The start-up world’s once-upon-a-time poster boy finds its finances and reputations in tatters. The sharp reversal of Byju’s fortunes, evident in the much-delayed FY22 results announced on Tuesday, came as a shocker. But that’s not merely because of the whopping loss of `8,245 crore on an income of `5,300 crore. It is obvious that not everything at the edtech firm seems kosher. While there have been several mishaps over the years, the near-collapse of Byju’s business is bad news for the country’s start-up ecosystem. This is a sector that held out much promise—by one estimate, around one million jobs was created till 2023. Since the bulk of the capital has been invested by private equity funds and, to some extent, by private debt players, the burden of risk has not fallen on local banks or shadow banks. Tracxn estimates that the number of investors has increased from 2,450 in 2014 to 16,300 in 2021.
However, the severe funding winter of the past two years was an indication of investors’ reluctance to back businesses they believed were not robust enough. Raising money has been twice as hard and in some cases—PharmEasy, for instance—we have seen local white knights step in. The many red flags raised by Byju’s auditors will make investors even more cautious. One can live with a business going bust, or because the assumptions were optimistic, but the near total breakdown of corporate governance practices is unacceptable. The charges are damning as Byju’s has been accused of violating several rules in the Companies Act, apart from lending to associate companies without board approval.
It is truly unfortunate that a company, which enjoyed the support of marquee investors and was running a sound business model, should let things fall apart in this manner. At one point, Byju’s commanded a valuation of $22 billion, but it has abused the confidence that its investors placed in it. The problem is that it is not just Byju’s; there have been many other instances of companies mismanaging funds—GoMechanic for instance. But the Byju’s episode is the ugliest of them all and will put more investors on guard to the detriment of deserving entrepreneurs. The sad fact is instead of being an example of how to scale up, Byju’s has become an example of what start-ups ought not to do.
To be sure, the investors too should have kept a much closer watch on the company. For example, it is surprising they allowed the auditors to delay the finalisation of the accounts. The mess at the edtech firm was clearly not made in a day, it must have been unravelling for some time now. While cash burn in the initial stages of growth is par for the course, it is strange that investors allowed Byju’s to run up a financial liability of close to `17,700 crore by the end of FY22; up from just `3,116 crore in the previous year. They also needed to have cautioned the company on the 11 acquisitions that it made. Byju’s is reportedly looking to raise $100 million at a valuation of $2 billion to help it tide of the current crisis. But the comment s from the auditors to the effect that there is “material uncertainty” and doubts on its ability to continue as a “going concern”, could hurt its fund-raising plans. Whatever the outcome, there are lessons to be learnt by all stakeholders: Play it straight.