Introduction
In the bustling classrooms of India, where eager minds yearned for knowledge, a silent revolution was brewing. And at the helm stood a visionary, armed not with chalk and blackboards, but with a digital canvas of infinite possibilities. Byju Raveendran, a maverick with a passion for education, embarked on a daring journey to reshape learning in the nation. With a stroke of brilliance, Byju’s emerged as the beacon of this edtech revolution, weaving a tapestry of innovation and inspiration. Through its virtual halls, a symphony of animated lessons danced, captivating students’ hearts and minds. Complex concepts transformed into vibrant spectacles, transcending the boundaries of traditional teaching. Byju’s became the alchemist of education, blending technology and personalized learning. However, Byju’s, once an unstoppable force, soaring to remarkable heights and empowering millions with its innovative approach, is now faltering to survive – grappling with issues of corporate governance. Today, Byju’s has become an example for startups on how corporate governance issues can clamp business growth. It’s a story of rise and fall, a cautionary symphony of ambition and adversity!
Unsustainable growth and business model
Byju’s is an Indian multinational edtech company at its core that provides online learning programs for students in kindergarten through grade 12, as well as professional and graduate education. The company was founded in 2011 by Byju Raveendran and Divya Gokulnath. It experienced rapid growth in recent years, thanks to the popularity of its online learning platform amid the COVID-19 pandemic. The company’s valuation has skyrocketed from USD 1 billion in 2018 to over USD 22 billion in 2022. Several factors have contributed to Byju’s rise. First, the company was able to tap into the growing demand for online education in India amid the pandemic. The Indian education market is already one of the largest in the world, and there is still a growing number of students who are looking for online learning options. Byju’s also developed a strong brand and marketing presence, reaching a wide audience through its television commercials, social media campaigns, and celebrity endorsements. However, Byju’s heavy investment in technology was one of the reasons that made it stand out from the others. The company’s online learning platform is user-friendly and engaging, and it offers a variety of features that help students learn effectively. However, Byju’s rapid growth also came with some challenges. One of the biggest challenges facing Byju’s was its high burn rate. The company had been spending heavily on marketing and sales to acquire new customers. This led to losses in recent years. In FY21, Byju’s lost INR 2,702 crore (USD 350 million) on a standalone basis. Meanwhile, the company relied on a subscription model, but the company’s churn rate is high. This meant that the company was constantly losing money on its existing customers. This forced the company to lay off over 6,000 employees in recent months to cut costs. The layoffs raised concerns about the company’s future growth prospects. In addition to financial challenges, Byju’s has also been facing criticism for its sales tactics. Parents have started complaining that they were misled by Byju’s sales representatives and that they were pressured into signing up for expensive courses. The company has been accused of using aggressive marketing techniques, such as cold calling and door-to-door sales. These challenges led to a decline in Byju’s valuation. In January 2022, the company was valued at USD 40 billion. However, its valuation has since fallen to USD 22 billion. In addition to these challenges, Byju’s is also facing increasing competition from other online learning platforms, such as Unacademy and Vedantu. Meanwhile, the Indian government is considering regulations that could make it more difficult for online learning companies to operate. Apparently, it seems like business growth issues, however, the problems run deeper.
Acquisition spree and debt trap
In the year 2021, with interest rates at a low and loans being cheap, the tech startup industry thrived, particularly in the field of edtech. Byju’s, an ambitious player in the edtech sector, had already raised substantial funding. However, with money readily available and an appetite for expansion, Byju’s sought to borrow additional funds. Initially aiming for a USD 500 million Loan from Lenders in the US to facilitate acquisitions, the company ended up borrowing more than double the amount, securing USD 1.2 billion. Lenders were keen to invest in this high-achieving edtech startup from India and were willing to throw money at it. Byju’s went on a spending spree. The company acquired several other edtech companies, including WhiteHat Jr, Toppr, and Aakash Educational Services. These acquisitions were costly and contributed to Byju’s mounting debt. Meanwhile, the company has been running television commercials and social media campaigns, and it has been using aggressive sales tactics to acquire new customers. The combination of acquisitions and marketing expenses has led to a high burn rate for Byju’s. The debt load has led to concerns about the company’s future. And thus, the company has been sued by its lenders in the United States.
