BYJU's : A crash course in red flags
BYJU’s.
India’s most valuable startup. The world’s most valuable ed-tech company. These are BIG milestones for any company — even though VC/private equity valuation is a number cooked up in thin air based on rosy and unrealistic forecasts — you’d think that BYJU’s must be one of the best run companies in the world.
Well, it’s the opposite. BYJU’s is in the news for all the wrong reasons. It’s a PR nightmare. And I thought it’s a good opportunity to take the case of BYJU’s to learn about some of the red-flags investors should look for before investing in a company.
Talk about silver linings.
A Tale of Red Flags
The good thing about BYJU’s — is that there are so many red flags, I can actually write an article about it.
Let’s take a look at some of the most eye-popping ones.
Red Flag #1: Auditor Resignation
Statutory auditors are people who are tasked with the independent evaluation & reporting of a company’s financial statements. Savvy investors read audit reports to see what the auditors have to say about the company’s numbers. An adverse comment in the audit report can cause a lot of damage to a company’s reputation [and its stock price].
In this case, Deloitte Haskins — the statutory auditors of BYJU’s — resigned last week stating that they were unable to conduct the audit for FY22 due to a delay in furnishing of financial information by BYJU’s. BYJU’s was able to appoint BDO as the new auditors for the company, but the damage was done.
Deloitte’s resignation sends a simple message. They have no confidence in the financial statements of BYJU’s and don’t care about the lofty audit fees. The numbers could be cooked. There is a possibility of a material misstatement in the financials possibly even fraudulent activity. If BYJU’s were a listed company — it’s share price would’ve taken a MASSIVE HIT and the world would find out the true valuation of the company in no time.
Red Flag #2: Resignation of Board Members
Keeping the streak of resignations alive, some of the Board of Directors of BYJU’s were next. G V Ravishankar of Sequoia Capital (now Peak XV Partners), Vivian Wu of Chan Zuckerberg Initiative, and Russell Dreisenstock of Prosus resigned from the Board.
If the resignation of auditors hints towards financial irregularities, the resignation of Board of Directors signals a loss of faith in the founder/top management of the company. They don’t trust how Byju Raveendran is running the company and some of the decisions that he is making for the company’s future.
You don’t want to see that as an investor. You want a strong board which brings in stability & wisdom into the company. These are people responsible for shaping the future of BYJU’s and with them gone — only the BYJU family remains on the Board of the company.
BYJU’s will need to urgently fill these board positions, but the question is — who in their right minds would want to join BYJU’s Board at the moment?
Red Flag #3: Predatory Sales Tactics + Toxic Work Culture
Look at any successful company in the world & you’ll see two common themes playing out. Loyal customers & a loyal workforce. You need sticky customers to drive recurring revenue. You need energetic & passionate employees with the ability to turn a vision into reality.
This isn’t a new red flag but something that I wanted to specifically highlight. There have been reports of how BYJU’s exploited the underprivileged to meet sales targets. That’s absolutely UNETHICAL.
The work culture for employees isn’t great either. There have been reports of verbal [even physical] abuse of employees in the company on non-achievement of sales targets. Reports of burnout. Constant layoffs to cut down costs.
You don’t want to invest in a company that exploits its customers and cannot keep its employees happy. There’s only one way that ship goes — underwater.
Other red flags
Delayed filing of financial statements - BYJU’s filed its financial statements for FY21 in September 2022 — 18 months after the financial year ended. For FY22, its the same story, they haven’t filed their financials yet. Makes you wonder — Is something shady going on here?
Legal battle with lenders - BYJU’s raised a $1.2B term loan in November 2021 which had a condition that if BYJU’s was unable to file its financial results on time — the lenders could demand an accelerated payment of its term loan. BYJU’s delayed filing its financial results. The lenders moved to demand an accelerated payment. BYJU’s response was to sue the lenders and the company also skipped paying $40 million in interest. So effectively, they’ve defaulted on a loan payment.
ED probe into FEMA violations - Enforcement Directorate (ED) recently conducted searches and seizures at various offices of BYJU’s along with the personal property of the founder over allegations of violation of FEMA laws. BYJU’s received funding from abroad and also made some acquisitions abroad — and ED felt that this might have led to round tripping. The investigation isn’t concluded and it will be interesting to see how this plays out. An ED probe signals that they’re smelling something fishy at BYJU’s.
Loss > Revenue - BYJU’s reported a net loss of INR 4,588 crore on consolidated revenues of INR 2,428 crore for FY21. The company says that’s because of a change in the revenue recognition policy where they weren’t allowed to record all of the upfront payments received in a single year. The founders are saying that FY22 will be much better — let’s see. Time to maybe cut down on the fancy ads and the cricket sponsorships?
Crazy acquisitions - One thing that BYJU’s specializes in — is fundraising. They’ve raised $5.78B over 26 acquisitions rounds till date. And with that money, they’ve gone on an acquisition spree, spending close to $2.88B. Aakash Institute (for which they’re planning an IPO very soon), Great Learning, Epic, WhiteHat Jr are some of its notable acquisitions. The problem with acquisitions is that a lot of them don’t work out. Especially when you make SO many acquisitions in such a short amount of time. If the acquisitions fail to turn profitable, that’s capital down the drain.
No wonder the existing investors are writing down the value of their investments in BYJU’s.
Blackrock — the world’s largest asset manager — wrote down the value of it’s investments in BYJU’s valuing the company at $11B. A few months later, they did another write down, thinking that maybe BYJU’s is actually worth only $8.2B.
Similarly, Prosus — which owns around 10% in BYJU’s — also wrote down the value of its investments in BYJU’s valuing the company at $5.1B.
Clearly these folks have no idea about how much the company is worth and are conjuring numbers out of thin air. For the startup industry, the recent calamities at BYJU’s serves as a good benchmark of how NOT to run a company.
The wise learn from the mistakes of other people.
What do you think happens next at BYJU’s? Let me know your thoughts in the comments section!
“The company says that’s because of a change in the revenue recognition policy where they weren’t allowed to record all of the upfront payments received in a single year.”
Isn’t this simply the difference between cash and accrual accounting?