2020-21 was the first full year of the pandemic, which significantly boosted India's edtech sector. In contrast, other edtech companies such as Lido Learning, which has since declared bankruptcy, experienced substantial revenue growth in FY20-21.
During that time, Byju Raveendran, the Co-Founder and CEO of Byju's, had told Moneycontrol in an interview that the company had to defer around 40 percent of its FY20-21 revenue to subsequent years. This decision was made based on the recommendation of their then-auditor, Deloitte. Prior to this, Byju's was known for its aggressive revenue recognition practices.
Aggressive revenue recognition refers to a company's strategy of inflating revenue figures by reporting gross revenue while deferring expenses, which artificially mitigates losses on paper. This approach is employed in an attempt to conceal losses and present a prettier financial picture.
The growing scrutiny by investors on the revenue recognition practices of edtech start-ups has the potential to lengthen the fundraising process for these companies. This shift is expected as investment metrics are likely to undergo significant changes.
Vanity metrics such as annualised revenue run rate (ARR) and gross bookings may lose their prominence, with investors increasingly prioritising more rational metrics such as net revenue (excluding cancellations and discounts), profitability, EBITDA, and others.
“I understand the large potential of India’s edtech market but then these are some of the on-ground issues companies need to get right,” said an edtech-focused investor, with five of India’s seven unicorns in his portfolio.
“Metrics like ARR and all are fine, but if cancellations are high, and retention rates are low, then such metrics don’t make any sense. Very little of this money is actually going to come on your books. These problems have started coming to the fore only after the pandemic, as that’s when these companies really expanded, and their retention rates, cancellations, etc., became more germane than before,” the investor added.
In addition, the increased scrutiny will intensify focus on Indian start-up valuations as well, making it harder for edtech start-ups to secure funding at inflated revenue multiples. Data compiled by Moneycontrol through Tracxn reveals that funding for India's edtech start-ups has already plunged over 97 percent to $45 million in the first half of 2022 (over the same period in 2021).
Valuations in the global edtech landscape have also declined significantly, with companies such as Coursera, Udemy, and Chegg Inc. experiencing drops ranging from 20 to 50 percent over the past year. This downtrend has also impacted the valuations of edtech companies in India, prompting United States-based asset management companies (AMC) to mark down the fair values of certain Indian edtech firms.
For instance, Blackrock, the world’s biggest AMC, has pegged the fair value of Byju’s at $8.4 billion as of March 31, 2023, while Prosus, Byju’s biggest investor, has cut the company’s fair value to $5.1 billion. Byju’s was last valued at $22 billion. Edtech unicorn Eruditus also saw its fair value getting marked down by US-based Private Shares Fund by 9 percent, to $2.9 billion.
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