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hi everybody in 2011 a company that just
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started with 25 students went on to
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become one of the most valued startups
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in Indian history in just 10 years by
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2021 not just Millions but hundreds of
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millions of students were using the
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resources the greatest star in the
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country was endorsing them and within no
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time it became an epitome of the booming
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edtech industry of India this company as
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we all know is by the Corona virus
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pandemic has disrupted education AC
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across the world there some families are
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struggling to adjust as the Corona virus
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crisis grows online education
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platform over the last so many years we
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are touching 150 million students across
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the world our lead story tonight is
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about B one of India's most celebrated
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unicorns today it is a startup engulf in
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a crisis BYU continue to be in focus a
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month after firm's investor forus
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resigned from BYU's board BYU is under
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the radar for alleged violation of
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India's foreign exchange
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laws in the last two years B has seen a
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dramatic downturn the Press has gone
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crazy about their functioning the
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company is dealing with investor
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troubles an auditor and multiple board
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members have left they've laid off
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thousands of employees and most
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importantly they've been bleeding with
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thousands of crores in losses BYU posted
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a loss of $327 million the company saw a
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loss of over 4,500 CR rupes the losses
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have gone up more than 15, times to come
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in at
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4,564 CR and during this time their
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valuation has dropped from $22 billion
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in 2022 to below $3 billion today this
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is because Baus took some bold steps
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that did not pay off as much as expected
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so if you're a business leader
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regardless of the domain you belong to
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listen to this case study very very
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carefully because the lessons from this
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case study will help you escape a
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miserable failure so in this episode
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today let's do a deep dive and try to
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understand what what is the story of
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Baus what are the challenges that they
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are facing and what are the lessons that
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we need to extract from the operations
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of this giant edtech
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company but before we move on I have an
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and now on with the
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episode this is a story that dates back
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to 2011 when a popular teacher named
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named ravindran and his wife Diva
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started byes with the goal of preparing
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content for school students and also
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wanted to cater to the test preparation
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market then in 2015 they launched their
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learning app and in 2016 the company
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claimed that its app was downloaded more
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than 5.5 million times in the last one
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year out of which 250,000 consumers were
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paid annual subscribers and from there
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on their user base kept on exploding by
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2019 they had 40 million users by 2021
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they had 80 million users and today they
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have around 150 million users during the
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same time their revenue had grown from
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110 cres in 2016 to 500 cres in 2018 to
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2,428 crores in 2021 and as per the last
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audit it stood at 3,569 crores in 2022
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this Revenue came from three sources
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sale of tablet and SD cards sale of
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reference books and tution and service
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fee during this time the valuation of
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BYU's skyrocketed to hit2 $2 billion and
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BYU became a benchmark for all et
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companies to follow B valuated over $22
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billion in October 2022 India's most
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valued startup at $22 billion the golden
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eyed boy of the Unicorn Club CEO BYU
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ravindran said in a statement and I
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quote baiju is now at that sweet spot of
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its growth story where the unit
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economics and the economies is of scale
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both are in its favor but you know what
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guys while on one side they were killing
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it with thousands of crows in revenue on
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on the other side their losses also shot
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up from 49 crores in 2016 to 2 49 crores
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in 2020 and then it shot up by 18x to
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touch
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4,588 cror in 2021 as per the most
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recent filings their fi 22 losses are
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2,253 crores so the question is how did
