Crisis at BYJU'S: Here's why the edtech major needs to implement some drastic measures

More than 13 acquisitions worth $3 billion. Expansion into international markets. Over $1.5 billion in funds raised. The coveted decacorn badge. And the crown of being the world’s most-valued edtech firm. All this achieved in a little over a year in 2021. Those were the halcyon days for BYJU’S.

Cut to 2023, and the edtech major is in a spot of bother. In the past year or so, it has been hit by a funding crunch, a decline in valuation (in May, investment firm BlackRock cut its valuation to $8.4 billion from $22 billion achieved in March 2022; Prosus valued it at $5.1 billion in June), governance issues, low demand as schools reopened after the pandemic, and accusations of aggressive sales practices, among others. Both time and money seem to be running out for BYJU’S, even as new challenges crop up every day. Now, only a bold and miraculous strategy might save the Bengaluru-based firm. And its CEO, maths-tutor-turned-entrepreneur Byju Raveendran, 43, is fully aware of this.

BYJU’S has been a pioneer in the Indian edtech sector. So, any challenges it faces and how it manages them could provide invaluable lessons to the entire ecosystem. Hyper-inflated unicorns competing for a narrow customer base are self-correcting. Hence, the fallout for the sector might not be as severe as expected. “The more significant repercussions, however, could be felt across the larger start-up ecosystem, given the heightened scrutiny from later-stage investors following the high-profile trials faced by companies like BYJU’S and PharmEasy. These investors may demand increased safeguards to protect themselves from business failures,” says Anirudh A. Damani, Managing Partner of Artha Venture Fund.

Tough Times

Before the repercussions, the focus must be on the troubles that BYJU’S, once the poster boy of India’s edtech evolution, has found itself in. These have intensified after a consortium of lenders that gave it a $1.2-billion Term Loan B or TLB—long-term secured loans availed by firms for big projects or acquisitions involving multiple lenders—during its growth years, sued it and demanded accelerated repayment. BYJU’S missed the quarterly interest payment in early June. It has said it won’t make any further payment to the lenders, including any interest, until the court resolves the dispute. In fact, it countersued its creditors to disqualify the lead lender, which would prevent them from exercising the terms of the TLB.

Back home, the situation was deteriorating fast—an investor (BlackRock) lowered its valuation—and the never-ending lay-offs further hit staff morale. Its troubles reached a zenith when statutory auditor Deloitte Haskins & Sells resigned, and three board members—G.V. Ravishankar of Peak XV Partners, Vivian Wu of the Chan Zuckerberg Initiative, and Russell Dreisenstock of Prosus— stepped down.

Deloitte attributed the decision to the prolonged delay in providing audited financial statements for FY22. “A statutory auditor acts as a watchdog for the shareholders, and not for the management or promoters. When the information was not forthcoming after repeated requests, it (Deloitte) feared that there could be some inconsistencies in financials and it didn’t want to take responsibility. That is why it has pre-emptively stepped down. If there are no issues around financial management, why wouldn’t BYJU’S provide these documents to its statutory auditor?” asks a senior executive at a Big Four firm. There are also reports that the Ministry of Corporate Affairs is inspecting the firm’s books, though BYJU’S has denied it.

Meanwhile, the impending legal battle apparently proved to be the tipping point for investors. Three sources, speaking on condition of anonymity, say the board members’ desire to step down was a result of discussions that stretched over several months due to concerns such as delayed financial statements, Enforcement Directorate raids and issues with lenders. The board seats were vacated “solely due to investors’ shareholdings falling below the required level”, says a BYJU’S spokesperson. “It was unrelated to the litigation with lenders.”

But Jidesh Kumar, Managing Partner at law firm King Stubb & Kasiva, says resigning will not absolve board members of liabilities that may have accrued when they were directors. “If there are any irregularities, the Companies Act provides the directors a forum to register their complaints, in the form of the Registrar of Companies. If they’ve not performed their duties, they can’t take refuge by merely resigning from the board.”

Meanwhile, employee morale has hit rock bottom as senior executives with over a decade of service were laid off recently.

Course of Action

Raveendran, though, looks ready to meet the challenges head-on. His top priority is to settle the dispute with lenders amicably and secure much-needed funding. At a town hall meeting on June 29, he claimed that the company was talking to investors about a new financing round, and if that doesn’t happen, he’ll consider liquidating non-core assets. According to sources, Raveendran has been negotiating a new round with Middle Eastern investors for months now, which is expected to give preferential rights that existing investors don’t have. But, it will help the company repay the term loan.

However, Raveendran must first reassure his employees. During the town hall meeting, he told them: “The best of BYJU’S is yet to come.” In a subsequent email to staff, he said discussions with the lender consortium were heading in a positive direction. “[We] are confident about achieving positive outcomes hopefully without further court intervention,” a BYJU’S spokesperson says. While the timing of the new funding round is still uncertain, the recent strategic shift to an inside sales process and the job cuts are already yielding favorable outcomes. Additionally, transition to shorter courses, spanning one- to two-years, has played a crucial role in ensuring more complete payments upfront, resulting in faster and improved cash flows. “With one- to two-year courses, the fee comes down to Rs 25,000–35,000 from the average fee of Rs 80,000 [for four- to five-year courses], and there is a higher probability that more parents would make full payment,” says a senior executive with the company’s sales team. These changes have been cited as the reason for many lay-offs, as it renders certain teams obsolete.

The future of BYJU’S hinges on its ability to turn the business around. While the current timeline for the Aakash IPO (mid-2024) seems ambitious, the immediate focus is on building strong governance practices with essential checks and balances. Raveendran has appointed former State Bank of India Chairman Rajnish Kumar and former Infosys Director T.V. Mohandas Pai to the company’s newly formed Board Advisory Committee, set up to advise the CEO on board composition and governance. He has also brought in Arjun Mohan, former CEO of upGrad, as the new CEO of the company’s international business division, to accelerate global operations.

“Any company looking to go public will have to establish a robust business, strict internal processes, right values, and good leadership,” says Amit Tandon, Founder and MD of IiAS, a proxy advisory firm.

More importantly, the BYJU’S episode could “lead to a recalibration of the investment climate” in India’s start-up ecosystem, “with investors becoming more focussed on backing ventures that exhibit sustainable business models,” says Damani of Artha Venture Fund. “While this might slow down the funding frenzy in the short term, it could foster the development of more robust and financially healthy start-ups in the long run.”

Finally, the time has come for BYJU’S to embrace the traits of a good public-listed company. One that places a premium on both good governance and strong performance.

@binu_t_paul