This is an audio transcript of The Morning Brief podcast episode: What's Going on at Byju's  

BG Sound  

This is the morning brief from the economic times. 

Arijit Barman  

It's the biggest edtech company in the world, and a $22 billion the most valued startup in the country by a mile that is still being run by a homegrown entrepreneur.

Manu P Toms  

We need to put in context by just mind boggling success with user growth and funding by just started raising serious amount of money from 2015. And that is when it did Series B round of about 10 million. From that it raised nearly $5 billion in the past seven years. So, almost every quarter, they raised money at phenomenal valuations and the growth as we as we know was largely driven by two set of activities one is the high ticket acquisitions that they have done time to time. So including the billion dollar buyout of our cash which is under spotlight right now. And the other driver has been marketing we know you know from the very early on gun was one of the you know, brand ambassador and from sponsoring Indian cricket team to the FIFA World Cup, it has been bold and aggressive when it comes to marketing. 

Arijit Barman  

My colleague, Manu Tom's editor of internet economy and venture capital at ET prime has been keeping a close tab on Byju's for several years now.

Manu P Toms  

So this growth, the and of course, you know, the the investors kept pumping in money because each time they saw impressive growth in terms of user base, and the revenue that is kicking in, so this growth was in some sense gravity defying and and and there is some problem with that kind of growth.

Arijit Barman  

In other words, what Manu is saying, whatever goes up, also has to come down. And if one grows at the speed with which Byju's has, then the fall can potentially be quite hard. And that is already playing out with a spate of negative news flows in the recent weeks,

BG Sound  

called us is giving onlookers chills from hundreds being fired from recently acquired units totally in a billion dollar payment. The next chapter in Byju's success story is a cautionary tale that the tech giant has been an integral part of acquisitions, which are now proven to be a pain point. News of delayed payments set off alarms and cash flow issues from the Bangalore based startup reports indicate that Byju's extending the deadline for making parts to payments for a $1 billion acquisition of Akash that is announced a year ago last week alone units acquired by Byju's to five over 1500 employees as per media reports, the company however states that this number is as low as 500.

Rishi Kapal  

My concerns are one education is mainstream, and tuition is good to have. And that model is flipping where it seems that tuition is becoming a must have. And tuition is being positioned as something which will move education in the future. The second element is in terms of the gravity of challenges, which are being put out in the marketplace in the last year and a half in the social media in the public domain are probably not being addressed with that adequacy. And the third element is that if you are doing something positive in some other part of the world, like acquisitions, what happens to your employees in the country of origin? We look at June 2022, the Deloitte situation then you look at six months ago, December 2021, BBC had put out an extremely, extremely strong article on you know, their concerns about Byju's and then in August 2021, they were FIR's filed on misleading people and also that's one side but then you go to these platforms like Mouth Shut and Glassdoor and Quora and you see the employees as well as the customers giving a four star rating and 68 to 70% of the employees saying that it is you know, a place where everybody should work with and all they appear to be very, very contradicting

Arijit Barman  

If Stanford alum, Rishi Kapal an author of crime and startup sagas, also an academic employability innovation specialist and faculty member of Vijay Bhoomi. University is searching for questions. Imagine the flutter in the entire startup ecosystem. It's Tuesday, 5th of July. From the Economic Times. I'm your host Arijit Barman and you're listening to what's going on at Byju's on The Morning Brief

But coating controversies are hardly new for a company like Byju's,

Manu P Toms  

As far as Byju's are concerned, there are two sets of problem which has always been talked about. So one is the aggressive sales tactics, we all know the over selling the high user dissatisfaction, which, which spills over all the social media platforms. And, of course, you know, the cancellation that happens after that after enrolling for paid for the for the paid courses. But many time there were problems about payments not stopping even after cancellation. And the other was on very high targets given to the salespeople, and they were going great lengths to achieve their targets. And that created sort of a work culture problem. And, and when we say that, you know, we need to keep in mind the fact that Byju's is an extremely sales driven organization. And its current status as the largest, you know, the highest valued Indian startup, the largest ad tech, and that is largely a success of the salesmanship that was exemplified by the founder Byju Raveendran himself.

Arijit Barman  

Being obsessed about sales, and possibly indulging in sharp business practices is one thing. But now, matters are evidently getting far, far more serious.

Manu P Toms  

And now a third area of focus is coming as far as Byju's is concerned, that's about the managing its own finances. So the news of audit related troubles and non payment, etc. So the future of Byju's depends on how well it navigates this challenge and which is very critical to its cash management and finances. And I think, given the raised $5 billion, they can absorb some of these setbacks. Also, a lot is riding on Byju's for some of the big investors such as Sequoia and Tiger Global.

