How did investors miss Byju's numerous red flags?

If and when a new management takes over, it will discover that there is no worthwhile business to run, says Debashis Basu.

Byju's is set to go down as the most spectacular corporate flameout. Little more than a year ago, India boasted five decacorns, an elite group of only 47 startups around the world valued at $10 billion (bn).

Of these, the most valuable Indian decacorn was Byju's. Despite a loss of Rs 4,588 crore in FY21, Byju's was valued at $22 bn in early 2022.

It even wanted to get itself listed in the US, by merging with a publicly traded shell company in that country, at an eye-popping valuation of $48 bn. It was a huge bubble, propped up by Byju's' deep-pocketed private-equity (PE) investors.

Recently, some of those investors voted at an extraordinary general meeting (EGM) to remove Byju Raveendran, Byju's founder and chief executive officer, and to reconstitute the board. Even if these investors gain control of Byju's, it is beyond redemption.

Byju Raveendran set up Think & Learn in 2011, got his first funding in 2013 and launched The Learning App in 2015, which became a case study at Harvard Business School.

In 2017, Byju's appointed Shah Rukh Khan its brand ambassador and, over the next seven years, amped up the business with 29 rounds of funding to raise over $5 bn. Of this, it blew up more than $2.5 bn in 2021 and 2022 on acquisitions alone.

In 2019, it became the jersey sponsor of the Indian cricket team. In 2022, it appointed Lionel Messi as its global brand ambassador and became the official sponsor of the FIFA World Cup at Qatar, in what would appear to be the peak of its fake glory.

The remarkable thing is that all through this the investors missed/ignored too many red flags back from 2018.

Too many red flags

Byju's' products weren't attracting customers organically, but were pushed through aggressive sales tactics, which was called out by Anirudh Malpani, a well-known Mumbai doctor and now an angel investor.

Dr Malpani has written more than 50 articles on his blog (external link) starting with a September 9, 2018, piece titled "Byju's is a money-raising machine. The real question is - will it become a money-making machine?"

The last of Dr Malpani's articles was titled "How Byju's cheats parents".

Dr Malpani diagnosed the Byju's problem thus: "They taught their sales-people to mis-sell by blaming and shaming parents, who are vulnerable.

"They exploited their ignorance by bad-mouthing schools and teachers, and warning them that their kids would be left behind in the competition if they did not buy the Byju's apps.

"They locked them into multi-year subscriptions by offering discounts for payments made using EMIs through a third-party financer, and once parents had signed these contracts, they were stuck and could not cancel."

To investor activists, who are now concerned about Byju's' ethics and governance, this should have been a huge red flag. Instead they kept pumping in money helping this toxic business grow bigger.

Dr Malpani was a prolific writer on LinkedIn on a wide range of topics covering the startup ecosystem including critical posts on Byju's' work culture, business model, and user experience.

In July 2020, Dr Malpani claims his account was deleted. Byju's is apparently one of the top advertisers in LinkedIn.

According to Dr Malpani, "They (Byju's) complained to LinkedIn, claiming my posts were defamatory -- even though they knew the posts were completely true, and in turn LinkedIn permanently deleted my account, without giving me a chance to be heard, or to appeal!"

All valuable tech startups have a common feature: They address a serious and widespread problem that consumers face, with a solution that works and, better still, that consumers love.

Byju's is not solving any problem and certainly does not have a solution that anyone loves. This was most obvious during Covid.

If ever there was a period when Byju's could have made bumper revenues and profits, it was when schools were closed and students and teachers had to adopt an edutech solution. But Byju's reported record losses in FY21 and FY22.

December 2022, the National Commission for Protection of Child Rights (NCPCR) alleged that Byju's was "stealing" phone numbers of students and shaming/threatening them to buy its courses.

Byju's reacted with a "strong denial" but later promised to ensure positive consent while signing up students for its programmes, and to stop sales agents from going to people's homes.

It has since lost cases in consumer courts, and many employees have come forward to speak about steep targets and aggressive sales pitches.

Without such tactics Byju's would probably have a fraction of revenues earned and losses would have ballooned even higher.

The fact is that massive layoffs (25,000 employees laid off from the peak of over 58,000 in 2022), employee grievances, and customer complaints show that Byju's simply does not have a worthwhile business model; a basic fact that seems to have escaped the smart PE funds that put Byju's on steroids.

April 2023, the Enforcement Directorate (ED) conducted searches at Byju's parent firm, Think and Learn Private Limited, and Raveendran's house for suspected violations of the Foreign Exchange Management Act.

In November 2023, the ED issued showcause notice alleging violations of Rs 9362.35 crore.

In June 2023, as Byju's continued to totter, Deloitte Haskins & Sells, which has audited it since 2016, and was supposed to continue doing so until 2025, stepped down with immediate effect, stating that "the financial statements of the company are long delayed".

Byju's is set to go the way of Housing.com and Zilingo. It is only a matter of time. Indeed, the coup attempted by investors will ensure that.

It will be an enormous distraction for the current management, and, if and when a new management takes over, it will discover that there is no worthwhile business to run.

Losses will spiral, the best of employees would leave, and it will face a solvency issue, having run out of cash.

Debashis Basu is editor of moneylife.in and a trustee of the Moneylife Foundation.

Feature Presentation: Ashish Narsale/Rediff.com