Byju Raveendran’s moment of reckoning

One day late in June, representatives of some 40 investors from far-flung time zones, from among the 70-plus that crowd the cap table at Think and Learn Private Ltd, got on a video conference call with the company’s talismanic CEO and straight-talking founder-rainmaker Byju Raveendran.

As the proceedings went on, the pitch and tenor of some of the questions felt unusually sharp for a Byju’s investor call, according to multiple people who attended the call.

Before we get to the investors’ concerns, it’s important to understand why they normally speak in measured tones to Raveendran.

For one, the ed-tech business that started with the eponymous founder’s maths lectures at sold-out Bengaluru stadia is now a behemoth valued at $22 billion. Secondly, Raveendran, a hands-on CEO who runs the company with a core inner-circle of trusted executives and co-founders, controls some 20% of the firm’s equity, and is on course, with fresh recent investments, to control a quarter of the firm’s equity ownership. The second largest investor in Byju’s owns less than half of the equity controlled by the founder group and most of the rest are part of a long tail of small shareowners. Thirdly, with a board comprising long-standing backers who are seen to largely let the CEO run the company the way he deems fit, a culture of questioning Raveendran on key decisions doesn’t exist among Byju’s stakeholders. And lastly, with his general seriousness of purpose, grasp of detail and lack of hesitation in being assertive, people have learnt over time to be careful about what they say to him. In short, it’s partly that he is both respected and feared, and partly that he has fashioned the company’s board, cap table and investor rights in a way that is not conducive to him being talked sharply to.

So what was different in the air during the late June investor call is the story of how the powerful founder faces a major moment of reckoning, besieged by internal business challenges, on the one side, and a potential valuation squeeze with slack macro-economic outlook globally and the tech stocks sell-off in the US specifically, on the other.

So much so that even investors who are virtually assured handsome returns—Byju’s valuation went from $5.7 billion in 2019 to $22.6 billion in July 2022—are among those who are asking questions.

The CFO question

Of the two major questions, one was around why Byju’s was continuing to be run without a dedicated CFO. The other was around mounting losses at Whitehat Jr, one among a slew of acquisitions the ed tech firm has made in the last two years.

The CFO question is key to one of the firm’s important current challenge. The company’s statutory auditors are yet to sign off on its financial statements for the financial year 2020-21. The extended government deadline on account of the Covid-19 disruption passed in December 2021.

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The delay owes to differences of opinion over how to recognize some of the revenue. If a three-year course is paid for up front, is it to be booked as revenue for that year or be booked across three fiscals? What should be a simple enough question is intractable in the case of Byju’s partly because of its scale and partly due to the question of uniformity in treatment at acquired firms.

The murmurs of aggressive recognition practices at Byju’s came to a head in mid-June when news portal The Ken first reported on the delay in the filing of financial statements. Reportedly, Deloitte, the company’s auditor, has raised concerns over the company’s revenue recognition practices.

A related nuance is product versus service. Does Byju’s sell a product or a service? The company’s core business is in the K12 segment, or in selling educational content to school students. Byju’s pitches the learning app as a product. While the content in the app can be consumed over many years, the total revenue is recognized when a sale is made.

Deloitte, perhaps, favours a less aggressive method. The sale could be recognized over a period of time, say three years, and treated as a service. Subsidiaries such as Aakash Educational Services or Whitehat Jr already account their revenue as a service. Since Whitehat Jr promises a refund anytime, revenue recognition based on ‘consumption’ of the product is able to accommodate for cancellations.

Some change in how revenues will henceforth be recognised by Byju’s is expected to be visible in the company’s audited statement for FY21, two shareholders familiar with the matter said.

This is likely to result in a downward revision of the company’s FY21 numbers, from what was previously understood or communicated to stakeholders, one shareholder said. However, the downward revision may get offset by the spill-over to FY22 numbers, he added.

They declined to elaborate as the numbers have not yet been signed off by the auditor or taken on record by Byju’s board. The company is aiming to close its FY21 book this month.

“If there is a change in revenue recognition, there might be a 20% dip in revenues over the next year. It will get normalized over a 1–2-year period. If one is taking a long-term view of 15-20 years, this should not matter,” a shareholder familiar with the company’s thinking said.

But the question for many investors is what role has the lack of a dedicated CFO played in matters coming to a head in this manner.

Anita Kishore, a key executive with co-founder status and the company’s head of strategy, also doubles up as head of finance and has handled the firm’s slew of M&A deals.

Besides Kishore, Byju’s has been relying on former Amazon executive Ranjit Pawar, based in the US, who is designated as senior vice president, finance, at Byju’s group, to lead the finance role for its global business. According to Pawar’s Linkedin profile, he heads finance operations for Byju’s acquisitions worldwide including Aakash, Osmo, Get Epic, Tynker, and Great Learning. A search for a CFO is on at the firm, three people with knowledge of the development said.

Losses at Whitehat Jr

Raveendran made a detailed presentation, conceding that the start-up was learning and had realized that a lack of a CFO had been a mistake, some investors Mint spoke to said.

Beyond the call, Raveendran, who is currently in the US due to a personal engagement, has been meeting investors individually and in small groups in an effort to assuage concerns, two people with knowledge of such meetings said.

In July, Byju’s said two of its investors—Oxshott Ventures and Sumeru Ventures—are yet to infuse the capital that was previously committed for the latest Series F funding round because of “macro-economic conditions”. Byju’s did close a $550 million round that month but the bulk of the money—$350 million—was funded by Raveendran himself.

