Will BYJU’S Massive Losses Lead To Its First Down Round?

Byju Raveendran is a great teacher and an excellent salesperson. However, it seems that his $22 Bn edtech giant BYJU’S is losing the plot.

If experts are to be believed, India’s second-most valued startup may, for the first time in its history, face a down round, or in simple terms, raise funds at a lower valuation than its previous funding round. No wonder, Raveendran says he hasn’t been sleeping well for the past six months!

A seasoned finance analyst told Inc42 that under no circumstances can a company whose revenue is half of its loss command a valuation of $22 Bn (INR 1,76,000 Cr). 

“No amount of selling and marketing justifies this valuation. The investors in BYJU’S, even the likes of General Atlantic, Sequoia, etc., must be a worried lot,” the analyst said. 

BYJU’S reported a loss of INR 4,588 Cr on a total income of INR 2,428.3 Cr during the financial year 2020-21 (FY21).

As a gold standard, investors and investment bankers usually value companies in multiples of their revenue in a particular financial year. For BYJU’S in FY21, this translates to a staggering 75X revenue, as per its current valuation.

“With losses up as much as 19X in FY21 (INR 4,588 Cr) when they should have done reasonably well, why should anyone give them a valuation which is 75 times their revenue? This should have the current and future investors worried,” an investor in growth-stage startups pointed out. 

The onset of the Covid-19 pandemic and the subsequent restrictions presented an opportunity for the edtech sector, and Raveendran made the most of this opportunity by raising over $2 Bn from Indian as well as overseas investors. The edtech decacorn’s valuation jumped nearly 3X from $8 Bn in January 2020 to $22 Bn in March 2022. 

BYJU’S, as per multiple media reports, is in talks to raise another $500 Mn at a valuation of $23 Bn. It aims to fund its acquisitions, including that of Aakash Educational Services, through fresh capital and increase its cash runway. 

Although concerns on aggressive sales work culture, ethics, and accounting standards need to be addressed by BYJU’S, its valuation would not be as badly impacted as is being projected, K Ganesh, serial entrepreneur and promoter of Portea Medical and BigBasket told Inc42.

“As a company which is going public, a company may adopt Indian Accounting Standards (Ind-AS), which is mandated by SEBI. In this case, BYJU’S may have switched to Ind-AS which led to changes in revenue recognition. From an investor’s standpoint, if there is not much difference from the aggressive revenues being projected by the company or its founders after accounting for expenses etc., then the valuation wouldn’t be so impacted. Mostly investors will do such due diligence before valuing a company,” Ganesh added. 

The veteran investor added that investors normally relook at valuations only in cases where revenue from creditable sales is recognised, but money is not recovered.

Raveendran surely seems to believe in BYJU’S ability to raise funds. In an interview with Moneycontrol, the edtech startup’s CEO said that even though BYJU’S did not receive $300 Mn which it was to get from Oxshott Venture and Sumeru Ventures, the company can raise the amount in a week.

The fact that Raveendran himself had to infuse $400 Mn in BYJU’S in March 2022, when the startup was eyeing an overseas listing, tells a different story.

Revenue Recognition Woes

BYJU’S has been in the headlines for all the wrong reasons over the last few months as the focus shifted to its long-delayed financial results for FY21 and its auditor Deloitte reportedly refused to sign the financial statements due to some concerns with accounting standards (related to revenue recognition). 

However, Deloitte has been BYJU’S auditor since 2016, and the top accounting firm’s failure to point out the inconsistencies in the accounting standards has stunned many.

An edtech company founder based in Bengaluru said that many companies involved in selling streaming courses, tablets, etc., recognise revenue in their accounting books after booking a customer, even though the money comes in over a period of time, even never in some cases. 

This is where accounting professionals are puzzled and have asked edtech companies to not recognise the complete revenue upfront but on a pro-rata basis over the period of the contract. Raveendran claimed that nearly 40% of its revenue was deferred even though the expenses for FY21 were factored in. 

The second reason for the huge loss in FY21 is that interest payments to lenders have now been recognised as finance costs and have been adjusted against the revenue.

In terms of revenue split, the sale of devices via SD cards and tablets remained the major revenue stream (accounting for 90% of revenue), followed by teaching courses and streaming services, as per the financial statements.

While BYJU’S claimed that it crossed INR 10,000 Cr revenue mark in FY22, critics argue that during that financial year, the marketing expenses of the edtech major went through the roof as it renewed its sponsorship contract with the Board of Control for Cricket in India (BCCI), and spent on IPL sponsorship and claiming the official sponsorship for FIFA World Cup Qatar, 2022.

The edtech startup spent INR 2,250.9 Cr on business promotion expenses in FY21, almost a 150% jump from INR 899.3 Cr it spent in FY20. The promotion/marketing expenses constituted 32% of its total expenses. It’s to be noted, BYJU’S marketing spend was almost 3X more than the marketing spends of Unacademy, Vedantu, and upGrad, which stood at INR 793.5 Cr in FY21.

“This is simple maths. Their promotion expenses were INR 2,250 Cr in FY21 when these sponsorship deals were not signed. In FY22, they have signed big deals and have to factor in the acquisitions too. Hence even at INR 10,000 Cr mark, the expenses incurred are going to rationalise it and even then the founders have to worry about sustainable cash run,” a Bengaluru-based venture capitalist said.

In an interaction with Inc42, the BYJU’S founder and CEO, while calling one of its costly acquisitions WhiteHat Jr an ‘underperformer’, said that the focus of his company will be on slower organic growth. He was bullish about this strategy which is pinned around BYJU’S international acquisitions of Epic, Tinker and GeoGebra.

He, however, added that future growth for WhiteHat Jr is likely to involve high cash burn, even as other acquired companies continue to march towards positive unit economics.

Only time will tell if BYJU’S two most-promising acquisitions – $1 Bn acquisition of Aakash Educational Services and $600 Mn buyout of Great Learning – will salvage Raveendran and BYJU’S sinking ship.