Byju's Impact On The Indian Startup Ecosystem

Private markets may not be in a funding winter, but the hike in rates has made the markets tighter since October 2021, when the Fed made the pivot to lower interest rates.

For the Indian startup ecosystem, can Byju's debacle add another shock? The answer has to be a resounding yes. There might be naysayers who will argue that good investments will find takers. But that is like rearranging deck chairs on the Titanic. That is like showing the price of Bajaj Finance in 2015 (up 72%) when the index itself suffered a 5% dropdown.

The obvious impact of a large, well-marketed, and well-owned private asset undergoing what it is, is that this will have ramifications. For valuations. For liquidity. For processes. But some of these might be for the better as well.

The unlisted markets, or private markets, as we call them, have come of age in India. Private deals are everyone's possibility these days, and the inflows into private deals were booming. But the start of the interest rate upcycle upset this apple cart significantly. The funding for startups in India dropped by 33% to $24 billion in 2022 as compared to 2021, according to a report by Bain & Company and the Indian Venture and Alternate Capital Association. As a result of the funding winter, many startups have been forced to slow down their growth plans or even lay off employees. And some have been forced to get hived off to better suitors at a fraction of their all-time high valuations.

A prime example of this is Nestaway, which Aurum Proptech acquired from the Tiger Global and Ratan Tata at a 95% discount from its peak valuation. But this is bigger than a relatively small startup having a valuation issue. This is Byju's, the big daddy of the startup ecosystem. And its impact will be different.

Byju's has been in the spotlight for all the wrong reasons over the past 12 months. The timeline of issues isn't pretty. From delaying filing its financial results for the year ended March 2022 to the subsequent valuation plunge in April—BlackRock reportedly cut Byju's valuation by nearly half to $11.5 billion in March and further to $8.5 billion in May—Byju's has faced some rough weather.

But the issues did not stop at funding and valuations, as by April 2023, the Enforcement Directorate had raided Byju's offices under the provisions of The Foreign Exchange Management Act, 1999. This was followed by a lawsuit in June 2023 by the lenders in the New York Supreme Court to accelerate repayment of the term loan to Deloitte. All of these would have an impact on the image of the Indian startup scene, even in isolation. But when these happen in a bunch, and that too in a little under 12 months with the largest Indian start-up, it may paint a very bad picture, whether we like it or not.

The founders have constantly been talking the issue down, with Raveendran and his wife and co-founder Divya Gokulnath talking about achieving profitability on a consolidated level by FY24 at the World Economic Forum in Davos in January 2023. However, people in the field believe otherwise as well.

Himanshu Khandelwal, MD of ASAS Capital, a boutique firm in Dubai involved in funding of private ventures in India and elsewhere assesses that independent of what happens at Byju's going ahead, the promising startups will get funding because the world at large is looking towards India. However, there would be near term repercussions to the funding in the tech startup world and the valuations at some of the other large startups due to tighter financial conditions. Another wealth outfit was a bit benign, saying that if Byju's manages to do a successful fund raise and a good listing of Aakash, there might be green shoots as well.

Of course, there will be exceptions to the potential fallout from issues at Byju's, as there are some seriously good businesses that are focused on solving the issue of profitably. Such a business model is not focused on burning cash to get subscribers and a promise of good times to come—the similarity of 'good times' to the 'king of good times' is unintentional here. The good part about the timing of this issue is that it happened when tech companies in the private sector realised that they needed to alter their business models to show not just promise but also profits and cash flows.

The thought that 'turnover is vanity, profit is sanity, and cash is a reality' has already come to the fore. And it is also evident in the behaviour of the listed market behemoths. Both Paytm and Zomato have realised this and are harping on the arrival of profitability sooner rather than later. Its just a matter of time before all the others start doing the same.

There are lessons here. A senior banker pointed to Byju's as a fine example of excesses in private markets, and how people will learn from its mistakes and hopefully implement them at their firms.

Aggressive accounting will get frowned upon, there will be more due diligence for startups, and in the case of large startups, institutional investors will set up more stringent processes and there will be a reduction in inorganic growth moves. May the good will outweigh the bad. It's a seriously good, thriving space, which can do with all the luck it can get.

Fingers crossed.