What's happening to BYJU'S? : Business Case Study
Summary
TLDRThe script narrates the rise and fall of BYJU'S, an Indian edtech giant, detailing its journey from a startup with 25 students to a valued unicorn and its subsequent challenges. It faced a dramatic downturn due to aggressive marketing, questionable sales tactics, accounting issues, and risky financial strategies like Term Loan B. The company's valuation plummeted, and it grappled with reputational damage, investor troubles, and significant losses. The narrative serves as a cautionary tale for business leaders, emphasizing the importance of balanced growth and ethical practices.
Takeaways
- 🚀 Rapid Growth: BYJU'S started with 25 students and became one of India's most valued startups within a decade, reaching 150 million students worldwide by 2021.
- 🌐 Pandemic Impact: The COVID-19 pandemic disrupted education globally, propelling BYJU'S to the forefront of the edtech industry in India.
- 📉 Financial Crisis: BYJU'S faced a dramatic downturn with losses increasing over 15 times, from $327 million in 2021 to over 4,500 crores, and a significant drop in valuation from $22 billion to below $3 billion.
- 💡 Marketing Strategy: Aggressive marketing tactics, including high-profile endorsements and sponsorships, contributed to a significant portion of the company's expenses, leading to a risky revenue-to-marketing expense ratio.
- 🔍 Sales Practices: BYJU'S faced accusations of fear-mongering sales tactics, targeting low-income families and pushing them into loans for course subscriptions, which eroded trust and reputation.
- 📊 Revenue Recognition: The company's accounting practices were questioned, particularly regarding revenue recognition for multi-year courses, which inflated revenue figures and masked financial health.
- 💔 Loss of Trust: Negative publicity and questionable sales practices led to a loss of reputation and trust among customers, impacting the brand's image.
- 🛒 Acquisition Spree: BYJU'S engaged in a series of acquisitions, which, while expanding its user base, also increased expenses and losses from the acquired companies.
- 💸 High-Risk Financing: BYJU'S took on a high-risk Term Loan B, which required small installments followed by a large bullet payment, increasing financial strain and risk.
- 📚 Lessons Learned: The case of BYJU'S highlights the importance of balanced marketing, ethical sales practices, prudent financial management, and the value of maintaining a strong reputation in business growth.
Q & A
What significant milestone did the company achieve in 2021?
-In 2021, the company had reached a valuation of $22 billion and became one of India's most valued startups, with hundreds of millions of students using its resources.
How did the COVID-19 pandemic impact the company's operations?
-The COVID-19 pandemic disrupted education globally, leading to a surge in demand for online education platforms, which the company capitalized on to reach 150 million students worldwide.
What is the controversy surrounding the company's sales practices?
-The company faced accusations of using aggressive sales tactics, including instilling fear in parents about their children's future, which eroded trust and created a negative perception of the brand.
How did the company's marketing expenses compare to its revenue in 2021?
-In 2021, the company spent ₹2250 crores on marketing, which accounted for 32% of their total expenses, while their revenue was ₹2428 crores, indicating a risky revenue to marketing expense ratio.
What was the impact of the company's lending partnerships on its financial situation?
-The company's lending partnerships, which involved a first loss deposit guarantee strategy, allowed it to easily lend money to people with low incomes, leading to a rise in customers taking out loans to buy courses and contributing to the company's financial challenges.
What accounting practices led to the company's significant losses?
-The company was accused of not following the accrual principle for revenue recognition, instead recording the full amount of multi-year course fees in the year they were received, which led to inflated revenue figures and significant losses when the true financial situation was revealed.
How did the company's acquisitions affect its financial health?
-The company went on a shopping spree, acquiring multiple companies at high prices, which, while increasing user numbers, also led to increasing expenses and losses from the acquired companies.
What is a Term Loan B and why did it pose a risk for the company?
-A Term Loan B is a loan that requires small installments followed by a large bullet payment at the end. It posed a risk for the company because most of the principal payment was due at the end, increasing the risk of default and financial instability.