Other investors quizzed him on its bleeding subsidiary, Whitehat Jr. How is Byju’s planning to stem the leaky bucket at this company, acquired in 2020? Whitehat Jr, an e-learning startup, had cost the group around Rs2,000 crore in losses in 2021-22 alone, two people familiar with the investor call said.

“Increased scrutiny is a function of time. Last year, the mindset was to grow at any cost. Startups were getting funding on tap. There was no conversation around profitability, because no one was willing to ask that question,” a shareholder at Byju’s said.

“People aren’t willing to ask questions when times are good, and that’s unfortunate. The few people that do it will not be seen as friends by any company. It is easier to ask these questions when the markets are down,” this shareholder added. He didn’t want to be identified either.

Byju’s declined multiple requests for an interview for this piece citing its pending audited financial statements for 2020-21.

On 5 July, Mint reported that Byju’s may have hit ₹10,000 crore in revenues in 2021-22.

Requests for comments to key investors such as CPPIB, Blackrock, General Atlantic, and Sequoia Capital remain unanswered. Blackstone declined to comment.

“We are working closely with leadership, the board and auditors to ensure the smooth completion of the audit in process,” a spokesperson at Prosus, another investor, said.

Chasing growth

Acquired for $300 million in an all-cash deal in August 2020, Whitehat Jr. reported a loss of ₹1,690 crore in 2020-21, according to regulatory filings. The subsidiary expects a higher loss of over ₹2,000 crore in 2021-22—the numbers are not public yet. Expenses shot up as the company was spending to expand globally, especially in the US, a person familiar with the developments said.

The earlier-than-anticipated departure of founder Karan Bajaj meant that some of the milestone-related payments promised to Whitehat Jr. founder were not fully paid, but this did not reduce the cost of the $300 million cost of acquisition.

“Nearly 70% of all acquisitions made by most companies fail. By that benchmark, Byju’s record isn’t bad at all,” a shareholder previously cited in this report said.

In the past two years, Byju’s has acquired over 10 companies, at an estimated cost of nearly $3 billion.

Its biggest acquisition to date is Aakash Educational Services, for which it agreed to pay close to $950 million to a $ 1billion in April 2021. It acquired professional upskilling platform Great Learning and reading platform Epic in July 2021, paying around $1.1 billion for both assets. It paid around $300 million for coding platform Whitehat Jr in August 2020.

The strategy was to use the capital it was raising to buy revenues and growth, which would then be fashioned into a larger conglomerate that could list abroad at a premium. Up until late last year, Byjus was angling for an IPO in the US at a valuation of $48 billion, according to news reports then.

Byju’s argument so far has been that its acquisitions have stretched its audit bandwith, an explanation it has offered in the past for the delay in FY21 financial statements.

Corrective forces

Why didn’t the investors, and Byju’s board, provide guard rails to the company over the past two or three years? A more proactive approach earlier could have surely prevented the troubles of the present.

One explanation investors forward is that most of them don’t have significant rights in the company.

This is different from how the first generation of Indian startup founders managed shareholders. The likes of Softbank and Tiger Global usually held extraordinary influence on the affairs of the companies they funded. Take the example of Flipkart. Before it was acquired by Walmart, the company’s leadership changes (and strategy) were dictated by one of its biggest investors.

Byju’s board today comprises of investors from Sequoia Capital, Chan Zuckerberg, Prosus and General Atlantic, in addition to the company’s management.

None of the company’s investors have any liquidation preference rights–a rarity in the Indian startup ecosystem, a shareholder familiar with the terms said. Liquidation preference rights is a clause in the contract that allows investors the right to be paid out first during an exit event or in extreme cases, like a corporate liquidation.

In the early days of Byju’s—before 2017—some of the early investors did have significant downside protection rights which protected their principal investment and gave them downside protection. They had rights that included a super vote (which offered them additional voting rights), right of first refusal (ROFR) rights, which allowed them the first shot to buy out other shareholders, as well as an ability to veto acquisitions or business forays in certain geographies especially if it involved a competitor, a person familiar with the agreements said.

But a lot of these rights were done away with as the company raised more capital in subsequent rounds. Several investors such as Sequoia, Verlinvest, Lightspeed, and Chan Zuckerberg have also made partial exits. Aarin Capital has fully exited.

A person familiar with the deal pegs Sequoia Capital’s return on investment at 100X today. Sequoia Capital did not respond to a request for comment.

Whatever be the case, the weak oversight meant that over the past two years, Byju’s was able to strike acquisitions at will despite some investors cautioning against such aggression. One of the shareholders told Mint that they often did not have the influence to advise against an acquisition.

Those who did have some influence could have been more vocal.

“PE-VC investors have a responsibility to ask questions, seek relevant information and be agile and vigilant. Especially as PE-VC firms have a fiduciary responsibility to their own investors whose money they are investing in companies,” said Nupur Garg, founder at WinPE, a platform for the private equity industry.

But if Raveendran manages to emerge from this shaky moment, sorting the firm’s accounts and balancing the bloodletting at Whitehat Jr with potential upside from other acquisitions, and if the sentiment among the tech investors in the US turns for the better in 12-18 months, he could yet emerge a winner, delivering returns to investors and cementing his wealth and legacy. With the power of scale on his side, profitability in the core Byju’s business and a planned foray into a hybrid physical plus digital model at home, a reversal of perception and fortunes is not hard to fathom.

But for any of that to happen, the company has to cross the challenge of clearing its FY21 financial statements.

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