Byju's stands at the edge of a precipice: Can the edtech major reclaim its lost glory?

Once the most-valued edtech firm in the world, Byju’s is now battling serious funding issues, a corporate governance crisis and court battles. The firm will have to urgently raise at least $1.5 billion and set its house in order. Can it succeed?

This June, Bengaluru’s real estate circles rippled with talk of Byju’s delaying payment of rent. Was India’s most valued edtech company planning to vacate acres of office space? Byju’s corporate entity, Think & Learn Pvt. Ltd, had taken three leased properties, the largest being Kalyani Tech Park in Brookefield—spread over half a million sq. ft—that had a monthly rent of Rs 3 crore. 

At the end of July, Byju’s pulled out of most of Brookefield, telling its staff to work from home or other offices. An executive at a top property consultant confirmed that Byju’s had been falling back on rents before the pullout. “I guess it was coming,” he says. 

Delayed rents were not the first warning sign. Byju’s had been falling back on statutory payments such as employees’ provident fund. It had reduced its headcount from 58,292 in March 2022 to 24,787 by May 2023, according to PrivateCircle Research, a private market intelligence platform.

Then Byju’s statutory auditor walked out, and so did three members of Byju’s board representing its investors. G.V. Ravishankar (of Peak XV Partners), Vivian Wu (The Chan Zuckerberg Initiative), and Russell Andrew Dreisenstock (Prosus NV) quit the board, citing “differences” with Founder Byju Raveendran. The board was left with Raveendran, wife Divya Gokulnath, and brother Riju Ravindran. 

[BYJU’S] founders need to accept that $22 billion [valuation] was in euphoric times. Through recapitalisation...the priority is to get money into the company, correct all mistakes and rebuild the business

K. Ganesh
Serial Entrepreneur and Investor

Deloitte Haskins & Sells, the company’s auditor, which has a five-year mandate up to 2025, said it had no clarity on when Byju’s planned to finalise its 2021-22 accounts or even fix issues it had raised about the accounts for 2020-21. 

Multiple sources close to the investors and the auditor told Business Today, requesting anonymity, that the promoters were not responding to emails about its financial results. One source said, “The promoters kept telling the investors and the auditor that ‘action is being taken’ or ‘we will come back with a plan.’”

Today, cynics who had questioned Byju’s $22-billion valuation (on which it raised the last two rounds of funding) look smug. The company’s global ambitions are souring, and its India business is struggling. Byju’s is also fighting a term loan issue. The crisis does not bode well for India’s start-up ecosystem. But there are lessons to be learnt. 

Byju’s, which prided itself on its interactive learning method from kindergarten to Class 12, is silent on questions investors have. A fresh fund infusion is critical, but prospective lenders are unlikely to cut a big cheque to Byju’s when they don’t know what (or how) it has been doing over the last financial year. (The company has not filed the audited financial reports for FY22 and FY23.)

The failure to file timely financial statements, coupled with high- profile acquisitions
without a CFO, calls into question governance standards and fiduciary oversight

Sonam Chandwani
Managing Partner
KS Legal & Associate

Byju’s appointed its first chief financial officer (CFO), Ajay Goel, in April 2023. The law doesn’t require unlisted companies such as Byju’s to have a CFO, but good corporate governance does. It is very unusual for a company of Byju’s scale not to have a CFO, especially when it raises truckloads of capital and makes big-ticket acquisitions. 

“No one knows what the real numbers are, and that is not a comfortable situation for a potential investor,” says Satish Meena, Principal Analyst at Datum Intel.

Even if Byju’s snags a new suitor, the funding will not be a straightforward equity deal but a heavily structured one at a fraction of Byju’s peak valuation. 

There has been a lack of transparency on the part of the edtech firm, which has also taken up too much debt. An investment banker, requesting anonymity, points out that Byju’s will have to use any fresh capital first to lighten its debt burden. “Which investor would want to do that? You want to put money to grow the company. Also, how will somebody even determine the valuation of this company?” asks the banker. “A mere $200-300 million doesn’t help; it has to be a large round, maybe about a billion,” adds the banker. “How will you even put a structured deal for a billion dollars? That is a lot of money!”

Most acquisitions don’t work because they are not done for pure business reasons...You may use debt to buy assets or inventory, but don’t use it for purposes that need you to raise
venture capitalto pay off the debt

Anirudh A. Damani
Managing Partner
Artha Venture Fund

Taking on debt

Investors are not thrilled about Byju’s functioning. It’s not just the absence of audited financial reports for the past two years. Byju’s has a host of corporate governance issues, which, experts say, it has often ignored.

When Prosus, a Dutch technology investor, cut Byju’s valuation to $5.1 billion at the end of June, it said, “Byju’s grew considerably since our first investment in 2018, but, over time, its reporting and governance structures did not evolve sufficiently for a company of that scale. Despite repeated efforts from our Director, executive leadership at Byju’s regularly disregarded advice and recommendations relating to strategic, operational, legal, and corporate governance matters. The decision for our Director to step down from the Byju’s board was taken after it became clear that he was unable to fulfil his fiduciary duty to serve the long-term interests of the company and its stakeholders.”