What external factors contributed to the company's financial challenges?
-External factors included the Russia-Ukraine war, which pushed Western interest rates high, increasing the installment amounts for companies that borrowed during low-interest times, and the subsequent impact on the company's Term Loan B.
What were the allegations against the company regarding its financial reporting?
-The company was accused of hiding half a billion dollars, failing to file its financial accounts on time, and facing allegations of Foreign Exchange violations, leading to a loss of reputation and trust among investors and customers.
What lessons can be learned from the company's challenges and operations?
-Lessons include the importance of responsible marketing, focusing on the value and impact of products while scaling, and understanding that a company's reputation can be ruined quickly if not carefully managed.
Outlines
🚀 Rise and Challenges of an Indian EdTech Giant
This paragraph outlines the rapid growth of an Indian edtech company, BYJU, from a startup with 25 students in 2011 to a highly valued company with millions of users by 2021. It highlights the company's endorsement by a major celebrity and its role as a symbol of India's burgeoning edtech industry. However, the script also introduces the company's current crisis, including allegations of violating foreign exchange laws, investor troubles, layoffs, and significant financial losses. The company's valuation plummets from $22 billion in 2022 to under $3 billion, attributed to failed bold steps and a call for business leaders to learn from this case study.
📉 Aggressive Marketing and Sales Tactics Backfire
The second paragraph delves into BYJU's aggressive marketing strategies, which included high-profile sponsorships and celebrity endorsements, costing more than their revenue in some cases. This approach led to a significant increase in expenses and consequently, heavy losses. The company's sales practices are criticized for pressuring parents and using fear tactics, which eroded trust and created negative perceptions. The paragraph also discusses the issue of customers unknowingly being signed up for loans to finance course fees, leading to further complications and reputational damage.
💼 Accounting Controversies and Financial Struggles
This section of the script discusses the controversy surrounding BYJU's accounting practices, particularly the improper recognition of revenue, which led to inflated revenue figures and a distorted view of the company's financial health. The company's losses are scrutinized, with a significant increase from previous years, and the impact of the COVID-19 pandemic on their business model is examined. The paragraph also covers BYJU's acquisition spree and the financial strain caused by integrating and managing these newly acquired companies.
🏦 The Risks of Term Loan B and Financial Negotiations
The fourth paragraph focuses on BYJU's risky financial decision to take a Term Loan B of $1.2 billion at a time of low-interest rates in the United States. The nature of Term Loan B is explained, with its small initial installments and a large final payment, which increases the risk for lenders. The script details the challenges BYJU faced in meeting the loan's conditions, including credit ratings and timely financial reporting, and the subsequent negotiations and conflicts with creditors as the company struggled to manage its debt.
📚 Lessons from BYJU's Business Journey
The final paragraph wraps up the story of BYJU, reflecting on the lessons that can be learned from its rise and challenges. It emphasizes the importance of responsible marketing, the need for businesses to focus on the value of their products, and the critical nature of maintaining trust and reputation. The script concludes with a cautionary note on the swiftness with which a company's standing can be damaged and the importance of making considered decisions in business practices.
Mindmap
Keywords
💡Edtech Industry
💡Unicorn
💡Valuation
💡Marketing Budget
💡Sales Practice
💡Loan
💡Revenue Recognition
💡Term Loan B
💡Acquisition
💡Reputation
💡Financial Crisis
Highlights
In 2011, a startup with 25 students grew to become one of India's most valued edtech companies within a decade.
By 2021, the company had over 150 million students using its platform, endorsed by a major celebrity.
The COVID-19 pandemic disrupted education globally, leading to a surge in online education platforms like BYJU'S.
BYJU'S faced a crisis with allegations of violating India's foreign exchange laws and investor troubles.
The company experienced a dramatic downturn with significant layoffs and financial losses.
BYJU'S reported a loss of $327 million, with losses increasing over 15 times to 4,564 CR.