Arijit Barman  

Let's start with the financial disclosures. And Byju's, auditor, Deloitte, a big for tax and audit firm for the last two years, that is fiscal year 2021 and 2022. Byju's yet to file its audited financial results. To be fair, private companies often delay filing their financials. But 15 months have passed since financial year 2021 ended and that's enough time to raise several eyebrows. That's not all dismounted self. There have been news reports that Deloitte is refusing to sign off on the 2021 numbers uncomfortable with the accounting practices and alleged business dealings of Byju's. And that is significant because

Rishi Kapal  

The challenge always happens is that when marketing promises the delivery system has to fulfill that promise. And I believe in the larger ecosystem, that gap of promise versus fulfillment is increasing and that is why the dissatisfaction starts to seep in.

Arijit Barman  

But hey, where is Deloitte in all this?

Rishi Kapal  

So, whatever I have read about Deloitte not signing it and Byju's has come back and said that no no it is not Deloitte not signing, it is just that the auditing bandwidth was not there. And and there was a lot of consolidation and mergers and acquisitions happening. So we had to take a lot of data. Now, between the two there has to be a referee and the referee has to be the regulator to say nothing doing if somebody has to file the returns, they have to file the returns. The company itself is refuting the their own audit or to say that, you know, it's like our auditor is not signing because we did not have the information at the right time. And the auditor is keeping quiet about it and Deloitte officially has not gone on record and said that we are hesitant and signing

Arijit Barman  

The radio silence from the auditor is indeed making matters more suspicious, to say the least.

Rishi Kapal  

Everybody's silent about it and silence most of the times in the parlance of compliances is not taken very favorably. So the key concern is that when Byju's gives an opinion about a report in the open that the auditor is not signing, the auditor is not responding. So somebody has to refute it to say that Byju's is saying that my auditor is not signing because we are in a you know mix of consolidations, mergers and acquisitions. The auditor is silent. So the two voices are not being spoken in unison.

Arijit Barman  

Like several cases Byju's high profile board and backers like Silverlake Sophina Qatar Investment Authority. Tiger global Blackrock CPPIB Naspers Sequoia, among others have also been silent thus far. And important disclosure here, Times Internet part of BCCL that publishes The Economic Times is also an investor in Byju's,

Rishi Kapal  

All the investments coming from US and most of the heavyweight the acquisitions, which are being done by Byju's when they acquired Epic when they acquired Osmo. When they acquired Tinker, they are also happening in the US. So is it that, you know, the board also knows that a larger play will happen in the country from where the money is coming, and hence keep on ignoring what's happening in India.

Arijit Barman  

But what's happening in India is no less confounding. Byju's bought Akash educational services, a test prep company in June of 2021, for a billion dollars in cash and stock in what was the biggest deal in the industry, then. Aakash and its investors. That's mainly Blackstone wanted a staggered payout. But now Byju's wants to defer its installments by at least 60 days, as per some reports, yet another set of reports claim it is parallely pursuing two large acquisitions in US that have to you and checks bought would be potentially over a billion dollar buyouts. And that begs the question, if past dues are not settled, would you still go ahead and splurge on shopping?

Rishi Kapal  

In the last 15 days, I think there is a news of around 2000 plus people which Byju's has to let go right. So now, you cannot connect the dots to say that there's an Indian company, which was acquired, but the money is being deferred. There are 2000 plus people, Indian employees who probably will not have a job because Byju's says that they need to consolidate operations. And on the other side, there is a news of an acquisition in US. So when a founder gets funded from a VC fund, say $2 billion and the $2 billion are tranched by the investor and the founder that this will be used for acquisition. At that point of time, it is the founders prerogative to decide with the investor whether the existing creditors can be you know, settled with that money or not. It seems that the agreement for the money which came in recently, was purely for an acquisition which could not have been used in any heads and that's a standard practice in the industry.

Arijit Barman  

But Byju's have also been charged with creative accounting practices by several of its critics for booking 55 to 60% of even its multi year subscriptions upfront, then again, to be fair, this is not unique to EdTech or Byju's, 

Rishi Kapal  

You look at India in the telecom sector is like 92 to 90% of our subscriptions are prepaid and there is always this conversation that are the actual subscriptions are these are activated cards lying with the distributors and retailers but not used. So this is how creative Accounting has earlier also been questioned in the country that are you booking a service which has been used? Or are you booking a service which had just been activated?

Arijit Barman  

in Edtech, we call it income sharing agreements or ISS. How does it work? So imagine you enroll for a course, but the course is given to you for free. But after you complete the course, you land up with the three lakh rupee job. But now that you've been employed, you have to pay the course fee of say a lakh back to the course provider, call it a train and hire model where you are being trained for free, but we'll have to share your income once hired financial intermediaries like NBFC 's and banks also get into the mix at this point to help ease the burden of payments. 

