Transparency in Governance, robust auditing and strong regulations are needed
By Arun Kumar Shrivastav
Byju's, the edtech giant, is grappling with a series of challenges that have put its stability and growth in question. With marked-down investments, the resignation of its auditor Deloitte, key board members quitting, employee layoffs, and defaulting on loan interest payments, Byju's stands as a stark example of the struggles faced by Indian startups, particularly unicorns.
One of the common misconceptions among startups and venture capitalists was that India's vast population automatically translates into a lucrative market. However, the reality is that having a large population does not necessarily equate to people having the financial means to spend. Merely having access to free-to-use websites and apps does not guarantee consumer purchasing power. As Nithin Kamath, the CEO of Zerodha, pointed out, the revenue opportunity for startups is limited to a small percentage of the population, highlighting the need for a more nuanced understanding of the market dynamics.
The narrative of VC-funded startups as the “next big thing” in the Indian economy was perpetuated by venture capitalists, founders, investment bankers, and the media. The allure of huge returns and the fear of missing out (FOMO) led to investments in companies without thoroughly scrutinising their business models. This hype-driven approach created an environment where basic questions were often overlooked, and startups' potential risks and vulnerabilities were disregarded.
Low-interest rates globally fuelled a search for higher returns, resulting in venture capitalists funding cash-burning startups. The model relied on taking losses initially to build scale and generate substantial returns in the future. However, the shift in interest rate dynamics, with rates rising, created a challenge for VCs in sustaining such cash-burning startups. The need for a sustainable business model prioritising profitability over rapid expansion became apparent.
Byju's experienced a significant setback when its long-standing auditor, Deloitte, resigned, citing a lack of communication and audit readiness. It highlights the importance of robust auditing and governance practices in maintaining transparency and instilling confidence among investors. Byju's decision to appoint BDO as its new auditor for five years raised questions about the circumstances surrounding Deloitte's departure.
The Byju's saga offers valuable lessons for both startups and investors. Startups need to prioritise sustainable growth and profitability over mere expansion. A solid business model and a realistic assessment of the market potential are crucial. Investors must conduct thorough due diligence and look beyond the hype to understand the long-term viability of a company. Sustainable growth and profitability should be the primary focus rather than solely relying on lofty valuations and future potential.
The deflation of Byju's, once hailed as a top unicorn in India's startup ecosystem, reflects the broader challenges the sector faces. The startup boom, characterised by lofty valuations and a digital transformation narrative, has encountered a stark reality check due to a global shift in credit conditions. The rise and fall of Byju's and other notable startups serve as a cautionary tale, shedding light on the need for a more realistic and sustainable approach to growth in the Indian startup sector.
Indian startups were often valued at astronomical figures, far surpassing established traditional businesses. However, this era of inflated valuations has been punctured by changing global credit conditions, exposing the vulnerability of these startups. Once valued highly, companies like Paytm and Nykaa have witnessed fluctuations in their market value, and investor interest in unicorn-chasing has dwindled. Byju's, in particular, experienced a remarkable rise in valuation but has now faced a significant setback with reports of substantial write-downs by private investors.
Byju's financial performance has raised concerns, with the company posting a staggering loss of over Rs 4,500 crore in the pandemic year of 2020-21, twice its revenue. While high cash burn was initially blamed for this loss, the company attributed it to accounting peculiarities, such as delayed payments from students. Furthermore, the company's failure to file its results for 2021-22 and the subsequent resignation of its auditor, Deloitte, have added to the growing apprehension surrounding Byju's financial health.
Byju's case highlights the need to expand regulatory oversight in the startup sector. While the National Financial Reporting Authority (NFRA) oversees the statutory auditors of listed companies and large public limited firms, private limited companies like Byju's do not fall within its purview. This lack of direct oversight leaves stakeholders vulnerable to the collapse of privately held startups, underscoring the need for a broader definition of “public interest” that includes the interests of those affected by a company's failure.
The challenges faced by Byju's serve as a wake-up call for the Indian startup ecosystem. The belief that a large population automatically translates into a vast market needs to be reevaluated, and a more nuanced understanding of consumer purchasing power is necessary. The hype-driven narrative surrounding startups must give way to a more realistic and sustainable approach to growth. Transparent governance practices, robust auditing, and adherence to best corporate practices are imperative for building trust and confidence among investors. Byju's journey is a cautionary tale, urging startups and investors to adopt a more measured and pragmatic approach for long-term success. (IPA Service)