The company's valuation dropped from $22 billion in 2022 to below $3 billion due to strategic missteps.
BYJU'S aggressive marketing tactics, including high-profile sponsorships and celebrity endorsements, raised concerns about its spending.
The company's sales practices were criticized for pressuring parents and using fear tactics.
BYJU'S was accused of pushing customers into loans to afford their courses, leading to financial strain.
The company's accounting practices were questioned, particularly regarding revenue recognition.
BYJU'S faced a decline in revenue and an increase in losses after the COVID-19 lockdown ended.
The company went on an acquisition spree, which added to its user base but also increased its losses.
BYJU'S took on a high-risk Term Loan B, which required large bullet payments and strict conditions.
The company defaulted on loan repayments and faced legal action from creditors.
External factors like the Russia-Ukraine war and increased interest rates added to BYJU'S financial challenges.
Lessons from BYJU'S include the importance of balanced marketing, focusing on product value, and maintaining trust and reputation.
Transcripts
hi everybody in 2011 a company that just
started with 25 students went on to
become one of the most valued startups
in Indian history in just 10 years by
2021 not just Millions but hundreds of
millions of students were using the
resources the greatest star in the
country was endorsing them and within no
time it became an epitome of the booming
edtech industry of India this company as
we all know is by the Corona virus
pandemic has disrupted education AC
across the world there some families are
struggling to adjust as the Corona virus
crisis grows online education
platform over the last so many years we
are touching 150 million students across
the world our lead story tonight is
about B one of India's most celebrated
unicorns today it is a startup engulf in
a crisis BYU continue to be in focus a
month after firm's investor forus
resigned from BYU's board BYU is under
the radar for alleged violation of
India's foreign exchange
laws in the last two years B has seen a
dramatic downturn the Press has gone
crazy about their functioning the
company is dealing with investor
troubles an auditor and multiple board
members have left they've laid off
thousands of employees and most
importantly they've been bleeding with
thousands of crores in losses BYU posted
a loss of $327 million the company saw a
loss of over 4,500 CR rupes the losses
have gone up more than 15, times to come
in at
4,564 CR and during this time their
valuation has dropped from $22 billion
in 2022 to below $3 billion today this
is because Baus took some bold steps
that did not pay off as much as expected
so if you're a business leader
regardless of the domain you belong to
listen to this case study very very
carefully because the lessons from this
case study will help you escape a
miserable failure so in this episode
today let's do a deep dive and try to
understand what what is the story of
Baus what are the challenges that they
are facing and what are the lessons that
we need to extract from the operations
of this giant edtech
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and now on with the
episode this is a story that dates back
to 2011 when a popular teacher named
named ravindran and his wife Diva
started byes with the goal of preparing
content for school students and also
wanted to cater to the test preparation
market then in 2015 they launched their
learning app and in 2016 the company
claimed that its app was downloaded more
than 5.5 million times in the last one
year out of which 250,000 consumers were
paid annual subscribers and from there
on their user base kept on exploding by
2019 they had 40 million users by 2021
they had 80 million users and today they
have around 150 million users during the
same time their revenue had grown from
110 cres in 2016 to 500 cres in 2018 to
2,428 crores in 2021 and as per the last
audit it stood at 3,569 crores in 2022
this Revenue came from three sources
sale of tablet and SD cards sale of
reference books and tution and service
fee during this time the valuation of
BYU's skyrocketed to hit2 $2 billion and
BYU became a benchmark for all et
companies to follow B valuated over $22
billion in October 2022 India's most
valued startup at $22 billion the golden
eyed boy of the Unicorn Club CEO BYU
ravindran said in a statement and I
quote baiju is now at that sweet spot of
its growth story where the unit
economics and the economies is of scale
both are in its favor but you know what
guys while on one side they were killing
it with thousands of crows in revenue on
on the other side their losses also shot
up from 49 crores in 2016 to 2 49 crores
in 2020 and then it shot up by 18x to
touch
4,588 cror in 2021 as per the most
recent filings their fi 22 losses are
2,253 crores so the question is how did
