During a search on Byju’s Bengaluru offices in late April, plainclothes Indian investigators seized laptops and made a public accusation against the most valuable education technology firm in the world of probable currency exchange fraud.
Byju Raveendran, the company’s founder and CEO, was pacing his condo in Dubai while taking calls from important investors and drinking cups of black coffee. According to those who participated in the calls, Raveendran broke down in tears defending his company as a proposed $1 billion equity fundraise from Middle Eastern investors remained in limbo.
For months, Raveendran had been in a state of distress. His formerly successful tutoring firm missed the deadline for filing its financial statements, in addition to the raid by India’s financial crime-fighting agency. A number of US-based investors accused Byju’s of concealing $500 million, which led to lawsuits.
One of the company’s first investors, Prosus NV, announced on Tuesday that it had resigned from the board of directors due to inadequate governance and contempt for the advise of the directors.
Both Raveendran and Byju have denied misconduct. But their story, which was put together after interviews with more than a dozen staff members, provides a glimpse into the difficulties faced by startups in India. Due to the lack of domestic venture capital, companies like Byju’s have sought assistance abroad. When startup funding suffered last year, it changed. By the first half of 2023, it would have reached a four-year low.
Without easy access to global capital, companies are now facing greater scrutiny over corporate governance, jeopardizing India’s quest to pull even with the US and China as a tech capital of the world.
“If the situation is not contained quickly and guardrails are not put in place at Byju’s, it will affect India’s image as an investment destination among overseas funds,” said Jacob Mathew, a chairman of investment banking at Incred Capital Ltd.
Global investors, such as Sequoia Capital, Blackstone Inc., and Mark Zuckerberg’s foundation, were enthralled by Raveendran’s climb from a private instructor to the head of a $22 billion firm. Raveendran dominated the Indian ed-tech business during the epidemic.
However, as the schools resumed, questions regarding Byju’s financial situation hurt the company’s standing. Investors questioned Raveendran’s decision to purchase more than a dozen businesses quickly around the world while delaying the employment of a chief financial officer for years. Numerous workers have either quit or been dismissed. Members of the board have left. Additionally, several classrooms are almost vacant.
Inaccuracies are attributed by Raveendran’s supporters to the passion and naiveté of an untried founder who expanded too hastily. His detractors charge that he operated carelessly by hiding financial information and skipping a thorough audit of the accounts. Many in the startup community in India view Byju’s as the most prominent illustration of what may happen when a company expands during a period of rapid economic growth without making plans for a bust.
Both Raveendran and a Byju’s representative declined to comment.
Raveendran was raised in a village in the Keralan coastal region and went to a local school where his mother taught maths and his father taught physics. People who knew him at the time said he was an unusual student, skipping class to play football and preferring to learn on his own time at home.
After a brief stint as an engineer, Raveendran started teaching students at a Bengaluru college. Every week, enrollment doubled, and Raveendran eventually moved the classes into a stadium. For thousands of students, lessons were shown on enormous screens.
In India, where qualified teachers are hard to find and educational practises are outmoded, Raveendran’s methods stand out. He was skilled at assisting pupils in preparation for the extremely difficult admission exams for prestigious engineering and medical universities.
With the help of his greatest students, Raveendran opened 41 coaching facilities. He set up Think and Learn Pvt Ltd., the parent business of Byju’s, in 2011. Together with Divya Gokulnath, a former student who is a biotech engineer and whom he later married, he co-founded the business.
In 2015, Raveendran digitized his business, launching a self-learning app focused largely on math, science and English for primary school students.
“I’ve always enjoyed learning things on my own and also taught myself to hack exams, so it was easy to tutor others,” Raveendran said in a 2017 interview.
Investors flocked to back Raveendran as late 2010s tech spending increased.
Ranjan Pai, who is in charge of one of the biggest healthcare and education conglomerates in the country, claimed he agreed to sponsor Byju’s practically immediately. A rise in internet usage in India provided an opportunity for Raveendran. A few of the world’s most competitive data tariffs were offered by businesses like Reliance Jio Infocomm Ltd.
Pai stated in a 2017 interview that “he stands out as one of the brightest entrepreneurs in the country—yet is a teacher at heart.”
Sequoia Capital was one of Byju’s first sponsors; according to Tracxn statistics, the company joined the team in 2015 and made an investment of 4.8 billion rupees ($58 million). Soon after, a $50 million fundraising round was taken part in by Lightspeed Venture Partners and the Chan Zuckerberg Initiative, the philanthropic foundation founded by the Facebook creator.
