By Chetan Soni

Abstract

Byju’s, some may argue, is single-handedly responsible for putting the ed-tech sector on the list of the fastest growing markets. However, throughout the past year, it has seen itself mingled and entangled in regulatory, and corporate governance concerns. The fall from glory of this fabled unicorn, can be said to be marked by the world’s biggest auditor- Deloitte dropping it as its’ client. Through this article, I will be attempting to trace Byju’s downfall, and attempt to answer if it has finally run out of juice (capital?)

Introduction

Byju’s has long been heralded as the Indian ed-tech industry leader. During the pandemic induced lockdown, the ed-tech products, which were previously considered a mere substitute to usual classes, was suddenly thrown into the fray as the source of education. The lockdown thus propelled its growth, and Byju’s customer base of students increased by manifolds. This growth aligned itself with another funding round, fuelled by astronomical valuations. In October 2022, owing to the large Indian market still left untapped, the company was valued at $22 Billion. An opportunistic scenario for growth, the company raised capital for equity. And thus, to facilitate its’ expansion, and attempting to go beyond borders, it went into a buying spree. And acquired its’ rivals, such as WhiteHat Jr., global players like Epic!, Great Learning Pvt. Ltd., Osmo, and a behemoth in the education sector- Aakash Educational Services Ltd.. Such heavy spending understandably requires a significant amount of cashflow. The ambitious management did not meet its cash-flow requirement through equity-funding alone, but rather took a $1.2 Billion term loan, while paying an interest rate of 5.5% plus London Interbank Offered Rate (LIBOR). Typically, a loan like such is required to be paid back over a period of 5-6 years.

At this juncture, it is necessary to note how Byju’s makes its money, and how it plans to repay the loan while providing a return to its investors, who have pitted it to astronomical growth. It primarily generates revenue via–

1. “Course fees- Income made from live tutoring. Session by session
   
2. Streaming fees :  Revenue earned when students stream pre-recorded courses
   
3. Revenue from tablets and SD cards — These involve offline course materials and tests. The target audience here is typically people from lower-income families who don’t have access to high-speed internet.”

Crucially, Byju’s had begun partnering with lending companies such as Capital Float and Bajaj Finserv to assist its consumers in breaking the affordability barrier. However, the model, while crucially fast-forwarding growth, inadvertently brought in a large number of defaulters. This was due to the fact that the customer-base was largely low-income parents who were unable to sustain affording the services. The practice of using Non-Banking Financial entities and Banks to facilitate credit to parents, is seemingly a ploy to targets low-income groups who are likely to default, all in the name for growth. The practice has been denounced by Priyank Kanoongo, Head of National Commission for Protection of Child Rights (NCPCR), who claimed the practice to be illegal- owing to the RBI guidelines on educational loans, not covering a scenario where parents can take loans for their children’s tuition.

The tie-ups with financing entities were not the only form of credit facility available to the customer, but rather Byju’s itself too has been providing funds to its customers to further incentivise purchases, referred to as the “internal loan payment model”. Namely, the Byju’s Direct and Byju’s Advantage, requires minimal paperwork, and no minimum credit score requirement. One of its’ chief-service of providing a tablet with educational content, it’s most profitable venture- was now provided through a buy-now-pay-later model. Customers are only made aware of this interest-free opportunity if they are unable to avail the loan facilities from external lenders due to not meeting the credit-check requirement. The same has the effect of greatly harming vulnerable customers’ financial stability. The internal loan financing programme will inadvertently be hazardous to the company’s sales, when defaults from low-income group customers will impact the company’s revenues.  When the seemingly unstoppable cash flow is restrained the same will be more visible.

And something on the same lines did happen!

The acquisitions made in haste were not-necessarily bearing fruit for the ed-tech giant, and it has been reported that 30% of the losses in revenue could be attributed directly to WhiteHat Jr. Moreover, the inevitable funding winter hampered its plans to raise more capital. Viewing the financial instability, its lenders of the $1.2 billion term-loan want assurance and have come calling sooner-than-later. Byjus, unable to meet the riding conditions with the loan, was now suffering in the bond market, its loan was now trading at a 30% discount with the people trying to get their hands off it. And its regulatory audit concerns, and mounting losses amidst the acquisitions, now requires repayment sooner than later. The first installment of $40 million was due, and no one knows whether the repayment has been made. The interest rate too is out-of-control and seemingly spiked. It is important to note that the unicorn’s insatiable appetite for growth could lead to its death. With the mounting debt dues and high interest rates now looming like a noose. And the world’s biggest audit firm dropping it as a client for regulatory concerns, the future is anything but certain for the unicorn.

The seemingly unstoppable juggernaut has thus been cut at its’ feet, and in the end, it is necessary to ask oneself what brought it here? Was it only mismanagement, and over-ambitious entrepreneurs, or is it a systematic concern underlining the inherent conundrum of the startup world. Throughout this article, I have used the word “growth” a number of times. It is important to note that any valuation, especially one as astronomical as Byju’s, is arguably based on unrealistic growth pumped up by venture capitalists. However, without such a valuation, a company would not seem to grow. Therefore, to achieve the valuation, the company creates “growth” and attempts to meet the unrealistic figures. This can create a potential environment of failure, as seen in the case of Byju’s.

Image Source: Google Images

About the Author

The Author is a 5th Year BA-LLB Student from Jindal Global Law School. He is interested in the intersection between law and economics, and how intrinsically this interaction impacts the daily lives of the common man. In his free time you can catch him discussing the implication of the country’s macroeconomic policies, or weirdly engrossed in a debate of whether the relevance of test cricket is hinged on Bazball!