this company incur such heavy losses
well the first and the most obvious
reason of all was their marketing budget
their advertising and promotional
expenses was their single largest cost
cost in fi21 and if you see this table
business promotion expenses alone
accounted for 32% of their total
expenses from title sponsorships in IPL
to the FIFA World Cup from bringing Shah
ruk Khan as its brand ambassador to even
getting lonel Messi it was spending more
on Advertising than its own employees
and operation in fact in 2021 while they
spent 22509 for crores in marketing
their revenue itself was
24283 crores now is this bad well well
not really because every company has its
own way of functioning but is the
revenue to marketing expense ratio risky
absolutely yes and as we move ahead you
will see how this snowballed into a
catastrophe for the company this is
where their second challenge came in
which was their sales practice some
parents accused BYU's marketing
Personnel of instilling fear in them
about their children's future in this
highly competitive World these tactics
eroded trust and created a negative
perception of the company one India's
most celebrated unicorns today it is a
startup engulfed in a crisis most
egregious Act was when customers who
bought courses on loan requested
cancellations and refunds according to
Hindu Frontline sales associates were
asked to find leads everywhere they
would visit schools malls and even
temples to persuade people to sign up
this also included the low-income
workers from Market sellers to even rsha
drivers according to rest of thee
world.org even at a local chai stall a s
to ask the seller if he had children and
if he wanted them to have a better
education and a better life if yes then
he must sign up for by juice and once
users installed the app they were asked
to sign up for a 15-day free trial using
a mobile number and once byus had this
mobile number their sales teams would
consistently follow up and they would
persuade the parents to buy a
subscription now again is following up a
problem not at all but furthermore
according to Hindu front line employees
revealed that BYU put them under immense
pressure to make their weekly sales
targets of 1 lakh rupees or else they
would be fired as a result according to
Hindu front line they made misleading
statements to parents and frighten them
into believing that their children would
fail if they didn't purchase a byju
course or they would push them to buy a
multi-year package now the question over
here is even if the salesman was very
pushy when the courses cost as high as
1.35 lakhs for J prep how could people
with low incomes offer these courses
well as a turns out many people were
buying this course by taking out a loan
Yes you heard that right people were
buying these courses by taking out a
loan an investigation by Ken analyzed
110 consumer complaints and they found
that 54 of these people were unaware
that they were being signed up for loans
when they signed up for subscriptions
and the problem was that the average
ticket size of these purchases was
66,000 rupes and they have to pay
interest if they pay in parts now the
question over here is how did this
lending happen happen so easily because
taking out a loan in India is a very big
hassle especially if you have less
income right then how did these people
with less income end up getting loans so
easily well this is where Buu's lending
Partnerships came in Buu used something
called the first loss and deposit
guarantee strategy in simple words this
is an arrangement between a third party
and a financial institution whereby the
third party garantees to compens the
lender if the borrower defaults in this
case BYU acted as a guaran for its
customers who borrowed from its
financing Partners so if the customer
defaults then buus would be liable to
make the loan repayments this is the
reason why the financing Partners were
very easily able to lend money to people
even with low incomes this is the second
challenge that the company faced where
some desperate salesman got over pushy
and eventually because of first loss
deposit guarantee people started taking
up loans to buy these courses but
regardless of that from the business
standpoint when multiple such cases of
forced sales pushy follow-ups and Loan
stories came up many customers of BYU
started losing trust in the brand so the
Second Challenge was loss of reputation
and Trust because of their sales
methodology now until this point this
story could still be discarded as the
story of a few handful of customers so
for a billion dollar company a few bad
customers are not a big deal at all but
this is where things go really crazy
with their accounting practices the
startup which lived the dream and is now
in the dumps the CEO Buu ravindran is
being blame for mismanaging the firm's
growth the one's highflying startup has
failed to file its Financial accounts on