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this company incur such heavy losses
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well the first and the most obvious
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reason of all was their marketing budget
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their advertising and promotional
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expenses was their single largest cost
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cost in fi21 and if you see this table
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business promotion expenses alone
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accounted for 32% of their total
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expenses from title sponsorships in IPL
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to the FIFA World Cup from bringing Shah
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ruk Khan as its brand ambassador to even
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getting lonel Messi it was spending more
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on Advertising than its own employees
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and operation in fact in 2021 while they
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spent 22509 for crores in marketing
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their revenue itself was
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24283 crores now is this bad well well
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not really because every company has its
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own way of functioning but is the
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revenue to marketing expense ratio risky
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absolutely yes and as we move ahead you
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will see how this snowballed into a
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catastrophe for the company this is
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where their second challenge came in
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which was their sales practice some
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parents accused BYU's marketing
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Personnel of instilling fear in them
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about their children's future in this
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highly competitive World these tactics
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eroded trust and created a negative
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perception of the company one India's
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most celebrated unicorns today it is a
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startup engulfed in a crisis most
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egregious Act was when customers who
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bought courses on loan requested
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cancellations and refunds according to
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Hindu Frontline sales associates were
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asked to find leads everywhere they
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would visit schools malls and even
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temples to persuade people to sign up
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this also included the low-income
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workers from Market sellers to even rsha
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drivers according to rest of thee
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world.org even at a local chai stall a s
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to ask the seller if he had children and
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if he wanted them to have a better
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education and a better life if yes then
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he must sign up for by juice and once
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users installed the app they were asked
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to sign up for a 15-day free trial using
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a mobile number and once byus had this
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mobile number their sales teams would
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consistently follow up and they would
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persuade the parents to buy a
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subscription now again is following up a
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problem not at all but furthermore
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according to Hindu front line employees
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revealed that BYU put them under immense
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pressure to make their weekly sales
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targets of 1 lakh rupees or else they
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would be fired as a result according to
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Hindu front line they made misleading
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statements to parents and frighten them
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into believing that their children would
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fail if they didn't purchase a byju
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course or they would push them to buy a
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multi-year package now the question over
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here is even if the salesman was very
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pushy when the courses cost as high as
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1.35 lakhs for J prep how could people
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with low incomes offer these courses
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well as a turns out many people were
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buying this course by taking out a loan
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Yes you heard that right people were
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buying these courses by taking out a
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loan an investigation by Ken analyzed
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110 consumer complaints and they found
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that 54 of these people were unaware
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that they were being signed up for loans
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when they signed up for subscriptions
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and the problem was that the average
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ticket size of these purchases was
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66,000 rupes and they have to pay
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interest if they pay in parts now the
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question over here is how did this
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lending happen happen so easily because
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taking out a loan in India is a very big
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hassle especially if you have less
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income right then how did these people
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with less income end up getting loans so
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easily well this is where Buu's lending
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Partnerships came in Buu used something
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called the first loss and deposit
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guarantee strategy in simple words this
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is an arrangement between a third party
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and a financial institution whereby the
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third party garantees to compens the
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lender if the borrower defaults in this
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case BYU acted as a guaran for its
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customers who borrowed from its
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financing Partners so if the customer
