The Byju's story: What is ailing India's once booming start-up sector?

While Byju's has stumbled and may well fall, one must hope that most start-ups learn to thrive in the changed context. The economy would be much less vibrant without them, writes T N Ninan

Byju’s, the edtech business, has become a poor advertisement for India’s once booming start-up sector. That comprises over 80,000 registered entities, of which at least 70 per cent will eventually fail, while at the other end some 100 have achieved unicorn status with valuations in excess of a billion dollars. Of these, Byju’s is the biggest, splashiest, most consistently controversial, and now on a roller-coaster that could see it crash, or magically survive. The odds on the second outcome have lengthened significantly in recent weeks and months.

What used to attract attention earlier — apart from its stratospheric valuations, which peaked at over $22 billion (not much lower than Tata Motors!) — were its hyper-aggressive sales methods, its toxic work culture, its questionable accounting practices, and persistent doubts about whether what it offered actually delivered for students. Its delayed results for the year ended March 2021 showed losses (Rs 4,588 crore) that were twice as much as revenue. The March 2022 results are not yet known, the auditor has walked out and non-promoter directors have quit, while thousands of employees have been fired. One investor has marked down its investment by 40 per cent, and another has lowered the company’s value in its books by 75 per cent. For good measure, the company is in court against lenders. Undeterred, it says it hopes to raise another billion dollars and the founder, Byju Raveendran, continues to promise jam tomorrow.

Flame-outs are an inescapable part of this business (remember Educomp), so they get ignored in the booster-rocket stage of the game as private investors buy into even unreal valuations for fear of missing out, often insisting that company managements continue pursuing growth rather than profits. Greed too has its role; quite a few promoters have been accused of fraud, and companies of poor governance norms, though there isn’t yet in India a case quite like Theranos in the US. But it is clear that the years of easy money and unreal valuations have ended. In a sector that has absorbed investment over the past decade of over $150 billion (most of it being overseas money), new funding in the initial months of 2023 is down by some 80 per cent when compared to 2022.

The emerging reality has meant gyrating valuations. Among the few publicly quoted entities, Zomato’s share price soared, then crashed, and is now back near the original listing price, while Paytm crashed without soaring. Nykaa and PolicyBazaar have also seen ups, downs, and then partial recovery. With investor money drying up, many companies have switched attention to sustainability and profits. Inevitably, this has meant cutbacks on promotional expenditure, slower growth, and even shrinkage of the business. Also large-scale staff sackings, making for a different set of headlines.

Few among even the household names are as yet out of the red. Nykaa is, while Paytm is on the cusp, and Oyo hopes to be out of the red in a year or two. For many companies, including Byju’s, the promised turnaround is usually a couple of years away, while some promise operational profitability as an interim step — which really means that the cash burn continues. Still, the shift of focus from externally funded growth to sustainability will provide a reality check for the sector.

One must not miss the wood for the trees. There is a macro-economic side to the story in that some of the ventures have become substantial businesses and employ large numbers, including gig workers (who need legal support for a better deal). Besides, the bigger start-ups have changed the Indian marketplace, eased the operating environment for small businesses, and transformed consumer habits. Millions will find it hard to imagine life without instant digital payments, the near-instant deliveries of everyday items, dial-up cab services that make car ownership unnecessary, lower pharmaceutical costs, easier investing, and the rest.

While many are copycat operations modelled on ventures in the US and elsewhere, some of them have a technological depth that is promising. While Byju’s has stumbled and may well fall, one must hope that most start-ups learn to thrive in the changed context. The economy would be much less vibrant without them.