Sunday, June 23, 2024
Outlook.com
Outlook India
Outlook Business

Will Byju's Debt Financing Gamble Help It Battle Its Capital Woes?

The edtech raised $250 million from US-based investment firm Davidson Kempner, which is part of the $1 billion funding round it hopes to close this month

Will Byju's Debt Financing Gamble Help It Battle Its Capital Woes?
Byju Raveendran, chief executive officer, Byjus
POSTED ON May 14, 2023 8:02 AM

Byju's has reportedly raised $250 million from Davidson Kempner Capital Management, a US-based investment firm, as part of an ongoing $1 billion funding round that the Indian edtech giant is looking to close by this month-end. As reported by PTI, this funding comes when it is facing some headwinds—its losses widened to Rs 4,589 crore in FY22 from Rs 232 crore in FY21. 

Once lauded as India's most valued start-up, Byju's, was recently in the news for all the wrong reasons. From laying off around 3,500 people to cutting costs, intense scrutiny over its accounting practices and its 18-month delay in filing its FY21 results and overspending on its marketing, the tide seemed to have been against the decacorn.

As if that was not enough, earlier this year, some of its early investors, including Lightspeed Investment Partners and Chan Zuckerberg, were reportedly seeking buyers to sell their respective stake of 2.4 per cent in the edtech decacorn. 

In April 2023, BlackRock, which has less than 1 per cent in Byju's, slashed the value of its investment by nearly 50%. The US-based asset manager pegged its per-share value at $2,400 in December 2022, down from $4,600 in April 2022. 

Earlier this month, the Enforcement Directorate (ED) searched the three premises of Byju Raveendran, the edtech's founder and chief executive officer, as part of its Foreign Exchange Management Act (FEMA) probe. 

Why Is Byju's Still A Catch?

Despite these mounting challenges, Byju's is still seen as a valuable asset, given its position as the largest edtech company in India and its over 100 million user base. The funding from Davidson Kempner is a vote of confidence since the investment firm has a long history of investing in successful companies. By backing Byju's, it has signalled that it sees the edtech as a long-term winner.

funding
A Stride Ventures report found that 91 start-ups in India raised $538 million in venture debt in 2021, almost double 2020's number

The funding will help Byju's to continue its growth and expansion as it looks to acquire new businesses and expand into new markets, such as the US and the Middle East. It is also investing in new technologies and products. 

More importantly, it will help the edtech decacorn prepay a part of the $1.2 billion term loan B raised in 2021. According to various media reports, Byju's was renegotiating terms with some lenders seeking a prepayment of $200 million.

More Takers For Debt Funding 

Raveendran has opted to raise capital from investors specialising in debt financing rather than traditional venture capitalists like Sequoia Capital, Prosus, General Atlantic, Sofina, Tiger Global and CPP Investments that currently back it. Is it in the hope that these investors will be more willing to overlook the company's challenges?

Byju's choice indicates a shift in the funding landscape for start-ups. Rather than relying solely on traditional venture capital, start-ups are now exploring alternative funding sources, such as debt financing, to fuel their growth. This trend will continue as companies seek to diversify their funding sources and access capital more efficiently.

Byjus
By backing Byju's, Davidson Kempner has signalled that it sees the edtech as a long-term winner

In 2021, BharatPe raised around $14 million in debt from MAS Financial Services, which marked its eighth round of debt funding. The fintech raised about $84 million in debt in that year.

In December 2021, Cars24 Services closed a $300 million Series G round led by Alpha Wave Capital (formerly Falcon Edge Capital) alongside $100 million in debt. 

Last June, Arzooo raised $70 million in a Series B round from SBI Investment, an investment arm of Japan-based SBI Holdings and Trifecta Leaders Fund. Existing investors, including Celesta Capital and 3 Lines VC, were also part of this capital raising round, which saw the participation of Tony Xu, founder of American food delivery start-up Doordash. 

The Bengaluru-based B2B retail technology platform had raised $7.5 million in Series A from Celesta and 3 Lines and a $6 million debt fund from Trifecta in February 2021.

Another Bengaluru-based start-up that took the same route was Bigbasket. In April 2020, it raised $50 million in debt funding from existing investor Chinese e-commerce giant Alibaba Group Holding Ltd. This development came just a week after the online grocery platform raised $60 million as a part of a new bridge round from Alibaba and other existing investors like South Korea's Mirae Asset and UK-development finance institution CDC Group.

Is Debt Funding A Safer Bet For Byju's?

A report by Stride Ventures found that 91 start-ups in India raised $538 million in venture debt in 2021, almost double 2020's number. Data from Venture Intelligence shows that between January to August 2021, 36 start-ups raised venture debt funding of $288.99 million as against 29 firms raising $77.36 million during the same period in 2020. 

This asset class found many takers in the start-up ecosystem since debt financing is cheaper than equity financing. When a company raises money through debt financing, it borrows money from investors. The interest rate on this debt is typically lower than the return investors expect from equity investments, which is helpful in the current economic climate. By gaining access to funding at a lower cost of capital than traditional equity financing, start-ups can save money by raising debt instead of equity.

venture capital
Debt funding found many takers in the start-up ecosystem since it is cheaper than equity financing

Raising funds through traditional venture capital would have been challenging in the case of Byju's, which is confronting several financial issues. However, tapping investors who specialise in debt would give it access to funds while it still addresses the concerns of its investors.

Moreover, when a company raises money through equity financing, it dilutes the ownership of existing shareholders, including the founders. Raveendran and his wife, Divya Gokulnath, respectively, own a 17.1 per cent stake and 3.2 per cent in Think and Learn, the company that owns Byju's.

If the duo is reluctant to dilute their ownership, debt financing allows them to quickly raise significant capital to sustain the company's growth. Moreover, since debt financing is more flexible, the edtech is not obligated to pay investors until the debt is due, which gives it more flexibility in its cash flow planning.

However, debt financing comes with its own set of risks and can't substitute venture capital. While it can keep the business running and help start-ups raise equity when valuations are right, Byju's could face bankruptcy if it cannot repay the debt. 

Nevertheless, the company believes that the potential benefits of debt financing outweigh the risks. Will its gamble pay off?

  • Related Articles

    Enthused by a 40 per cent increase in paid listening hours last year, the Amazon audio content subsidiary is collaborating with local partners to develop regional content that augments its English...

    Localised Stories Is The Core Of Audible's Indian Content Strategy, Says Country Manager and VP, Shailesh Sawlani

    Cashfree's co-founder and CEO, Akash Sinha, explains how its latest acquisition Zecpe will help D2C merchants avoid returns, have higher conversions and ensure higher customer retention

    Leave No Customer Behind: How Zecpe Acquisition Helps Cashfree Tackle The Checkout Conversion Challenge  

    Training its lens on affordability, Snapdeal CEO Himanshu Chakrawarti explains why the company transitioned from a horizontal ecommerce platform to focus on the value lifestyle sector, a highly...

    Snapdeal 2.0: Building A Value Proposition That Extends Beyond Discounts And Seasonal Sales