Messi, mis-selling, sackings, and burning cash: Byju's’ annus horribilis

Things seemed rosy for Byju Raveendran, the founder of the eponymous Byju’s, India’s most valued startup, and his wife and co-founder Divya Gokulnath , at the beginning of 2022, when the two were at a conference organised by an edtech investor in San Diego, California.

Almost all edtech founders of India attended the conference and Raveendran and his wife were the talk of the town as the two had raced past their competitors, to become India’s largest edtech company. The two, also had reached San Diego, before most founders, and were meeting investment bankers, investors and government authorities in the US as they were eyeing a potential listing for their edtech giant in the US.

“It (the IPO) was almost done. It looked like they would be going public very soon, they had large expansion plans. From what we heard, they had built not just one, but three to four large businesses through their acquisitions,” said an edtech founder who attended the conference, requesting anonymity.

“We all were happy. We felt the edtech community in India had matured. After Freshworks, Byju’s was going to be the company to watch out for. I remember the other founders at the conference discussing how the Byju’s IPO would be a watershed moment for edtech companies in India and would help all of us scale further,” the founder added.

But none of the edtech founders, including the Byju’s co-founders themselves, saw what was coming. It was an annus horriblis for the edtech sector in general, but more so for Byju’s. The company still happens to be the talk of the town, but for the wrong reasons. The year 2022 has indeed been a time of reckoning for the world’s most valued edtech firm, as the $22 billion giant has come under fire for accounting irregularities, alleged mis-selling of courses, and mass lay-offs.

Byju's declined to comment on the story.

All good until March

Until March, very few startups in the country felt the chills of the funding winter and Byju’s was no different. The company, like most edtech startups in the country, had gotten a fillip because of the pandemic-induced stay-at-home restrictions.

The sector was riding high on fast-growing demand for online learning services, and Covid, which was rapidly spreading in the country until March, meant that the reopening of physical tuition centres  was still some time away.

But the third wave of the pandemic, unlike the previous two, waned faster, and so did the demand for online learning with schools, colleges, and coaching centres reopening for offline classes. Edtech companies now had to find a way to keep up with their projections as demand for their core business was dwindling.

Byju’s seemed to be the first among online edtech companies to have anticipated a drop in demand, and the company was quick to address it. In February, it made a commitment of $200 million for opening tuition centres across the country as it charted out a plan for its post-pandemic journey.

The company followed it up in March with a huge fundraise, one of India’s largest PE/VC (private equity/venture capital) rounds of 2022, which saw its valuation balloon to $22 billion. Byju’s became the most-valued startup in the country with the fundraise, and the most-valued edtech startup in the world. While the fundraise did push its IPO plans by some months, Raveendran was confident of taking the company public by the end of 2022.

With millions of dollars in the bag, a presence in the offline sector to take on traditional coaching giants, and market leadership in the online category, Byju’s was all set to make 2022 a memorable year. To top it off, the company also signed a multi-million dollar deal with the FIFA World Cup as one of its title sponsors, which made the edtech titan look colossal. But what followed was anticipated by very few.

Troubles begin

The first two months of the new financial year starting April 2022 were not so great for India’s startup ecosystem. The country saw only one new unicorn getting minted in April and May, against 10 in the same period of 2021. Stories about startups and unicorns (startups valued at more than $1 billion) laying off in masses started surfacing, with many companies taking such initiatives anticipating a longer funding winter.

Even the country’s most-funded startups were laying off in masses. However, very few were expecting the funding winter to hit Byju’s hard, as it had just announced an $800 million fundraise. But a story in the online publication The Morning Context (TMC) in May said that Byju’s was selling its trade receivables, which, in most instances is considered as an indication of a company requiring free cash at hand.

Selling trade receivables, or securitising trade receivables, is a way of ensuring that a company gets immediate cash. Byju’s was securitising its trade receivables through pass-through certificates (PTCs), which help an issuer pool illiquid financial assets like trade receivables and convert them into marketable securities which can be sold to investors, according to the report. It further said that since 2019, Byju’s had offloaded eight such tranches.

“The (TMC) report raised many eyebrows. I still don’t understand why would Byju’s need to securitise these. Edtech companies securitising trade receivables is unheard of. I mean, why would anyone do that? It suggests that there was a cash crunch, but for Byju’s, which had raised so much over the years, it was hard to believe that,” said another edtech founder, requesting anonymity.

Accounting woes

Just a month after the TMC report, another online news publication, The Ken, reported that Byju’s auditor, Deloitte, had refused to sign off on its FY21 (2020-21) financial results, as they had issues with the way Byju’s had recognised its revenues. The Ken’s article argued that since Deloitte had refused to sign off, the company had not been able to file its results for more than 15 months since the financial year had ended.

Private companies like Think & Learn, the registered entity that operates Byju’s, are required to file their financials by September every year, six months after the financial year ends.

