Byju Baawara?

Byju’s, the ‘popular’ Education Technology company finally declared its FY2021 annual results on 14th September 2022 – about 17 months too late and after a warning by the Indian Government! Whew, talk about living dangerously!

So, what’s all the hullaballoo about? I am no accounting expert but still was literally dumbfounded by what transpired at Byju’s with the blessings of none other than its namesake founder, Mr. Byju Raveendran. The auditor’s refusal to sign off on the Annual report earlier perhaps led to the chain of events that brought out the glaring financial shenanigans at Byju’s.

Shenanigan number 1: Turns out that the good folks at Byju’s were recognizing revenues from its long-term courses (say 2-3 year courses and such) in the very first year! This practice inflated the current year’s revenues by a huge margin. The correct accounting treatment is to recognize the portion of the revenues which pertains to the current year only! In an interview with the Business Standard, here is what Mr. Raveendran had to say about this, “In growing fast, we would have overlooked a few things and that’s why we are being penalized a lot more than we should have been”. Sure buddy we feel your pain. Lol.

Shenanigan number 2: This one was done in stealth mode. Interest paid to loan partners on behalf of customers in respect of loans granted directly to customers was being classified as finance cost and not subtracted from revenues, thus again having the effect of inflating revenues! It’s wrong to book revenues raising activity as a financing activity!

Hope you see what’s happening here. It took great work by the audit firm, Deloitte Haskins & Sells to ensure that this guy and his antics were brought to a screeching halt. Ok, so what now? The shit in all likelihood has hit the fan.

Well, Byju’s (btw reportedly valued at $22 Billion!) has been on a takeover spree over the past two years or so. Check out the companies in 2020 and 2021 all financed by funds raised from Private Equity firms(of course!).

Ahem. That's a boatload of companies to 'integrate' within a mother organization in such a short span of time. The company has a presence in about 120 countries and claims to have 7.5 million paid users on its platforms and maintains an average retention rage or renewal rate of 86% annually. But wait, it gets better. It is backed by marquee investors such as General Atlantic, Sequoia Capital, the Chan-Zuckerberg Initiative, Naspers, Silver Lake, and Tiger Global among others. It is planning to go public in a couple of years and is handing out ESOP's to employees as well! Here are the questions that come to my mind after putting together all this information;

1) Fundraising from Private Equity (PE) investors/firms is obviously backed by numbers/facts. What did the PE firms really understand about the revenue recognition practices at Byju's? Or what were they told by Byju's team during the investor meets/presentations?

2) After the initial investments, what mechanism/process (if any) was put in place by the PE firms to track the growth at Byju's? Who was in control of this process?

3) Amusingly, now that the information is out in the public domain, how will the existing PE investors react? Will they stay invested? Will they seek tighter controls and reporting?

4) What about employee morale? I have no doubt that a LOT of key employees were led in by the temptation of the Employee stock options program. What about them now? After the recent IPO debacle especially of Zomato, it would be interesting to see if they can retain these key employees.

In my opinion, undoubtedly some PE investors will exit, some employees will exit and heads will roll at some of the PE firms for their lack of due diligence. All said and done, it promises to be an interesting story for the future!