Rishi Kapal  

Technically, if I am suppose if I owe the content provider or the training company, one lakh rupees, the company say charges me 10,000 rupees per month over 10 months, and that is where early booking of revenue started to say that my order booking So, there is a difference between order booking and there is a difference between net sales. So, if I have if I owe you one lakh rupees, you have put an order for one lakh. But my net sales might be happening over 10 months time and that is where in between these loan elements came into picture with you look at Creative accounting. That may be the subscription has been say taken for 50,000 rupees, but it has not been used. But I've already booked that 50,000 rupees in my revenue, because in between, I have you know, put a person who's basically my partner who's giving loans to the parents and they are going to recover the loans from the parents and have taken a back to back assurance from them. So for all practical purposes, if you ask a layman that when should you book revenues, you book revenues when you actually get those revenues or you actually collect those revenues. But I think I'm not very clear about the fact that the numbers which come out are actually orders booked where services are still to be utilized, or the money has been paid up in advance by the loan providing companies and they are recovering the loan from the parents.

Arijit Barman  

It gets further muddled once you consider Byju's makes a lion's share of its total income of around 65 to 70% by selling hardware, that is Byju's, tablets and SD cards to children in the K 12 segment from kindergarten to grade 12 Based on the last available financial data from two years ago. Put simply, unlike other ad tech players, which largely sell only software products, like apps, and online classes, Byju's is always bundled hardware with their software product.

Rishi Kapal  

Hardware is a one time asset. Yeah. And it is like any other mobile phone or a laptop or a tablet, which basically is a trading business, you don't manufacture your own laptops, you basically bring it from somewhere you brand it and you send it out, but it's about who's accepting that model. So, if the investors believe that 60% of the revenue coming from tablet sell is okay and it is called like a golden handcuffs, where if the tablet is inside the product or the service will definitely be inside it's a model maybe the model is working more because of the reason that the people were being given these tablets and the software's for them it is to aspirational to aspiration to a level that they are actually compromising on their other expenses and taking 50,000 to one lakh rupees loan even to you know get the services from Byju but in August 2021 There was an a fire filed against Byju's that the curriculum for the public services exams that they had put up was actually misleading.

Arijit Barman  

Equally distressing is the web of financial arrangements, like first loss default guarantees, or FLDG or 100% default guarantees that Byju's allegedly get into with several of its lending partners that on the face of it may appear great gestures, but a problematic for a variety of reasons, including regulatory ambivalence. Byju's spokesperson claim the company offers FLDG of less than three and a half percent. But finance industry executives counter argue by saying the figure varies from lender to lender and in reality is much higher.

Rishi Kapal  

 What happens in the first last default guarantee is the fact that how much is the default and is the default actually getting covered by the parent company or not. So while it has been put out, as you know, a positive in which a company backs a vendor or a service provider or a financial provider, but the defaults probably are not out in the market to see how much default happened and how much did you know Byju's cover for that matter. So I think people are still reading between the lines to say that is really a favor being done to the to the service providers with the FDLG or anyway there is a mechanism in which the money is getting recovered. So that is where it is completely completely you know in a stealth Byju's went on record and mentioned the 90% of the legal cases which happened in the consumer court have been settled by us for that matter. That is the perspective where FLDG's were discussed. 

Schemes like 100% Money backs, or first lost default guarantees is that it makes the company like Byju's, a permanent seeker of capital. Like it's been packaging its trade receivables, to pass through certificates, securitizing them, only to sell down to external investors.

The challenge of the existing popular product itself is coming under a lot of conversations from multiple parties. And if there is a byproduct which is going into getting converted into securities and getting into the markets for people to acquire, I think again it is the regulator whose lens needs to be very, very sharp over that.

Arijit Barman  

It's a lot like the refund scheme. But as a recent BBC report highlighted, there is a lot of difference between promise and delivery.

BG Sound  

Parental anger against Byju's is growing, at least through some of its customers. Their allegations pushing sales people selling expensive courses to parents, difficulty in getting refunds and a lack of customer support after a sale is made in online forum scores of positive reviews and happy parents, but also hundreds of complaints from unhappy customers Byju's denies all these allegations. But there have been at least three cases where Indian consumer courts have ordered Byju's to even pay damages in disputes related to refunds and deficiency of services

Arijit Barman  

 There's always a fine line between a guarantee and an assurance, right?

Rishi Kapal  

Companies which provide guarantees would always be at risk. So most of the companies have walked away from guarantees, just because people use and then one day make up their mind that I just do not use this service. So I think there is a very, very thin line assurances are always in terms of the onus being equally on the service provider as much as the service seeker. And I believe that a company would be legitimate and will be able to sustain its businesses, by assurances not by giving blanket guarantees. And is the word guarantee is more being used by the sales team. Or it is actually the organization which is saying that you give guarantees, but ultimately we will execute assurances is again, you know, our word against somebody else's.

Arijit Barman  

My colleague Manu sums up this core corporate philosophy rather well. 

