Byju’s taught a lesson by investors unhappy with online learning group

The eponymous founder of India’s leading online education provider has been earning low marks from investors over the past few weeks, as the affairs of what was once the world’s most valuable edtech descended into chaos.

In one week in June, the start-up Byju’s, at one time valued at $22bn, suffered the resignation of its auditor and three board directors amid concerns about its accounts, leading to a weekend crisis call with investors.

According to a person briefed on the call, Byju Raveendran said the company had made mistakes but had learned from them. He added on a personal note: “Byju’s is not my work, it is my life.”

That life has been one of major highs and lows over the past four years. The Bengaluru-based company he founded 12 years ago had been a big winner as Covid-19 pandemic lockdowns made online learning services seem indispensable.

An adept fundraiser, Raveendran rode an international investment wave for Indian start-ups. He pulled in $2.5bn during that period, using it to acquire some 20 companies worldwide and amassing 150mn students.

But as the world shook off the pandemic and central banks started to raise interest rates last year, the easy money began to dry up. Indian start-ups as a whole attracted just $2.8bn in the first quarter of 2023, down from $12bn the previous year, according to data provider Tracxn.

As well as the financial drain of its acquisition spree, Byju’s cash burn had been fierce, including millions of dollars spent on marketing promotions such as sponsoring the Indian cricket team. “Business promotion expenses” for its 2020-2021 year were Rs22.5bn ($295mn).

“The guy got himself into a liquidity crunch thinking he could access money whenever he wanted,” said a venture capitalist familiar with the situation. The problem with Byju’s, the investor said, is “largely liquidity and horrible PR”. Byju’s did not respond to a request for comment on any liquidity issues.

That bad PR included allegations last year of a toxic workplace culture and of mis-selling of its digital education products to parents, which included pushy sales tactics and misrepresenting the efficacy of those products. The company also began a process of firing thousands of employees, which analysts said was an effort to save money. Byju’s has denied the mis-selling allegations and has said that the job cuts were, in part, a result of overlapping roles as it integrated businesses it had acquired.

Its core digital learning offering — live or recorded video lessons for school-age children through an app — is still “an attractive business that’s performing an important function in the Indian market”, according to Bob van Dijk, chief executive of South Africa’s Naspers internet group, which invested in Byju’s in 2018. “That business is good and has legs,” he said.

However, there have also been long delays in Byju’s financial reporting. It did not publish audited accounts for the 2020-2021 financial year until September 2022, an 18-month wait, finally revealing some $560mn in losses.

Its auditor Deloitte had insisted Byju’s overhaul its accounting practices, including recognising revenues over time for its services. In its June letter resigning as auditor, the international accounting firm alleged that Byju’s had failed to provide financial data that would enable it to audit its 2021-2022 business year.

Byju’s has hired an affiliate of accounting firm BDO to take over as auditor. New chief financial officer Ajay Goel told investors on the weekend call that the 2021-2022 audit would be completed by September, and 2022-2023 would be closed by end of the year.

Byju’s lenders in the US have also cited a lack of timely financial reporting — and payments — in a Delaware lawsuit over its $1.2bn term loan. They accuse it of hiding $500mn and argue Byju’s is in technical default on the loan, partly because it has failed to provide financial updates. Fighting back, Byju’s last month refused to make a $40mn interest payment while in dispute and launched its own lawsuit in New York against its lenders, accusing them of “bad-faith negotiating”.

Byju’s travails have left its early backers unhappy. Naspers’ investment arm Prosus was one of the three investors whose representatives quit Byju’s’ board. The others were venture capital firm Sequoia India (now Peak XV) and the Chan-Zuckerberg Initiative, Meta founder Mark Zuckerberg’s philanthropic fund.

“The reality is that we’ve been thinking about this for a while,” said Naspers’ van Dijk. “The amount of information we got [from Byju’s] made it really difficult.” Prosus has said it had made an accounting judgment last year that it “no longer exerts significant influence over the financial and operating policies” of Byju’s. The company’s new chief financial officer only started in May, filling a vacancy that had been open since December 2021.

However, experts point out that responsibility for financial reporting is shared by a company’s board.

“In any company where there is a delay in submission of accounts, the board has equal responsibility as management,” said Mohandas Pai, chair of Bengaluru-based Aarin Capital Partners and one of Byju’s earliest investors.

Industry experts and investors still expect Byju’s to survive its crisis. Concerns are “way overblown” said the venture capitalist familiar with Byju’s, adding that the group has a “significant business” and “some good assets”.

However, the imbroglio has reduced what was once the world’s most valuable edtech start-up, with an implied worth of $22bn, to being only valued at $8.4bn, according to Tracxn. US fund manager BlackRock has written down the value of its minority stake for an implied valuation of around $8bn, while Prosus has also reduced its assessment of its stake, suggesting a valuation of only around $5bn.

Raveendran, one of India’s richest self-made tycoons, still has a fortune at stake with around 25 per cent of Byju’s equity remaining in his hands. He had personally invested $900mn in Byju’s and its subsidiaries, the person briefed on the investor call said, partly through borrowing against his shares.

In a move that could shore up the company financially, Byju’s has decided on a flotation next year for Aakash, the exam coaching institute it bought for $1bn in 2021.

Meanwhile, consultants say Byju’s backers need to take lessons in financial reporting and ask themselves why they were not posing enough questions in class. “This company did not even have a CFO,” said Shriram Subramanian, managing director of governance advisory firm InGovern. “As long as the ride was hunky dory and the valuations were doing well, all the investors kept quiet.”