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Byju’s, an Indian edtech company, has gone from hero to zero in just two years. Following the pandemic tech boom, the online tutoring business — founded by Byju Raveendran — was India’s most valuable start-up in 2022, worth around $22bn. Its backers included BlackRock, Facebook founder Mark Zuckerberg and even the World Bank’s investment arm. It sponsored the Fifa World Cup in Qatar and India’s illustrious cricket team. But last week, Raveendran said that the company was now in effect “worth zero”. What went wrong?
As interest rates rose following the pandemic, cheap money dried-up. That exposed cash burn at Byju’s, including on numerous marketing promotions. The value of the company plunged, and investors had to write off stakes worth hundreds of millions of dollars. Numerous legal battles — including a case brought by creditors in Delaware to locate almost half of a $1.2bn loan — have also highlighted governance problems.
Delayed account filings showed Byju’s losses almost doubled to nearly $1bn in the year to March 2022. Raveendran’s brother, a former sole director of Byju’s Alpha, which was created to receive loans, struggled to explain the whereabouts of part of the creditors’ loan. His “testimony lacks all credibility”, said a US bankruptcy judge at a hearing earlier this year. Separate findings have unearthed a money trail through various companies. The brothers deny allegations of wrongdoing.
Either way, this was clearly a poorly run company. Raveendran admits his own mistakes in mistiming the market and overestimating Byju’s growth potential. But what does the firm’s implosion say about its high-profile venture backers? Indeed, they put over $5bn into a company that did not have a CFO for sixteen months.
Venture capitalists are by nature exuberant. As a result they can sometimes stuff exciting companies with excess capital and press them to expand too quickly, until the entire operation chokes, leading them to jump ship. Analysts call it VC “foie gras”. Raveendran claims investors acted this way at Byju’s. It would not be the first time. Financiers appear to have exhibited similar excitement at co-working business WeWork, which filed for bankruptcy in the US last year, and FTX, the crypto exchange firm that collapsed in 2022.
It usually starts with credulous belief in the founder. Raveendran’s profile as a charismatic maths whizz drew in backers just like now imprisoned, MIT graduate, Sam Bankman-Fried did at FTX. The FT was impressed by the founder too, trumpeting Byju’s at its Boldness in Business awards. Reverence is often accompanied by insufficient focus on the business model. Byju’s got distracted from its core digital learning product. FTX’s backers missed numerous accounting red flags, and WeWork’s series of long-term real estate leases were ultimately unsustainable.
Then comes a push for expansion. Raveendran pulled in billions in funding, acquired numerous companies, and said investors urged him to expand. Rapid growth stretched WeWork’s balance sheet too. Whether Raveendran was excessively pressured or not by investors, the company’s board must still provide a check and balance. In Byju’s case, several funders had board seats, but appear to have done little to rein in the management. A lack of investor oversight at WeWork and FTX, also allowed problems to fester.
Misjudging a business’s potential is part of the VC game. And, a feel-good story can always help propel an innovative firm off the ground and on to a successful trajectory. But fear of missing out is no replacement for solid due diligence and good corporate governance.
A better strategy for both ambitious start-ups and investors — particularly in India, as its VC landscape matures — may be to make haste more slowly, to ensure growth is built on firm foundations. After all, moonshots need solid launch pads.
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