Over the years, Byju’s has been accused of mis-selling, governance issues and aggressive promotion of its courses. But it ignored criticism as it went on an acquisition spree, starting in 2020-21 when interest rates were almost zero in the US market.

Byju’s picked up Singapore-based higher education firm Great Learning, offline tuition chain Aakash Educational Services, and a platform that teaches kids coding, WhiteHat Jr. It even bought start-ups in the US, including a kids-focussed digital reading platform Epic. Byju’s splurged $3 billion on acquisitions, with the K-12 segment flourishing. It raised approximately $3.5 billion as equity capital during the period.

Meena says it helped that China tightened edtech regulations, which prompted investors to re-route funds to India. “Byju’s found itself in a sweet spot. But making acquisitions is one thing; running those companies well is equally important,” says Meena. 

Raveendran’s strategy seemed to be to ‘buy revenue through acquisitions’ and raise equity on top of the added valuations. Company insiders admit to Raveendran having had “a massive leverage with investors and buyouts made only for vanity metrics, without realising that Aakash was the only gem”. It also went on a marketing overdrive, even sponsoring the Indian cricket team at one point. 

Then came the Covid-19 pandemic and the lockdowns. The lockdowns from March 2020 disrupted physical classes in schools and colleges and powered a surge in online education. Byju’s reaped the rewards of its big investments—for some time at least. Take WhiteHat Jr, which was making Rs 1 crore or so a month before Covid-19. Revenues shot up to Rs 10 crore monthly or Rs 120 crore for 12 months. That was enough for Byju’s to cut a cheque for a whopping $300 million (around Rs 2,250 crore or 19x projected revenue for a loss-making entity) to pick up the company. Once the pandemic ebbed, monthly revenue numbers dropped to Rs 50 lakh with a cash burn of Rs 100 crore every month. 

BYJU’S was only after growth and valuations... Aggressive sales and marketing, a bad work
culture, misselling... are manifestations, and the board didn’t even try to change these
practices

Shriram Subramanian 
Founder and MD
InGovern

An investor said the firm’s plan seemed to be to take debt, fund M&As, and then raise equity on the revenue-multiple valuations (from acquisitions) to pay off the debt. However, Byju’s ran into a streak of bad luck as the cycle turned and equity became extremely scarce, especially for those businesses that saw numbers drop after the pandemic ebbed.

Shriram Subramanian, Founder and Managing Director of InGovern Research Services, a corporate governance advisory firm, is blunt. “Byju’s was only after growth and valuations without putting many requisite business practices or value systems in place. Aggressive sales and marketing, a bad work culture, mis-selling to parents who couldn’t afford the offerings, non-filing of audited accounts even 18 months after year-end are external manifestations, and the board did not even try to change these practices,” he says. 

Neither Byju’s nor its investors responded to a detailed questionnaire from BT for this story. 

For Byju’s, which continues to burn cash on operations, equity capital was not enough to fund the acquisitions. So, it headed to the US market, which has providers of the large structured debt that it needed. In November 2021, it landed a massive $1.2-billion Term Loan B or TLB (which involves nominal repayment of the principal over its term and full repayment at the end) from a consortium of US-based creditors. As late as May 2023, it announced a $250-million fundraise from New York-based investment manager Davidson Kempner Capital Management. 

That $1.2-billion TLB has returned to bite Byju’s. 

In June 2023, Byju’s missed a $40-million loan repayment and filed a lawsuit against its lenders, countering their legal action. Byju’s accused them of using predatory tactics. People in the know say the TLB lenders are looking for interest rate of 10-11 per cent (up from the original 6.78 per cent yield-to-maturity rate). That means Byju’s must set aside $100-120 million from its cash flow each year to meet the new terms. 

Anirudh A. Damani, Managing Partner at Artha Venture Fund, says it is not wise to use debt for anything other than short-term working capital. “Most acquisitions don’t work because they are not done for pure business reasons. When you are acquiring a company, you need to ensure that the core business is generating enough cash to deal with the pressures of the acquisition. You may use debt to acquire an asset or some inventory to sell, but don’t use debt for purposes in which you are going to raise venture capital to pay off the debt,” he says.

It will take a lot for investors to deal with the issues around the Aakash litigation...
BYJU’S will easily need to raise $1-1.5 billion over the next 6-12 months

Satish Meena
Principal Analyst
Datum Intel

The Aakash affair

Then there is Aakash, which offers students test preparatory coaching services for competitive exams. Byju’s acquired Aakash in April 2021 for about $1 billion (see chart Binge Remorse). Aakash is in a legal tangle today, but more on that later. Can Byju’s raise some money from Aakash, the only gem in its empire? 

Meena says it will take a lot for investors to deal with the issues around the Aakash litigation, which could cut valuations. “Convincing them to walk into this situation will not be easy. Byju’s will easily need to raise $1-1.5 billion over the next 6-12 months to meet current cash flows.”

