Is The Tide Changing For Byju's?

'They have got the advisory council, a CEO has been appointed finally, and they have made some headway on the term loan B.'

After Prosus, The Netherlands-based institutional investor, came out with a statement about why its representative had to step down from the board of India's largest edtech firm Byju's, social media has been buzzing with comments.

Many believed that the end of Byju's is near, while others said it was karma.

However, many raised questions about the sudden spurt of ethical and fiduciary responsibility being shown by Byju's investor Prosus and Peak XV Partners (earlier known as Sequoia Capital).

Several people from the VC community and start-up founders believed that if Byju Raveendran, founder of Byju's, went overboard with his ambitions, it was with the support of investors.

However, the ministry of corporate affairs now looking to get to the root cause of the issues with the edtech major is probably making them come out with such statements, they said.

Prosus and Peak XV's board representatives -- Russell Dreisenstock and G V Shankar -- stepped down from Byju's board on June 22.

It took more than a month for both firms to come up with an explanation as to why their directors chose to step down.

At the time of their resignation, people aware of development said that this was happening because the shareholding of these investors had come down.

If one reads the statement of Prosus, it said Byju's grew considerably since 'our first investment in 2018, but, over time, its reporting and governance structures did not evolve sufficiently for a company of that scale.

Despite repeated efforts from our director, executive leadership at Byju's regularly disregarded advice and recommendations relating to strategic, operational, legal, and corporate governance matters.'

According to some members of the VC community, the question that Prosus and Peak XV need to answer is: Why did they wait so long to flag these concerns to limited partners (LPs) and stakeholders?

Is it because they want to wash off their hands off Byju's in case it gets pulled up by investigation agencies in India, they asked.

Or if they now believe that their investments in the company will not yield desired results, they further questioned.

According to media report, Peak XV Partners in the letter to LPs said it is marking down its investment in the company due to lack of transperancy into its aduited financials.

"The question these board members need to be asked is why it took so long to come out with such a statement. Was it because the market was good, and their valuations were going up and that's why it was okay to sit silent?" asks one investor having significant bets on Indian start-ups/

"The moment things get tough, they want to run away."

Byju's raised $7.24 billion, according to Tracxn data. Of this, slightly over $2 billion was used for acquisitions.

Curbs during the COVID-19 pandemic gave a boost to the firm's growth amid a focus on online classes.

Another investor said: "The filing of the financial report of a company is the first step towards ensuring proper governance. The fact that you are on the board and the company is delaying its financial filing ... doesn't that raise any doubt?"

Byju's delayed giving its FY21 financial report by 18 months and when it did, it reported a loss of Rs 4,570 crore. The FY22 financials are yet to be filed.

With Prosus' statement, corporate governance issues are back on the table among the start-ups in India, but the founders have a valid question.

"These are institutional investors. Assuming start-ups don't have the bandwidth of hiring a CFO or senior officials, that role is expected to be played by these investors. They have global experience, so what stops them from finding loopholes?" asked a start-up investor.

At a recent TiEcon event in Mumbai, Abhay Pandey, general partner of A91 Partners, shared that LPs are very strict when it comes to governance issues.

'LPs do take these things very seriously. GPs' (general partners'>/em>) job is to take the capital, deploy it, and monitor the deployment and progress of the company,' Pandey said in a panel discussion.

'Diligence and governance is a very critical part of their 2 per cent that they make from LPs,' he pointed out.

About the overall corporate governance issue, he blamed investors, as well as the funding environment for the lapses.

'I believe this was a function of how fast things were moving, how large a portfolio everyone was building. Therefore, there is very limited time for the diligence that a company requires,' Pandey stated.

;The desire to win an investment is so much due to competition that one overlooks certain basic facts, or in the pursuit of superior returns... but there is no excuse to say I did not do my job thoroughly and because one was making 15 investments in a year, I did not have time to focus on one... it's unacceptable,' he said.

Sources in the industry hint towards tide changing for Byju's.

"They have got the advisory council, a CEO has been appointed finally, and they have made some headway on the term loan B as well," said another investor.

"So it looks like they are doing the right things now."

Feature Presentation: Ashish Narsale/Rediff.com