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defaults then buus would be liable to
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make the loan repayments this is the
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reason why the financing Partners were
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very easily able to lend money to people
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even with low incomes this is the second
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challenge that the company faced where
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some desperate salesman got over pushy
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and eventually because of first loss
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deposit guarantee people started taking
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up loans to buy these courses but
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regardless of that from the business
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standpoint when multiple such cases of
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forced sales pushy follow-ups and Loan
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stories came up many customers of BYU
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started losing trust in the brand so the
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Second Challenge was loss of reputation
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and Trust because of their sales
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methodology now until this point this
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story could still be discarded as the
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story of a few handful of customers so
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for a billion dollar company a few bad
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customers are not a big deal at all but
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this is where things go really crazy
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with their accounting practices the
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startup which lived the dream and is now
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in the dumps the CEO Buu ravindran is
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being blame for mismanaging the firm's
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growth the one's highflying startup has
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failed to file its Financial accounts on
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time investors have accused byj of
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hiding half a billion dollars which has
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been troubled by mass layoffs mounting
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losses valuation cuts and several other
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issues there are allegations of Foreign
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Exchange violations by is being probed
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for this how by has uh not paid
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attention to business fundamentals in
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its growth journey us in accounting
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there is a very simple concept of
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Revenue recognition and this is called
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as acrel principle and this principle
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states three key points number one
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revenues are to be recognized when they
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are earned and not when they received
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for example if think school sells a
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course to a student on credit in 2021
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and doesn't receive payment until 2022
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then the revenue would still be recorded
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in 2021 when the sale was made similarly
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if the student pays 40,000 rupees for a
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2-year course in 2021 with each year of
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the course costing 20,000 rupes the
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revenue must be recorded as 20,000 R for
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20 20 21 and the rest of the 20,000
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rupees must be recorded as revenue for
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the year 2022 similarly if a business
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received a utility bill in 2021 but paid
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it in 2022 the expense would be recorded
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in 2021 when the service was used and
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not in 2022 but as it turns out
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according to money control BYU did not
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record revenues like this since BYU
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takes the fees of 2e or threee courses
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in the first year itself it would record
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it as revenue of that year itself
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instead of splitting it in 2 to three
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years so it's it's like if a customer
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paid 60,000 Rupees for a three-year
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course in 2021 to think school then the
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entire 60,000 Rupees was recorded in
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2021 itself now what is the problem with
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this practice when the investor looks at
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the balance sheet it inflates the
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revenue and makes it look like byj is
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scaling up exponentially this is the
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reason why deoy asked him to defer 40%
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of its Revenue that it recorded in 2021
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to both 2022 and 2023 and because of
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this the company had to record
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significant losses in 2021 on top of
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that when the covid lockdown ended while
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many students suddenly chose to leave
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the course and went back to offline
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classes many left due to negative
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reviews and publicity this is when Buu's
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sales started going down as you can see
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in this chart Buu's Revenue declined by
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38% from 2020 to 2021 in India but at
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the same time their us business grew by
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133% and in the Middle East it grew by
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103% and guess what while all this drama
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was going on BYU went on a shopping
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spree to acquire companies one after the
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other you've paid two times sales for
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white hat Junior uh their annual run
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rate being 115 million and you've paid
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out cash of 300 million now agreed you
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have cash on the books India's Ed Tech
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startup by is acquired coaching Center
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Chain Akash do you know for how much