Manu P Toms  

What's the core problem is the inherent problem. One underlying reason that becomes increasingly clear is aggression. And but you know, aggression is good as far as startups are concerned, you know, the aggression is good. It's necessary in scaling up startups. But it needs to be reined in at some point in time.

Arijit Barman  

So do you milk a student to the maximum or build a long term relationship over the years

Rishi Kapal  

Some companies look at a business model to say that I've acquired 100 students, and I've got a five year roadmap for the students. So I will ensure that at least 60 to 70% of the students I can retain over a period of a five year lifecycle. So that is what we call as a customer lifecycle. Good at tech companies that I've seen, always have believed in almost more than half of their client base to be retained for customer lifecycle value. But in terms of having a new customer every day, accountability also does not come up in the long run.

Arijit Barman  

Rishi feels Byju's realized it much earlier than its peers, that an omni channel model, that is a combination of online classes with physical tutions work best, as fears of COVID 19 pandemic has started to ebb. 

Rishi Kapal  

At least the Byju's marketing machinery has post deep insights in the marketplace that they should start opening physical centers as soon as COVID recedes. So that is why Byju's tutions, are now becoming physical centers. And that is probably also something as a business model, which will be more in their favor that they've told people that we are not just there online, we are also going to be available offline. And that is a credit I can give to the company in terms of being really smart and understanding how the wave is changing.

Arijit Barman  

But the onus is on players like Byju's to prove their commitment and accountability. 

Manu P Toms  

Deeper question there is about the product. So what is the real effectiveness of online tutoring championed by Byju's? And what is the real outcome? So So what is the edX commitment to educational outcome? That's a larger question that needs to be discussed.

Arijit Barman  

Following China's crackdown on edtech parliamentarians in India, too, are becoming deeply concerned,

Manu P Toms  

As we know already edtech and primarily Byju's are facing accusations of overselling, and which forced the government to come up with an advisory in December. And that advisory rates do not trust the success stories of ed tech companies without proper checks. And they may be a trap. That's what the government advisories said. So, we know Kartik Chidambaram's remarks in the parliament about the predatory marketing, auto debiting etc. So he covertly mentioned Byju's in that speech as well. So, so, so this practice has already become a topic of discussion and and there is a demand for strong monitoring of ed tech sector. And as a result, now there is a self regulation code that the edtechs have come up with, and that came just three months ago. So now we will need to see whether they are enough.

Arijit Barman  

Responding to ETS detailed questionnaire. Byju's spokesperson said our fundraising efforts are on track and majority of the $800 million has already been received. The balance is also expected soon. Our payments to Akash are closed and the audited financial results are going to be announced in the next 10 days. Talking about job cuts, She further added in order to reduce redundancies across our organization. After multiple acquisitions, we have to let go of nearly 1% of our 50,000 was an plus strong workforce. This retrenchment was a result of a strategic decision to improve business efficiencies through Byju's and its group companies Byju's remains a net hirer with 50,000 plus employees and growing, we take immense pride in our role, as India's largest job creator among startups, Byju's continues to hire across levels for various businesses, departments and functions. My take, the issues are diverse, as are the allegations, and so other regulators concerned. financial disclosures, alleged accounting discrepancies fall under the Ministry of Corporate Affairs. Overall education comes under another ministry and referee. So if a company like Byju's is expected to perform in all domains of ethics, education and finance, then regulators cannot work in silos. But do we have such a framework in this country that still remains smitten by the number of unicorns it produces every month. So to me, who keeps a tab on ed tech companies is equally important in a sector as emotive and sensitive as education. The socio economic ramifications are humongous. Having said that, education is at the core. That's why the money is coming in. And that's why ethics are being repeatedly questioned. So the onus primarily should lie with the HRD ministry and the relevant education regulator. But then again, look at Byju's breadth of offerings, and each one would fall under different regulators. K 12 comes under CBSE CISCE that conducts the ICSE and ISC exams, then there's NCRT. Nevermind the regional boards, higher education is under the purview of AICTE or UGC, and test prep. Well, I doubt if there is any who is overseeing them in the first place. The whole business runs on word of mouth success. So it's not an easy one to crack, but an essential one to start seriously thinking about. 

You've been listening to what's going on at Byju's on The Morning Brief with me your host Arijit Barman producers for the episode Bhavya Dilip Kumar from ET and Swati Joshi from Aawaz. Sound Editors, Rajas Naik from ET and Saundarya Jayachandran from Aawaz, executive producers Anupria Bahadur and yours truly, The Morning Brief drops every Tuesday, Thursdays and Friday. If you liked this episode, please make sure to share it on your social media. Thank you for listening, and have a great week ahead. Do tune in to ET play our latest platform for all audio content, including The Morning Brief. All clips used in this episode belong to their respective owners. Credits mentioned in the description.

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