time investors have accused byj of
hiding half a billion dollars which has
been troubled by mass layoffs mounting
losses valuation cuts and several other
issues there are allegations of Foreign
Exchange violations by is being probed
for this how by has uh not paid
attention to business fundamentals in
its growth journey us in accounting
there is a very simple concept of
Revenue recognition and this is called
as acrel principle and this principle
states three key points number one
revenues are to be recognized when they
are earned and not when they received
for example if think school sells a
course to a student on credit in 2021
and doesn't receive payment until 2022
then the revenue would still be recorded
in 2021 when the sale was made similarly
if the student pays 40,000 rupees for a
2-year course in 2021 with each year of
the course costing 20,000 rupes the
revenue must be recorded as 20,000 R for
20 20 21 and the rest of the 20,000
rupees must be recorded as revenue for
the year 2022 similarly if a business
received a utility bill in 2021 but paid
it in 2022 the expense would be recorded
in 2021 when the service was used and
not in 2022 but as it turns out
according to money control BYU did not
record revenues like this since BYU
takes the fees of 2e or threee courses
in the first year itself it would record
it as revenue of that year itself
instead of splitting it in 2 to three
years so it's it's like if a customer
paid 60,000 Rupees for a three-year
course in 2021 to think school then the
entire 60,000 Rupees was recorded in
2021 itself now what is the problem with
this practice when the investor looks at
the balance sheet it inflates the
revenue and makes it look like byj is
scaling up exponentially this is the
reason why deoy asked him to defer 40%
of its Revenue that it recorded in 2021
to both 2022 and 2023 and because of
this the company had to record
significant losses in 2021 on top of
that when the covid lockdown ended while
many students suddenly chose to leave
the course and went back to offline
classes many left due to negative
reviews and publicity this is when Buu's
sales started going down as you can see
in this chart Buu's Revenue declined by
38% from 2020 to 2021 in India but at
the same time their us business grew by
133% and in the Middle East it grew by
103% and guess what while all this drama
was going on BYU went on a shopping
spree to acquire companies one after the
other you've paid two times sales for
white hat Junior uh their annual run
rate being 115 million and you've paid
out cash of 300 million now agreed you
have cash on the books India's Ed Tech
startup by is acquired coaching Center
Chain Akash do you know for how much
close to $1 billion $1
billion so in the past few years Buu
went on to acquire companies like
Whitehead junor akas Education Services
and 17 other companies while whad Junior
was acquired for $300 million at EPC was
acquired for $500 million and Akash was
acquired for $950 million so while they
experienced substantial growth in user
numbers they also faced increasing
expenses on top of that not all these
companies were profitable so along with
users they also got more losses from
their acquired companies this was the
third challenge that the company was
facing which were the losses from
acquired companies now even here we can
argue that Bas could easily turn these
companies into a profitable Venture
because of their distribution and skill
but you know what guys this is what
brings us to another risk that Buu took
up which is something called Term Loan B
and this is what made things very very
difficult for BYU to tell you about it
in 2021 the United States was offering
loans at near zero interest rates if you
remember this is because they printed
trillions of dollars because of which
the interest rates in the US touched
rock bottom and this was a very very
attractive offer for both startups and
VCS so with this attractive offer by
just took up $1.2 billion in loan but
you know what guys this loan wasn't just
any loan it was a Term Loan B in simple
words it is a loan which requires small
installments and is followed by a large
bullet payment at the end now the
technical definition of Term Loan B is a
little complicated so let's understand
this using a story let's say a company
called X took a Term Loan B of $100
million let's say the interest rate is
set at 5% per anom and the term loan is
only for 6 years for Simplicity let's
also assume that that the interest is
calculated annually so the payment
structure of this loan will look like
this at the end of year 1 x will pay 1%
of the principal which is $1 million
plus 5% interest on this principal
balance which is 5% of $100 million
equivalent to5 million so the total
repayment would be $6 million at the end
of year two x will again pay 1% on the
principal that is $1 million plus 5% on
the remaining principal balance that is