Lawsuits and countersuits
In November 2021, prominent investment managers such as Blackstone, Fidelity, and GIC showed great enthusiasm to provide loans to Byju’s. However, the situation changed by September 2022 when these lenders became desperate to offload their loans, offering them a steep 36% discount on the principal. Byju’s loan process typically involved the company approaching an investment bank to syndicate the loan to investors who would become the lenders. Negotiations took place, resulting in an agreement that satisfied all parties involved. It’s common for the original investors to later sell their loans to other investors, often leaving the company unaware of its lenders’ identities. At present, Byju’s debt carries a 20% discount, suggesting that Distressed Debt Investors, specialized in purchasing such distressed loans from regular investment managers, likely acquired the loans. Consequently, these distressed debt investors took calculated risks, anticipating potential defaults by the company. Their goal is to recover their investment swiftly, often resorting to legal action to ensure repayment. In the case of Byju’s, these new lenders, the distressed debt investors, filed a lawsuit in the Delaware Court of Chancery. It’s worth noting that the lawsuit wasn’t triggered by a payment default, but rather by the lenders’ anticipation that Byju’s might default in the future, prompting them to act proactively. The lenders claimed a default due to Byju’s failure to obtain approval from the Reserve Bank of India (RBI) for Whitehat, one of the guarantor companies with a negative net worth. Additionally, the lenders seized on the delay in the company’s financial audits as grounds for another default claim. Byju’s financials for 2021 had been delayed due to concerns raised by auditors regarding certain accounting practices. Byju’s has also faced legal challenges in the US regarding USD 500 million allegedly missing from its US entity, Byju’s Alpha. The lenders have sought to gain control of the US subsidiary.
Despite Byju’s attempts to negotiate a deal with the lenders, offering assurances of its financial health and making concessions worth tens of millions of dollars, the lenders remained uncompromising. They demanded full repayment of the principal or a significant portion along with increased interest rates. In response to the lenders’ inflexibility, Byju’s has prepared its defence, highlighting the loan clause that prohibits its transfer to distressed debt investors and raising questions about the lenders’ eligibility. Byju’s lawsuit alleges that the lenders were under the control of distressed debt dealers, which would violate the terms of the loan agreement. Byju’s has categorized its TLB lenders as predatory and moved to disqualify Redwood as a lender.
Creative accounting and resignations
Byju’s faced a major setback when its statutory auditor, Deloitte Haskins and Sells, and three external board members resigned, adding to the company’s existing challenges. Deloitte, which had been auditing Byju’s parent company Think and Learn Private Limited for six years, announced its immediate resignation due to the delayed financial statements for the fiscal year ending on March 31, 2022. Last year, Deloitte was also appointed as the auditor for Byju’s-owned entities Aakash Educational Services Ltd and Aakash EduTech Private Limited. In addition to the auditor’s resignation, all three external directors representing Peak XV, Chan Zuckerberg Initiative, and Prosus Ventures reportedly submitted their resignations earlier this month. These directors played a significant role as representatives of shareholders. Byju’s has named BDO as the new statutory auditor for the company and its subsidiaries, however, the company referred to the news of the directors’ exits as speculative and denied the claims made in this regard. Deloitte’s resignation letter mentioned multiple letters sent to the company, however, they have not received communication on the resolution of audit report modifications for the fiscal year ending on March 31, 2021, nor the audit readiness of the financial statements for the fiscal year ending on March 31, 2022. This impeded the start of the audit process. The resignation of an auditor is uncommon, and it is usually preceded by discussions and explanations of the issues at hand. Deloitte had previously expressed concerns about Byju’s internal financial controls in its audit report for the fiscal year 2021, highlighting certain revenue recognition practices. Meanwhile, the departure of non-executive directors often occurs due to differences of opinion between the directors and the company’s promoters. It is also seen as a move by the resigning directors to avoid future liability for the company’s actions.
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