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Business News/ Opinion / Columns/  Byju’s problems are a sign of the times as monetary flows tighten

Byju’s problems are a sign of the times as monetary flows tighten

Investors are finally asking hard questions of cash-burn models as easy-money availability dries up

Byju Raveendran, founder of edtech firm Byju’s (Photo: Mint)Premium
Byju Raveendran, founder of edtech firm Byju’s (Photo: Mint)

Last week, Think and Learn Pvt Ltd, the parent company of edtech major Byju’s, declared its results for 2020-21, with its losses jumping to around 4,589 crore. The losses had stood at 232 crore in 2019-20.

The company attributed the leap to a change in the way it’s now accounting for revenues. So, let’s say an individual pays 90,000 for a two-year course to prepare for engineering entrance exams. Earlier, the company would recognize the entire 90,000 as revenue at the time it was paid. Now the recognition is spread over two years, taking the period of contract into account.

As a Mint news report ( points out, this change in accounting practice led to the 2020-21 revenue of Byju’s being 40% lower than what the management had previously projected.

This is not the first time a tech company has resorted to upfront revenue recognition on a long-term contract. In Financial Shenanigans, Howard M. Schilit and Jeremy Perler take the example of Computer Associates, a company that sold long-term licences for customers to use its mainframe computer software. This was in the 1990s.

The customers paid an upfront licensing fee for the software and an annual charge to renew the licence in subsequent years. As the authors point out: “Despite the long-term nature of these agreements (some contracts lasted as long as seven years), the company would recognize the present value of all licensing revenue for the entire contract immediately."

In the case of Computer Associates, only a part of the revenue (licensing fee) was paid upfront. The annual charge to renew the licence was paid in the subsequent years. The company recognized this yet-to-be-paid amount as revenue by calculating a present value of the future payments. In Byju’s case, for the two-year course mentioned earlier, the entire money is paid upfront. Unlike Computer Associates, Byju’s already has all the money in its bank account. So, why not recognize it as revenue upfront?

Accounting is done on an accrual and not cash basis, and given this, revenue generation activity must be fully complete for it to be included as revenue during a given period. Hence, if a contract is spread over a number of years, the revenue needs to be recognized accordingly on an annual basis, irrespective of the company taking the entire payment upfront.

The question is: why has this point come to the forefront only now? The answer perhaps lies in what economist John Kenneth Galbraith wrote in The Great Crash, 1929: “In good times people are relaxed, trusting, and money is plentiful." All this changes, when good times end. “Money is watched with a narrow, suspicious eye… Audits are penetrating and meticulous," Galbraith wrote. And that’s how things are now playing out for Byju’s. As the good times of easy money have ended, basic questions are being asked.

Since 2008, central banks of the rich world have printed and pumped money into the financial system to drive down interest rates and push up growth. Low interest rates have sent big investors across the rich world in search of higher returns. In The Price of Time, Edward Chancellor quotes a tech industry insider as saying that a lot of money printed by the US Federal Reserve has made “its way to venture [capital] funds and from there into the pockets of a bunch of kids… building start-ups."

In fact, there was so much money going around that it didn’t really matter if these startups were profitable or not. The venture capitalists are very happy to fund the cash-burn startup model. Take the case of Byju’s. In 2020-21, it lost two rupees for every rupee it made.

Over the years, the rush to invest in startups became so huge that, as per CB Insights, a tech market intelligence firm, globally, as of July, there were more than 1,100 firms with $1 billion-plus valuations. As of May, India had 100 such firms, Byju’s being the biggest.

As Chancellor writes: “In 2013 venture capitalist Aileen Lee came up with the term ‘unicorn’ to describe start-up companies valued at more than a billion dollars. Lee called these firms ‘unicorns’… because ‘it means something extremely rare, and magical.’"

But unicorns now are hardly unique and more a function of all the easy money floating around. So, the term unicorn has become a misnomer. Of course, with so much money at stake, unicorns became experts at what Chancellor calls narrative construction, where the investors and owners of such firms kept talking about how their cutting-edge technology was going to disrupt the existing way of doing things without really explaining when these firms would become profitable. This kept new investor money coming and that let them burn more cash.

Among other things, all the money floating around has led to very high inflation through much of the rich world and their central banks are reversing what they were doing by gradually taking out the money they had pumped into the financial system.

Hence, money is not as easily available as it used to be. Venture capitalists are finally talking about for-profit business models. Accountants are asking questions they hadn’t asked before. The times are changing. And Byju’s current state symbolizes just that.

Vivek Kaul is the author of ‘Bad Money’.

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Published: 20 Sep 2022, 10:01 PM IST
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