The shenanigans at Byju's will hopefully put an end to the indiscriminate hiring and overspending prevalent in the edtech sector and bring the much-needed focus on profitability over glorified annualised revenue run rates
"Byju's is not my work; it is my life," said the edtech's founder and CEO Byju Raveendran, at a recent shareholder call. Raveendran also stated that he was entirely committed to the beleaguered start-up and had even injected a significant chunk of his personal funds, taken as loans, into the company. The impassioned statements came amidst growing concerns about the firm’s health.
Byju’s has been able to grab headlines for a while now, albeit for all the wrong reasons. The dawn of each day brings fresh news of what's ailing the company.
Last year, reports about aggressive mis-selling of expensive education courses to parents, financial misgovernance and a series of layoffs amidst overspending on marketing did the rounds. The company also faced criticism for delaying the release of its FY 20-21 results. After being called out by parliamentarians like Karti Chidambaram and other industry stakeholders, Byju's finally released the results in September 2022, after a significant delay of around 18 months.
In 2023 too, the edtech firm has managed to stay in the spotlight. Recently, its auditor, Deloitte, resigned after the edtech delayed providing its financial statements for over a year, while three independent company directors representing various venture capital companies also left the company. Byju’s has also been dragged into a lawsuit after defaulting on a $1.2 billion loan in the US. The Enforcement Directorate (ED) also raided the company’s offices recently in connection with a case registered under the Foreign Exchange Management Act.
All the negative attention surrounding the company has come at a cost. The company's valuation has taken a severe beating. In its annual report, Prosus NV slashed the edtech's valuation to $5.1 billion, a massive 75 percent drop from last year's valuation of $22 billion. Earlier in March, the asset management company Blackrock pegged the edtech's fair value at $8.4 billion.
Even as Byju's issues defiant rebuttals to every update emerging about the company, questions are now being asked whether its shenanigans negatively impact India's edtech sector as a whole.
There are multiple factors that ensure the success and sustainability of any start-up. This includes its business model, adaptability, market dynamics and strategic decision-making. While Byju's achievements are commendable—it was India's third decacorn after Paytm and OYO, and became synonymous with online education during the pandemic—it failed to assess and address challenges to ensure long-term viability.
The company primarily focused on K-12 education, which propelled its success story, especially during the Covid-19 induced lockdown period. However, its overreliance on this vertical, especially its online avatar, made it vulnerable. It tried diversifying its offerings in the offline space by getting into a spree of acquisitions, which only ate into its profits.
While Byju's remains the cynosure of the attention it would rather shy away from, industry players maintain that it isn't right to paint all edtech companies with the same brush. Manish Agarwal, co-founder of test preparation platform PrepInsta, notes that several edtech players continue to do a good job, especially in the prep edtech space.
Others, too, agree that one company's decisions or strategies cannot be seen as representative of the whole sector. However, the expectation that edtech companies would be able to maintain the same level of growth post-pandemic as they were posting during the global lockdown was fundamentally flawed and misguided. A certain amount of correction in the pace of growth once the world opened up again was bound to happen and should not have taken anyone by surprise.
Ravi Bhushan, founder and CEO of BrightCHAMPS, opines that the current problems for edtech players stem from overpromising on the back of this unsustainable trajectory. This assumption of growth numbers also led to indiscriminate hiring and overspending. But there are enough and more players in the market who don't hire and spend reactively based on micro trends.
"Many of us have kept the macroeconomic view firmly in mind and focussed on sustainable growth with low burn. It is unfortunate that some of the bigger players have stumbled, which is why the narrative for the whole sector is being written in this way," he adds.
Agarwal views the unfolding drama at Byju's from a different lens. The decacorn was in the news for mis-selling and aggressively selling its courses. Following Byju’s footsteps, a few other edtech start-ups also promoted their brands by promising guaranteed placements.
Not anymore, though. Seeing Byju's—touted as India's most valued start-up—struggle has cautioned other players against the temptation to overpromise or assume a wildly unrealistic pace of growth for their product.
"Today, companies are more cautious," Agarwal notes. "At PrepInsta, we never use terms like placement guarantee, even though this could boost our revenue by 20 per cent to 25 per cent. By adhering to ethical business practices, we can get the funding to help us grow," he adds.
Funding to the edtech sector slowed down in 2022 as investors started asking pointed questions about their existing business models as layoffs plagued the industry. According to PwC's Start-up Deals Tracker for 2022, venture funding in edtech start-ups more than halved from $4 billion in 2021 to $1.8 billion in 2022. The number of funding deals in 2022, too, declined to 52 from 88 in 2021, as per the report.
Following the crisis at Byju's, many investors are evaluating how edtech start-ups define their profitability, EBITDA and net revenue, excluding cancellations and discounts. Amidst the funding winter, they are no longer impressed by metrics like annualised revenue run rate (ARR) or gross bookings.
This introspection has been due for a long time now. Investors and founders alike are focusing on finding product-market fit and a believable path to sustained profitability instead of buying into the story or hype of a product that serves only a momentary need.
For now, investors’ interest in edtech firms is cooling off. However, industry stakeholders believe it is a period of recalibration, rather than the end of the road. They are basing this assessment on the premise that education is a quintessential need, not a comfort or luxury.
Mahankali Srinivas Rao, CEO of Hyderabad-based incubator T-Hub, points out that any significant event involving a prominent player in the edtech sector can have ripple effects. However, he adds that it is crucial to assess the situation based on the specific circumstances and the overall dynamics of the sector.
"While challenges faced by Byju's might impact investor sentiments temporarily, the overall potential of the Indian edtech sector remains intact. Innovation, technology adoption, and market demand continue to drive growth, and the ongoing funding winter can be seen as an opportunity for companies to refine their business models and prioritise sustainability," he adds.
Despite Byju’s implosion, industry players continue to be bullish about the edtech sector’s potential and the ability of astute players to raise funds. This is because investor sentiments can vary based on individual experiences and market conditions. While some may exercise caution due to recent events, investors still have great expectations about the sector's potential and the value it can create.
Rao believes that companies with robust business models, clear value propositions, and a focus on addressing market needs will continue to attract investments.
BrightCHAMPS claims to have remained mindful of its expenditure and avoided chasing growth at the risk of unsustainable burn. "Apart from our acquisitions, almost all the money we've raised continues to remain in our coffers, giving us a long and comfortable runway of several years," Bhushan says.
He is even more confident about the sector due to the rise of artificial intelligence (AI). Bhushan argues that AI can go a long way in solving the problem of access to quality learning at scale and seamless customisation of learning material to improve the student experience and learning outcomes. "These have been capital-intensive, time-consuming, and people-dependent pieces of the puzzle, which will no longer be the case," he adds.
Circling back to Byju's, the edtech recently held a town hall meeting to instill employee confidence as the company navigates turbulent waters. Raveendran, who presided over the meeting, reassured the staffers that the company's association with Deloitte and the three independent directors who recently exited Byju's ended on an amicable note.
While maintaining that the organisation was working industriously to resolve its issues, he steered clear of addressing topics like the series of layoffs and delays in remitting provident fund amounts. Instead, he stated that Byju's "will grow more sustainably going forward". It remains to be seen whether Raveendran, the erstwhile poster child of India's edtech sector, will be able to fulfill this promise.