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There is a popular saying that a crisis is all you need to separate the strong from the weak. The economic crisis in the form of rising interest rates and shrinking systemic liquidity is taking its toll on tech startups which have been nourished on years of easy money and tidal waves of overseas investments in the form of private equity and venture capital (PE/VC) inflows. One unicorn after another in India has wilted under the pressure, but the woes in the spotlight are those of edtech leader Byju’s. The company’s results for 2020-21 were finally released last week after a delay of 18 months. Its auditor had required changes and two discomforting facts were revealed. One, the business had merrily been booking unaccrued revenue, due in the future but not yet earned, thereby inflating its top line and valuation. Byju’s has now shown losses of ₹4,589 crore for 2020-21, on the back of consolidated revenues of only ₹2,428 crore, reflecting a write-back from previous years. It took other liberties of accounting. It was also remiss, for example, in its treatment of the interest component paid to it for passing on to associated lenders by subscribers who had taken loans to cover their fees.
The second awkward thing about Byju’s recast of accounts is the evident lack of basic governance norms in unicorns that seem to have found favour with many storied PE/VCs. In an astonishing number of startups, institutional investors appear to have been willing to condone indiscretions of accounting, breaches of human resource policies or deliberate lapses in the conduct of board business (extending occasionally to even imprudence in financial flows) as long as the executive cadre manages to keep the top line growing at any cost, which would then reflect in higher business valuations. It would then seem that a profitable exit is the sole focus of their investment, even if such short-termism leaves the organization wrecked. Byju’s website boasts of a long list of high-profile investors—Sequoia Capital, BlackRock, General Atlantic, Tiger Global, Tencent, Naspers Ventures, International Finance Corporation, among others—and yet all of them failed to spot its oddities of book-keeping or use their authority as major financiers to force a course correction.
The unfortunate upshot from the Byju episode will be the reverberations felt across not just the edtech sector, but the entire startup universe. It is a no-brainer that the Indian education sector, especially at the primary and secondary stages, needs large investments; penurious state and central governments unwilling or unable to invest the requisite amounts have left a vacuum for the private sector to exploit. However, private players, especially edtech startups, have displayed a muddled sense of priorities. By employing a hybrid platform to deliver education modules and even working with the state, they could provide a part-solution to a national problem by filling a yawning gap in our social infrastructure. This newspaper is not against companies earning profits on crucial services, but would caution against a ruinous race for valuations that invites instability, impairs quality and lets other stakeholders down. Listing on stock exchanges has exposed the inherent structural weakness of numerous unicorns, which includes suspicions of deliberate price inflation. The tech startup universe is supposed to thrive on innovation and the last thing it needs is the heavy hand of regulatory intervention.
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