Raveendran purchased more than a dozen educational businesses in India and abroad as money passed through the company’s accounts. The buyouts looked foresighted at the time the pandemic drove students online. Raveendran intended to use a SPAC merger to IPO the business. According to records, some investors offered valuations as high as $48 billion.
Additionally, Raveendran used the debt markets to fund his buying spree. Even though Byju’s only planned to borrow $500 million in 2021, foreign investors such as Blackstone Inc., Fidelity, and GIC contributed enough money to increase the firm’s term loan B’s target amount to $1.2 billion.
But by the middle of 2022, issues started to get worse. The need for online tutoring decreased along with the SPAC boom. Employees questioned Raveendran’s business judgement since he wanted to seek additional stock rather than save money and aim for profitability as the relaxation of Covid limitations hit ed-tech.
Last July, that plan ran into trouble. Due to “macroeconomic reasons,” two significant investors, Sumeru Ventures and Oxshott, were unable to transfer around $250 million from the previously disclosed $800 million round. People with knowledge of the transaction claimed that before announcing the agreement, Raveendran did not confirm that the investors had sufficient funds. (The monies were never received.)
By relying on Anita Kishore, his chief strategy officer, to carry out the majority of his operations, Raveendran has avoided contacting investment bankers on deals, according to Byju’s employees.
Raveendran and Kishore declined to comment.
In the meantime, Byju’s received inquiries from Indian authorities asking why the company couldn’t close its financial records for the fiscal year that ended in March 2021. Officials at the company received summonses from India’s Enforcement Directorate, which looks into money laundering and forex offences, according to sources with knowledge of the situation.
After the raid in late April, Byju’s was not charged. However, according to Bloomberg last month, India’s company regulator, the Ministry of Corporate Affairs, will soon determine whether to launch a formal investigation.
Requests for comment from the MCA and enforcement directorate went unanswered.
Byju’s disclosed its audited financial accounts 18 months after the end of the fiscal year. In comparison to the prior year, they revealed losses of 45.7 billion rupees, a 13-fold increase. Byju’s attributed the poor performance to accounting procedures that postponed revenue to later years. Others noted a sharp rise in marketing expenditures.
Investors were frightened by the firm’s finances. Blackstone was one of the creditors who sold off their assets, allowing distressed US investors to take on the $1.2 billion loan at rates as low as 64 cents to a dollar.
These creditors started requesting expedited payments soon after purchasing the debt since the company had broken covenants, such as a September deadline for reporting its results for the year ending March 31, 2022.
After eight months of discussions, Byju’s US lenders filed a lawsuit in Delaware accusing the company of concealing $500 million. They argued that Byju’s is in technical default over the $1.2 billion loan because the firm hasn’t provided regular financial updates.
Byju’s skipped a $40 million interest payment in June and filed its own lawsuit against the lenders in New York, alleging “bad-faith negotiating.” The debt arrangement, according to the corporation, forbids lenders from selling their holdings to certain investors, such as those who focus on distressed debt.
The stakes keep going up. Three significant investors’ representatives recently resigned from the board of Byju: Peak XV, Prosus, and the Chan Zuckerberg Initiative. In addition, Deloitte Haskins & Sells, Byju’s auditor, left the company due to the company’s shaky financial records.
“Byju’s grew considerably since our first investment in 2018, but, over time, its reporting and governance structures did not evolve sufficiently for a company of that scale,” Prosus said in a July 25 statement, explaining why its director stepped down from Byju’s board.
In recent weeks, Raveendran and Ajay Goel — who joined Byju’s in April as its chief financial officer — hired an affiliate of accounting firm BDO to take over auditing. Goel has said that long-delayed financial accounts will be finalized by the end of September.
“The best of Byju’s is yet to come,” Raveendran told employees at a recent town hall, where he pushed back on criticisms. The company has “not come this far to only come this far.”A $1 billion equity investment from Middle Eastern backers is what Raveendran is relying on and it may happen as soon as next month. In order to get by during the economic crunch, he is now turning to some of his early donors in India.
People tracking the negotiations who didn’t want to be identified because the talks are secret said that if the money comes through, Byju’s may pay off creditors and buy out the rebellious US-based investors.
Lenders also concurred earlier this week to work on modifying the $1.2 billion debt by August 3.
The majority of investors have reduced the company’s estimated value to under $10 billion. Although Byju has had a rough few months, many people are still optimistic about the company, citing its substantial assets, which include 150 million customers.
“The company can still be brought back from the brink,” InCred’s Mathew said. “Some of its businesses have good cash flows, which can potentially attract value investors, who will come in with big cheques helping to sort out things.”