Byju’s made a public statement that it would be filing its FY21 results by the end of June. But failed to do so. Byju’s missed at least three deadlines it set itself for filing its FY21 results, as Deloitte was refusing to sign off.

The delay in filing its FY20-21 audited financial reports attracted the attention of Congress MP Karti Chidambaram, who wrote to the Serious Fraud Investigation Office (SFIO) in July, requesting them to conduct a thorough investigation into Byju’s’ financials. In August, the Ministry of Corporate Affairs (MCA) also wrote to Byju’s seeking its reply on the delay in filing its audited results.

Byju’s, through media releases, finally revealed its FY21 audited financials in mid-September 2022. The financials, however, raised a lot of concerns as Deloitte had made adverse comments on the internal financial controls of Byju’s.

The financials also highlighted the high cash burn at WhiteHat Junior, a code-learning company acquired by Byju’s in 2020, Byju’s’ bloated ESOP (employee stock option) programme, and issues with revenue recognition as it had recorded a surprise drop in FY21 revenue due to accounting changes, as advised by Deloitte. To be sure, FY21 was a landmark year for direct-to-consumer (D2C) edtech firms as students were made to switch to online learning due to pandemic-led restrictions.

The FY21 financials also revealed that Byju’s had deferred payments to private equity giant Blackstone, a shareholder of Aakash Educational Services, which held about 38 percent stake. Byju’s had acquired Aakash, an offline coaching giant, in April 2021 for $950 million.

Earlier in June, some media reports said that Byju’s had also deferred payments to Aakash’s promoters. However, in July, the company said that it had cleared the dues of Aakash’s promoters. Byju’s added that the payment was delayed due to regulatory guidelines and that the payment timelines had been mutually agreed upon between the two firms.

Byju’s then officially filed its results with the MCA in October, which revealed that the standalone entity that operates its K-12 (kindergarten to class 12) core business had also slipped into losses. In FY20 (2019-20), this business was profitable. Byju’s has not filed its FY22 (2021-22) results yet, which the company was supposed to file by September, according to MCA guidelines.

Financing and valuation troubles

Byju’s announced an $800 million fundraise in March 2022 at a valuation of more than $22 billion. But the company did not receive a significant chunk of the money. Sumeru Ventures, a VC firm that was supposed to participate in the funding round, backed out and Byju’s fell short of a chunk of change.

Similarly, Oxshott Capital, another investor that had committed participation in Byju’s’ funding round of September 2021, also backed out, citing macroeconomic headwinds. Altogether, Byju’s said that it had not been able to raise about $300 million from its previous two equity fund raises.

In October 2022, the company raised $250 million from existing investors by way of primary funding. The funding, however, came in at a flat valuation, making it the first-ever flat fundraise for Byju’s. The round saw participation from the Qatar Investment Authority (QIA). Byju’s did not reveal the names of the other investors who participated.

Exclusive of the $250 million primary funding, the round also saw secondary sales at a valuation of $16-17 billion, down from its $22 billion valuation in March. Secondary sales, however, often happen at a discount. Back in October, the company was even offered a valuation of $11-12 billion, Moneycontrol had reported.

The flat funding round, and new investors’ willingness to come in only at half of Byju’s existing valuation, came in the backdrop of Byju’s’ lacklustre financial performance in FY21. However, the company has denied all this and said that it had clocked unaudited gross sales of Rs 10,000 crore in FY22 (2021-22). Gross sales do not include discounts, cancellations and refunds.

Not just that, in November, Prosus, one of Byju’s’ biggest shareholders, cut the fair value of its nearly 10 percent stake in the company to $578 million, effectively determining Byju’s ‘fair value’ at $6 billion. The Netherlands-based investor also did not participate in new funding rounds of Byju’s, which led to its stake falling to less than 10 percent, and it thus lost control over Byju’s operations, it said.

Byju’s also came under pressure from debt investors. The company had raised a term loan B (TLB) of $1.2 billion from a clutch of investors last year, one of the largest for Indian startups.

According to a Bloomberg report, these creditors were seeking faster repayment of part of the loan as the edtech giant had breached certain terms, including a September deadline for filing its results for the year ended March 31, 2022. In TLB, borrowers aren't required to service the principal upfront. They can pay a large amount at the end of the loan period, unlike a regular loan where they pay part of interest plus principal throughout the tenure.

The creditors also renegotiated terms with Byju’s, with which the company agreed, the report said. The renegotiated terms included providing monthly business updates, hiring a CFO, and increasing the interest rate on the loan, according to the Bloomberg report.

Issues with the business

Amid pressure from investors, media, auditors, creditors, and the government, it would have been difficult for any company to continue business as usual and Byju’s was no different. During the year, Byju’s also had to deal with pressure from its most important stakeholders — employees and customers.

The company has come under fire even before for alleged ill-treatment of employees and customers. But with the overall media narrative turning against Byju’s this year, stories about the mistreatment of employees and customers were shared more widely than ever.

