Byju’s, which arose as perhaps one of the most dominant start-ups after Flipkart, is on a slippery slope. Issues like defaulting on loan settlement, handing over pink slips to thousands of employees, delayed release of FY22 financial statements, the resignation of the auditor, and, the exit of three external board members without giving specific reasons raise serious questions vis-à-vis corporate governance. And it does not augur well for the start-up ecosystem, which has thrived on easy money flowing in from foreign investors. Pathetic governance and scam will put off financiers making it all the more difficult for the honest ones to raise money.
If the pandemic years had spawned hopefulness for domestic start-ups to make a mark in India, the year 2023 is turning out to be nightmarish for them. Byju’s, the most well-liked, homegrown EdTech titan, recognized as the flag possessor of India’s start-up ecosystem, has run into rough weather. Its action of handing over pink slips to thousands of employees and the exit of external board members did not augur well for the start-up environment. The resignation of the auditor was the final nail in the coffin.
There is a picture being painted by a few industry experts that the whole entity may be sold off to an old-fashioned firm that is considering moving into the education or Edutech business. That raises the vital question: how did Byju’s get into this kind of trouble?
It would be comfortable to give an easy answer – the problems originate from Byju Raveendran’s misadministration of the company, his plentiful unhealthy acquisitions, floppy financial controls, a noxious work philosophy, and other such matter. The hostile tactic for quick development through inorganic direction by acquiring over and above 17 companies across geographies and its failure to stick to accounting and ethical standards in pursuit of expansion should have led to the present sordid state of affairs. Byju’s would have gotten into a dilemma sooner or later because of these matters and, the funding winter in start-ups only triggered the crisis. Byju Raveendran’s management is no doubt the main cause behind the company’s troubles. But the very fact that he could get into this big a mess before things blew up despite warning signals being available for quite some time is a good example of the way Venture Capitalists (VCs) have slanted the start-up playing field.
Why Do Many Start-Ups Fail?
The start-up domain is frequently appreciated as the spring of innovation and entrepreneurship. However, one of the biggest challenges facing start-ups now is the exorbitant rate of failure. According to research, only one in ten start-ups survive for ten years. In recent years, there have been numerous high-profile instances of start-ups disappearing, leaving investors and employees high and dry. According to news reports, more than 2,000 start-ups shut down in India in 2022, an upsurge of 20% from 2021. So why do many start-ups fail?
There are four main reasons for the collapse of start-ups. Firstly, a start-up’s product or service may flop to harmonize the requirements of its target market. It could be because of a lack of market study, a misapprehension of the target market, or a market change. Secondly, Indian start-up founders have not handled investors’ money with the same level of carefulness as their Western counterparts. In a few start-up cultures, it is seen as acceptable to involve in unethical or illegal practices which can be labelled as the culture of silence.
Thirdly, some start-ups collapse because they flourish too quickly. It can lead to cash flow issues, employee fatigue, and a loss of focus. It is also because of the impractical aspirations of the founders. Start-ups rely largely on brilliant people to produce innovation, implement business strategies, and circumnavigate the competitive terrain. However, Indian entrepreneurs have significant problems in attracting and retaining brilliant workforces. Due to restricted resources and hard-hitting competition from established entities, start-ups often struggle to acquire outstanding people.
Fourthly, navigating the complicated governing landscape in India is frequently a scary task for start-ups. Cumbersome bureaucratic procedures and unclear policies can curb innovation, obstruct growth, and enhance compliance costs for start-ups. The start-up network in India is ferociously competitive. Lack of product distinction, failure to build a distinct value proposition, and entry into crowded markets with established incumbents can all lead to start-up failure.
Government Must Act Now
The crumbling of homegrown Edutech giant Byju’s is a hindrance to India’s start-up network. Byju’s, which arose as perhaps one of the most dominant start-ups after Flipkart, is on a slippery slope. Issues like defaulting on loan settlement, handing over pink slips to thousands of employees, delayed release of FY22 financial statements, the resignation of the auditor Deloitte Haskins & Sells, and, the exit of three external board members without giving specific reasons raise serious questions vis-à-vis corporate governance. And it does not augur well for the start-up ecosystem, which has thrived on moderately simpler norms, fewer compliances, and hordes of easy money flowing in from foreign investors.
Nonetheless, Byju’s case is not an exceptional one. Reports of non-compliance, financial unseemliness, and misconduct in start-ups have become a daily affair. Healthtech start-up Mojocare is facing inspection from its investors after they discovered financial wrongdoings. The investors have initiated an evaluation of the company’s financial statements. Online car service and repair start-up GoMechanic, too, faced analogous concerns, and it admitted to financial reporting blunders. There are many more cases: Ankiti Bose, former Zilingo CEO, and Ashneer Grover, former MD and founder of BharatPe, were forced to quit after charges of financial irregularities. What makes matters worse is the full-blown public fight between these founders and the investors.
Well-times public disclosure of audited financial results is essential to confirming good corporate governance and guarding various stakeholders, comprising creditors, lenders, and investors. While regulators are generally efficient in guaranteeing compliance with the Companies Act in listed companies, they appear to be sleeping at the wheel when it comes to unlisted ones, particularly start-ups.
Despite several governance slipups, Byju’s succeeded to nurture around $6 billion from marquee investors such as Sequoia Capital, Tiger Global, and Chan Zuckerberg Initiative and was valued at $22 billion in March 2022. Byju’s example exhibits that regulators must be thoughtful about imposing compliance with the Companies Act in unlisted companies, too.
While how Byju’s has been breaking rulebooks came into the spotlight recently, regulators have been aware of these gaps for some time. Manifold grievances had been received by authorities including the Ministry of Corporate Affairs (MCA), Serious Frauds Investigation Office (SFIO), and The Institute of Chartered Accountants of India (ICAI) in 2022, over supposed uneven accounting practices in the company. The MCA had written to the company in August 2022 necessitating to know why it had delayed filing its accounts for FY21 beyond the legal time limit of six months from the end of the financial year.
The Financial Reporting Review Board of the ICAI started the review of the company’s financial statements for 2019-2020 and 2020-2021 in December 2022. The question is, why did the authorities not take rigorous action? The auditors too should have raised the red flag earlier, rather than wait for eight months after the due date for disclosing results for FY22. While there could have been apprehensions among regulators over the influence of any action on their part on the start-up funding network, more damage appears to have been done by their inaction or indecision.
Even if banks or financial institutions are not directly advancing to these start-ups, there is definitely public interest involved here as these start-ups employ people in the thousands and they symbolize the face of the industry in India. Pathetic governance and scam will put off financiers making it all the more difficult for the honest ones to raise money. It is time that the government applies its mind to a process for ensuring corporate governance in the start-up sector.