Saving Byju's From Byju: Need a change of management to protect the most valuable EdTech

While the market purists would advise that Byju’s should be allowed to collapse, in the interest of all stakeholders, the edtech should be taken away from its promoters like Satyam and BharatPe.

K Yatish Rajawat

Byju’s, possibly the largest education technology (Edtech) company in the world, at least in terms of valuation, needs to be saved from its promoters. This is not just to keep the company but to save the collateral damage it can cause to its stakeholders. The fallout of a large company like Byju’s will be huge not only for the startup ecosystem but also for those students who have paid money — their future is at stake — as well as those of trainers, educators, and employees.

This is important because the promoters clearly seem to have lost not just the plot but also moral leadership. Besides, the three founders have already diluted their stake in secondary sales of up to 400 million dollars which shows their lack of faith in Byju’s future.

According to a report compiled by PrivateCircle Research, the total stake of founders has come down from a high of 71.6 percent in 2015-16 to 21.2 percent in 2023. While this dilution is because of multiple rounds, the secondary sale, where the money has not been raised by the company but by the promoters — founder Byju Raveendran ($3.28 million), his wife and co-founder Divya Gokulanth ($29.40 million) and his brother Riju Raveendran ($375.83 million). The promoters have clarified that the money raised through the stake sale was pumped back into the company. Though they did not elaborate on why they had to do so, VC investors say that part of it may have come back to keep the valuation ‘high and alive’. A practice that, if carried out by promoters of a listed company bringing money parked abroad into the company, would be called round-tripping.

But there are many things that apply to listed companies. Corporate governance, for instance, which most unlisted private equity-funded companies like Byju’s consider irrelevant. The poor standards of corporate governance came to light with the resignation of the auditors and the independent directors on its board. The resignation was followed by both the Ministry of Corporate Affairs and the Serious Fraud Investigation Office (SFIO) saying they are investigating the company. Earlier, Enforcement Directorate (ED) had admitted that they were investigating charges of money laundering against the company. While all these are investigations at this stage, there is reason to believe from press reports that the company did not have proper corporate governance. This is reason enough to remove the promoters and look at appointing seasoned professionals as Chairman of the board.

What created the problem is low-interest rates that drove huge sums of money into VC funds and also drove out rationalised behaviour. Now that interest rates are at a peak again and funding is drying up, the practice of flipping to increase valuation is coming to light. Flipping the parcel with a new wrapping of valuation from one consortium of VC funds to another buddy consortium is a reality of mutual back-scratching that the industry never acknowledges publicly, despite everybody knowing that the emperor of edtech wore no clothes, none of the funds acknowledged it. Even now it is very difficult to find a VC fund to go on record to say what is wrong with the business model of Byju’s.

The Model

The irony behind the business model of Byju’s is that it has become the model for almost every startup in the country. While most edtech companies try to sell courses, assessments, or something related that will help their customers educate themselves, the biggest edtech sold devices and forced parents to buy subscriptions by pressuring them that the future of their child was in danger of being ruined. The aggressive selling practices have created a customer swell of parents enjoying a schadenfreude moment in seeing edtech disintegrate.

If there is a limit to selling content which is mostly available free on a Khan Academy kind of site, what do you do? Well, you start acquiring revenues. Acquire companies in niche segments that actually have student customers and unique content or classes and trainers built over the years. Byju’s has acquired six companies since its inception. Company observers say that the reckless valuation of these acquisitions, especially companies like Whitehat Jr, is the reason for Byju’s debt problem. Now, it is also difficult to understand why the most market-valuable startup in the country and possibly edtech startup in the world has to raise debt and not equity.

The high valuation bubble was being kept afloat by promoters buying their one stock or the company borrowing and buying highly-priced companies to embed higher valuation. How supposedly hard-nosed savvy investors, with their formidable experience, got blind-sided and fell over each other to invest in this obvious Ponzi scheme begs belief.

The model is clearly unravelling, it had to — not only on the valuation but also with the debtors in the US — initiate a legal recovery process.

The challenge is what should the board, the investor, and our government be doing in such a circumstance. There are two examples, one is BharatPe, and the other is the older Satyam Computers. In both cases, the promoters were asked to step out of the organisation and a new board and management team were constituted to run it. I had written about the God complex that entrepreneurs seem to acquire and why it needs to be addressed. Following this article, one good thing that came out was that BharatPe was rescued by Rajanish Sharma from the clutches of Ashneer Grover.

There are enough people out there who can rescue and revive Byju’s. The first generation of Aptech and NIIT is still active and capable of playing a stellar role in Byju’s revival. They have to be brought in very much like what happened in the case of Satyam where a new board was formed by the government to protect the company and save the reputation of the entire sector.

While the market purists would advise that the market must take its “due” course and Byju’s should be allowed to collapse, in the interest of all stakeholders, Byju’s should be taken away from its promoters in line with existing precedents.

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