A warning story for new businesses
The startup scene in India is in disbelief. Its poster boys are in hot water, and the $10 billion giant dec acorns have plummeted in value. In the limelight is Byju’s, the project that, with its enormous $22 billion value, was long thought to be the best of the bunch. It topped the list as the nation’s most successful startup for many years. Presently, the erstwhile decacorn is confronted with several litigations in addition to proceedings brought before the National Company Law Tribunal (NCLT), and investors, both local and international, are demanding that founder Byju Raveendran be removed from his position.
In the meanwhile, millions of users had to deal with the widely used Paytm wallet service closing earlier this month. The Reserve Bank of India issued strict guidelines that were obeyed, stating that the closure was due to persistent disobedience of previous regulations. In an attempt to quell the outcry, Paytm founder Vijay Shekhar Sharma, who is largely credited with launching the nation’s digital payment revolution, has resigned as chairman of the Paytm Payments Bank.
Byju’s is a soup startup at the moment. This renowned tech company’s narrative is well recognized. When it was first introduced in 2011, it was an offline issue. Raveendran is a highly skilled educator who created cutting-edge, interactive learning methods when the school went online in 2015. During the Covid-19 epidemic, when there was a pressing demand for online instruction, the firm really took off. Millions of students registered for its tutoring services at this time, which included instruction for all subject areas up to the college level.
The firm received funding from both domestic and international investors. The business was funded by reputable venture capital firms like Blackrock, Prosus, and Sequoia Capital in addition to the Qatar Investment Authority. By 2022, the value had skyrocketed to $22 billion. It then quickly bought a number of tech companies with specialized knowledge in various fields. Consequently, Think and Learn, a firm owned by Byju, acquired Aakash, Great Learning, and Epic—all very successful offline businesses. Analysts argue that the haphazard purchases lacked much logic in hindsight, although at the time, no criticism seems to have been voiced.
The post-Covid period marked the beginning of the company’s financial downturn. Media allegations appeared about Byju’s marketing arm-twisting parents to promote online courses. With traditional schools starting courses again, homeschooling also started to fall. In addition to Byju’s, the whole tech industry that had prospered during the epidemic was negatively impacted by the decline in demand for online education.
Allegations of financial misconduct surfaced when the corporation encountered losses and disagreements around unpaid debts to several entities. The company had sponsored the Indian cricket team and even appointed football sensation Lionel Messi as a brand ambassador during the Covid period. Investors said there was a lack of transparency on financial matters, which caused auditing company Deloitte to depart. Investors now want Raveendran and his family to leave the company entirely, but the founder is waging a last-ditch effort to remain CEO.
Last week, the crisis came to a head when Prosus, the shareholders’ organization, called an Extraordinary General Meeting with the goal of ousting Raveendran. All of these actions, however, have been put on hold temporarily due to a high court stay on any such ruling. The NCLT has convened hearings in response to allegations of mismanagement and persecution, and the Corporate Affairs Ministry has begun an independent inquiry into the company’s operations.
The celebrity decacorn is, to put it another way, in a difficult situation. This episode has a lot to teach the tech industry in particular as well as the startup community in general. First and foremost, startup enterprises must cultivate strong governance and intimate investor-founder connections. Second, before making significant financial choices, purchases must be thoroughly evaluated by financial specialists. Third, the greatest business brains aren’t often the entrepreneurs who specialize in one area, as Raveendran did in education. They want direction from seasoned and reliable financial advisors.
In this instance, as with Paytm, it is essential to adhere to the regulations set out by the authorities. The RBI has noted that the Paytm Payments Bank’s drastic decision to halt operations came about as a result of the business’s disregard for many prior orders pertaining to account monitoring. There have been allegations of users using Paytm’s lenient KYC (know your customer) policies to launder money. The phenomenal success of some firms may give their founders the confidence to believe that laws may be broken with impunity. It is appropriate to say that the regulator will not tolerate rule-breaking that might result in financial misconduct, as seen by the Paytm crackdown.
These disputes have arisen during the startup financing freeze that started in 2021. While the depletion of venture capital funds is a worldwide occurrence, in India it is mostly due to worries about startup valuations, which have often dropped precipitously. A Traxcn report states that funding collected in 2023 decreased to $7 billion from $25 billion in the year before.
Given this context, the Byju story serves as a lesson for all company entrepreneurs. Venture investors may become concerned about the sustainability of investments made in this nation as a result. This is regrettable since a large number of Indian startups have grown into successful businesses. It is now more important than ever for investors to provide top performers in the startup ecosystem more financial know-how assistance. In this case, the overused Spider-Man adage, “With great power comes great responsibility,” is appropriate. It is the duty of investors and startup founders to maintain a close eye on financial stability.