$100 million minus $1 million which is
$999 million so 5% of $99 million gives
us an interest of $4.95 million so the
total repayment for year two is $4.95
million + $1 million equal to 5.95
million this will go on till the last
year and this is when X will pay the
company the entire remaining amount of
$95 million in one shot and pay the
interest of 5% on $95 million this is
how the transac action will be complete
so you see the installments are small
but are followed by a large bullet
payment now do you see the risk over
here most of the principal payment is
done at the end and this increases the
risk for the lender because in between
this time if the borrower company goes
bankrupt then the lender will lose all
the money so the risk for the lenders is
very very high right this is why to
mitigate this risk the lenders do three
things number one they demand High rates
of Interest number two the banks sell
these loans to institutional investors
who are willing to take up such high
risks and finally they attach some very
stringent terms and conditions in
baiju's case they were asked to get this
loan rated by two Credit Agencies like
Moody's or fit they were asked to
publish their audited 2021 Financial
results on time and several such
conditions were applied but guess what
this is the timeline of the drama that
followed according to Economic Times in
November 2021 Baus raised $1.2 billion
of Tom loan B in July 22 BYU said that
it will announce its delayed audited
financials in August the MCA itself sent
Buu a letter over a 17mon delay in
filing results and then finally in
September BYU announced the results
where the investors saw that the losses
had risen by 18 times to 4,588 crores
Meanwhile they closed $250 million in
financing from existing investors then
in December 2022 the creditors sought an
immediate Term Loan B part payment this
is when in March 201 3 BYU offered to
pay a high interest on Term Loan B to
renegotiate the debt financing so then
the lender sought up to 200 million
dollar with higher interest from Baus
for restructuring again parall Baus
raised another 2,000 crores from
Davidson Kempner and then finally the
creditors pulled out of the negotiations
to recast the term loan P then on 6th of
June 2023 BYU defaulted on the loan
repayments and sued its creditors
meanwhile another thing that happened
was the Russia Ukraine war and this
pushed the interest rates of Western
countries so high up that the base
interest rate went from 0.2% to
5.85% and this increase in interest
rates increased the installment amounts
for many companies that borrow during
low interest times if you remember this
is exactly what happened with the
Silicon Valley Bank on top of that if
you look at this graph as the interest
payments were missed the prices of this
Term Loan B had dropped drastically from
99 cents on the dollar 2022 to as low as
49 cents in September this year all this
brought back lenders to the negotiating
table and recently Baus came out with
saying its Term Loan B would be repaid
by March next year but we can only wait
and see what exactly happens and as if
this was not enough their auditor deoy
and three other board members resigned
BCCI has dragged them to court over
sponsorship issues they've been accused
by the enforcement directorate of
Foreign Exchange violations of over
9,000 CR
and they've also been struggling to pay
their employees this is a story of Baus
where heavy marketing accounting
practices sales methodology fast-paced
acquisition and Term Loan be together
they've put up a massive challenge in
front of Buu so now what remains to be
seen is how will BOS come out of the
situation and claim their position as
the market leader in India and this
brings us to the last part of the
episode and that are the lessons that we
need to learn from the challenges and
operations of Baus lesson number one
marketing is a double-edged sword on one
side while it may look like the primary
instrument of Revenue growth if not used
properly it could bleed your company
with losses lesson number two while good
businesses focus on the speed of scale
great businesses focus on the
uncompromised value and impact of their
products while they scale and lastly
Warren Buffett once said it takes 20
years to build a reputation and 5
minutes to ruin it if you think about
that you will do things differently in
this case days we saw how things shaped
up with BYU its investors and its
customers due to its practices this is
the story of BYU and I just hope you
learn something valuable from this case
study that's all for my side for today
guys if you learn something valuable
please make sure to hit the like button
in order to make you baba happy and for
more such insightful business and
political case studies please subscribe
to our Channel thank you so much for
watching I will see you in the next one
bye-bye
[Music]
n
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