Davidson Kempner’s loan was a structured credit transaction tied to the shareholding and future cash flows of Aakash. The Blackstone Group, the private equity giant, and the Chaudhry family, minority stakeholders in Aakash, hold 30 per cent of Aakash. Byju’s has 43 per cent, while Raveendran has 27 per cent. Davidson Kempner is reviewing its loan proposition and has disbursed only a portion of the original amount. It also accused Byju’s of breaching some of the loan covenants. 

Meanwhile, Blackstone and the Chaudhrys refused to trade their stakes in Aakash for shares in Byju’s, and Kempner has sent a legal notice to Aakash, asserting its right to Aakash shares pledged as collateral.

Since then, Byju’s has also issued a notice to Aakash’s founders, demanding the transfer of shares. The issue could be a barrier to a potential deal that Byju’s needs. Byju’s sees Aakash as its trump card and had planned an IPO in mid-2024 but has been stumped by this legal maze. But Byju’s has a Plan B for Aakash: it has spoken to Manipal group Chairman Ranjan Pai to offload a part of Raveendran’s stake to net around $80 million, with which it can repay part of the Davidson Kempner loan.

Questioning the “over-the-top valuations and very convoluted shareholding structures”, Subramanian points to the Aakash deal. “Raveendran has a personal stake. Which board allows that? The whole thing has been fuelled by a mad chase for valuations in an era of readily available capital.”

The way forward

K. Ganesh, serial entrepreneur and promoter of BigBasket, Portea Medical and HomeLane, says there is value left in Byju’s. “The founders need to accept that $22 billion was in euphoric times. Through recapitalisation, existing investors will have to take a haircut, but the priority is to get money into the company, correct all mistakes and rebuild the business,” he says. “We are all rooting for Byju’s to come out of this and succeed as the bellwether in edtech.” 

As a core education provider using technology, Byju’s and its group companies still have value. Ganesh feels Byju’s can raise money against its assets, but nowhere near the $22-billion valuation.

But if Byju’s succeeds in raising money against these assets (Aakash, Great Learning and Byju’s itself), the existing investors will be wiped out unless they take a haircut and participate. Those privy to discussions say the focus will be on profitability and not valuation, making it similar to what one saw at WeWork. 

Bringing in T.V. Mohandas Pai, former CFO of Infosys, and Rajnish Kumar, former chairman of State Bank of India, into a newly created board advisory council are steps in that direction, says Ganesh.

Mukul Gulati, Managing Partner at Zephyr Peacock, which provides equity capital for small and medium enterprises, says profitability must be the first priority to establish confidence among investors. “For companies where there are perceived governance problems, where questions have been raised around real business models, or where profitability is not established, two things could happen—the companies will either not go public despite the promises they make, or if they do, the stock price performance is going to be disappointing.”

Another investor says, “Byju’s needs a fundamental reset... Have a full understanding of where the cash is coming from and where it is bleeding. Come out with a singular aligned vision of what you want to be as a company and let go of everything that doesn’t align with that vision. Be brutal. You may not get back to a $22-billion valuation, but there is a chance of getting out of this mess and maybe return everyone’s capital.”

The company has started making changes, though its current board, with only family members and no independent directors, might deter potential investors. Some structure has been put in place. Now, operations are managed by Mrinal Mohit (India CEO) and Arjun Mohan (CEO of international business). Mohit and Mohan report to Raveendran. Anil Goel (President, Technology, and Group CTO) and Ajay Goel (Group CFO) also report to Raveendran, who looks after finance, technology and products at a group level. The company is currently undertaking a business and vertical restructuring, as a part of which its Chief Business Officer Prathyusha Agarwal and two other senior executives are leaving the organisation.

Meanwhile, on Aakash, Sonam Chandwani, Managing Partner, KS Legal & Associates, feels that the proposed share swap agreement following the buyout is a contractual dilemma and a test of corporate ethics and partnership. “Also, the conflict with the TLB lenders in the New York Supreme Court and the acceleration of a substantial $1.2-billion loan reveals underlying tensions in Byju’s financial management and challenges to its credit reputation. The failure to file timely financial statements, coupled with high-profile acquisitions without a CFO, calls into question governance standards and fiduciary oversight,” she says.

In a recent interaction with potential investors, Raveendran said he was determined to rebuild Byju’s and “that he would be around for decades”. Even his worst critics will concede that he is perhaps the only one who can do the job, simply because no one else can grasp the complex business model or the system. “He is out there talking to investors and listening a lot more. Nobody can work as hard as he does,” says a person privy to the discussions. Meanwhile, the start-up ecosystem can take lessons. (See box Learnings from L’affaire Byju’s.)

If Byju’s files the financial statements and fixes the TLB issue, it will have done two important things. But Raveendran will need to do much more than that—not just for his reputation or his company’s but for a sector and an ecosystem that needs a liberal dose of investor confidence. Rarely has the biggest player in a segment failed, and Raveendran can keep that record intact. Is he listening?