To begin with, in May, Byju’s-owned WhiteHat Junior had come under fire as more than 800 employees put in their papers as the company asked all its employees to work from office within a month’s time, and to relocate to different cities, according to a report by Inc42. Byju’s, however, denied the story and said that the number of employees who had put in their papers was far smaller.

However, in June, the company fired more than 300 employees from WhiteHat Junior in a restructuring exercise. Just a day after firing 300 from WhiteHat Junior, Byju’s fired about 350 from Toppr, a test preparation platform it acquired last year.

Moneycontrol had reported that Byju’s was looking to fire about 2,500 employees across group companies in the same month, with about 1,000 employees being sacked from its core business. Byju’s ‘strongly denied’ the story. But just a couple of months later, Byju’s announced it would be laying off 5 percent of its workforce, or about 2,500 employees, across subsidiaries and teams as the company said it was aiming at profitability by March next year.

In October, Moneycontrol also reported that Byju’s had sent performance notices to over 5,000 employees across group companies. The company had also changed its internal employment policy for sales employees.

The new policy gave Byju’s the power to terminate the services of employees with immediate effect without giving them a chance to improve their performance, which was the case earlier. Byju’s denied this story too. However, recent media reports suggest that the company’s employee strength had fallen to about 35,000 from over 50,000 in October.

In the same month, Byju’s was allegedly forcing about 170 staff members in Trivandrum to resign as the company was planning to stop operations in the city. The employees, along with members from Prathidhwani, a welfare organisation of techies, met Kerala’s Labour Minister  V Sivankutty. Eventually, Byju’s had to roll back its decision of shutting down the Trivandrum office after state government officials intervened.

Byju’s has been vehemently denying claims of not having much cash on its books. When Moneycontrol wrote about Byju’s taking a Rs 300 crore loan from its wholly-owned subsidiary, Aakash, a company spokesperson told Moneycontrol that the company had more than Rs 9,000 crore of cash in its account.

But the company has failed to make vendor payments of late, while aggressively looking to cut down its burn rate. A recent media report revealed that Byju’s owed more than Rs 90 crore to various vendors.

With Byju’s cutting costs aggressively this year, the company received a lot of criticism on social media for signing up Messi as its brand ambassador for its `Education For All’ initiative. However, the company claimed that it  had paid Messi close to nothing to for the partnership.

Byju’s has significantly reduced ad spend post the FIFA and T20  world cup. An Economic Times report recently said that the company was also looking to exit its jersey deal with the BCCI (Board of Control for Cricket in India).

Byju’s and its group companies were also criticised heavily during the year for alleged mis-selling and overselling of its courses. Byju’s-owned Great Learning had come under fire for allegedly misleading learners into buying a Continuing Education and Quality Improvement Programme (CE&QIP), a certificate course offered by IIT-B, as a PGP (post-graduate programme). However, the Indian Edtech Consortium (IEC), a self-regulatory body for edtech companies, ruled in favour of Great Learning.

Byju’s also had to settle a consumer court plaint filed by a parent by offering a refund of Rs 99,000 and compensation of Rs 30,000, according to a media report in June. On December 25, another media report said that Byju’s had to refund Rs 44,500 to a Ludhiana resident and the court also directed the company to pay Rs 7,000 as compensation and litigation charges.

To worsen matters, in December, a two-part series by news publication Context (part of the Thomson Reuters Group), revealed more details about Byju’s sales tactics, its toxic work culture, and how it allegedly dupes poor families into buying its courses, which caught the attention of the National Commission for the Protection of Child Rights (NCPCR). The child right’s body issued summons to Raveendran. The report by Context was widely shared and read globally as the publication is part of an international news agency.

On December 23, a founding member of Byju’s appeared before the NCPCR on behalf of Raveendran and agreed to change its refund policy, while also guaranteeing that Byju’s would stop selling its courses to families with a monthly income of less than Rs 25,000.

2022 has well and truly been a year of reckoning for the world’s most-valued edtech firm. The company has set itself a revenue target of nearly $2 billion for FY23 (2022-23), while looking to achieve profitability on a company level by then. Industry observers believe that the revenue target Byju’s has set itself will be a task, given the recent changes it has had to make to its sales practices and refund policies.

Moreover, at a time when demand for online learning solutions is faltering, the company will have to change course offerings, edtech experts said, in a bid to reach a wider audience in India and globally.

To be sure, Byju’s is betting big on the offline segment amid dwindling demand for online education. It expects offline to contribute at least a third of its overall revenues in the next two years, according to Gokulnath’s recent media comments.

Byju’s and its investors have a lot to watch out for in 2023. For one, it will be interesting to see if the company manages to meet its revenue and profitability targets. Secondly, it is also planning for an IPO of Aakash Educational Services next year, valuing the company at about $3.5-4 billion. If the IPO plans go through, Byju’s will earn about 3-4 times on its investment in Aakash as it had bought the company for $950 million. Watch this space to know how 2023 pans out for the world’s most-valued edtech company.