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close to $1 billion $1
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billion so in the past few years Buu
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went on to acquire companies like
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Whitehead junor akas Education Services
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and 17 other companies while whad Junior
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was acquired for $300 million at EPC was
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acquired for $500 million and Akash was
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acquired for $950 million so while they
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experienced substantial growth in user
00:13:36
numbers they also faced increasing
00:13:39
expenses on top of that not all these
00:13:41
companies were profitable so along with
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users they also got more losses from
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their acquired companies this was the
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third challenge that the company was
00:13:49
facing which were the losses from
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acquired companies now even here we can
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argue that Bas could easily turn these
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companies into a profitable Venture
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because of their distribution and skill
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but you know what guys this is what
00:14:00
brings us to another risk that Buu took
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up which is something called Term Loan B
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and this is what made things very very
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difficult for BYU to tell you about it
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in 2021 the United States was offering
00:14:13
loans at near zero interest rates if you
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remember this is because they printed
00:14:17
trillions of dollars because of which
00:14:19
the interest rates in the US touched
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rock bottom and this was a very very
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attractive offer for both startups and
00:14:25
VCS so with this attractive offer by
00:14:28
just took up $1.2 billion in loan but
00:14:31
you know what guys this loan wasn't just
00:14:33
any loan it was a Term Loan B in simple
00:14:37
words it is a loan which requires small
00:14:39
installments and is followed by a large
00:14:41
bullet payment at the end now the
00:14:43
technical definition of Term Loan B is a
00:14:45
little complicated so let's understand
00:14:46
this using a story let's say a company
00:14:48
called X took a Term Loan B of $100
00:14:50
million let's say the interest rate is
00:14:52
set at 5% per anom and the term loan is
00:14:55
only for 6 years for Simplicity let's
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also assume that that the interest is
00:14:59
calculated annually so the payment
00:15:01
structure of this loan will look like
00:15:03
this at the end of year 1 x will pay 1%
00:15:05
of the principal which is $1 million
00:15:08
plus 5% interest on this principal
00:15:10
balance which is 5% of $100 million
00:15:13
equivalent to5 million so the total
00:15:16
repayment would be $6 million at the end
00:15:19
of year two x will again pay 1% on the
00:15:21
principal that is $1 million plus 5% on
00:15:25
the remaining principal balance that is
00:15:27
$100 million minus $1 million which is
00:15:30
$999 million so 5% of $99 million gives
00:15:34
us an interest of $4.95 million so the
00:15:38
total repayment for year two is $4.95
00:15:40
million + $1 million equal to 5.95
00:15:44
million this will go on till the last
00:15:46
year and this is when X will pay the
00:15:49
company the entire remaining amount of
00:15:51
$95 million in one shot and pay the
00:15:54
interest of 5% on $95 million this is
00:15:57
how the transac action will be complete
00:15:59
so you see the installments are small
00:16:02
but are followed by a large bullet
00:16:05
payment now do you see the risk over
00:16:07
here most of the principal payment is
00:16:09
done at the end and this increases the
00:16:11
risk for the lender because in between
00:16:13
this time if the borrower company goes
00:16:15
bankrupt then the lender will lose all
00:16:17
the money so the risk for the lenders is
00:16:19
very very high right this is why to
00:16:22
mitigate this risk the lenders do three
00:16:24
things number one they demand High rates
00:16:26
of Interest number two the banks sell
00:16:28
these loans to institutional investors
00:16:30
who are willing to take up such high
00:16:31
risks and finally they attach some very
00:16:34
stringent terms and conditions in
00:16:36
baiju's case they were asked to get this
00:16:38
loan rated by two Credit Agencies like
00:16:40
Moody's or fit they were asked to
00:16:42
publish their audited 2021 Financial
00:16:45
results on time and several such
00:16:47
conditions were applied but guess what
00:16:49
this is the timeline of the drama that
00:16:51
followed according to Economic Times in
00:16:53
November 2021 Baus raised $1.2 billion
00:16:56
of Tom loan B in July 22 BYU said that
00:16:59
it will announce its delayed audited
00:17:01
financials in August the MCA itself sent
00:17:04
Buu a letter over a 17mon delay in
00:17:07
filing results and then finally in
00:17:09
September BYU announced the results
00:17:11
where the investors saw that the losses
00:17:13
had risen by 18 times to 4,588 crores
00:17:17
Meanwhile they closed $250 million in
00:17:20
financing from existing investors then
00:17:22
in December 2022 the creditors sought an
00:17:25
immediate Term Loan B part payment this
00:17:27
is when in March 201 3 BYU offered to
00:17:30
pay a high interest on Term Loan B to
00:17:32
renegotiate the debt financing so then
00:17:34
the lender sought up to 200 million
00:17:36
dollar with higher interest from Baus
00:17:38
for restructuring again parall Baus
00:17:41
raised another 2,000 crores from
00:17:43
Davidson Kempner and then finally the
00:17:45
creditors pulled out of the negotiations
00:17:47
to recast the term loan P then on 6th of
00:17:50
June 2023 BYU defaulted on the loan
00:17:53
repayments and sued its creditors
00:17:56
meanwhile another thing that happened
00:17:58
was the Russia Ukraine war and this
00:18:00
pushed the interest rates of Western
00:18:01
countries so high up that the base
00:18:04
interest rate went from 0.2% to
00:18:07
5.85% and this increase in interest
00:18:09
rates increased the installment amounts
00:18:11
for many companies that borrow during
00:18:13
low interest times if you remember this
00:18:16
is exactly what happened with the
00:18:18
Silicon Valley Bank on top of that if
00:18:20
you look at this graph as the interest
00:18:21
payments were missed the prices of this
00:18:24
Term Loan B had dropped drastically from
00:18:26
99 cents on the dollar 2022 to as low as
00:18:30
49 cents in September this year all this
00:18:33
brought back lenders to the negotiating
00:18:35
table and recently Baus came out with
00:18:37
saying its Term Loan B would be repaid
00:18:40
by March next year but we can only wait
00:18:42
and see what exactly happens and as if
00:18:45
this was not enough their auditor deoy
00:18:48
and three other board members resigned
00:18:50
BCCI has dragged them to court over
00:18:52
sponsorship issues they've been accused
00:18:54
by the enforcement directorate of
00:18:55
Foreign Exchange violations of over
00:18:57
9,000 CR
00:18:58
and they've also been struggling to pay
00:19:01
their employees this is a story of Baus
00:19:04
where heavy marketing accounting
00:19:05
practices sales methodology fast-paced
00:19:08
acquisition and Term Loan be together
00:19:11
they've put up a massive challenge in
00:19:13
front of Buu so now what remains to be
00:19:16
seen is how will BOS come out of the
00:19:18
situation and claim their position as
00:19:20
the market leader in India and this
00:19:22
brings us to the last part of the
00:19:23
episode and that are the lessons that we
00:19:25
need to learn from the challenges and
00:19:26
operations of Baus lesson number one
00:19:28
marketing is a double-edged sword on one
00:19:31
side while it may look like the primary
00:19:32
instrument of Revenue growth if not used
00:19:35
properly it could bleed your company
00:19:37
with losses lesson number two while good
00:19:39
businesses focus on the speed of scale
00:19:42
great businesses focus on the
00:19:44
uncompromised value and impact of their
00:19:47
products while they scale and lastly
00:19:49
Warren Buffett once said it takes 20
00:19:51
years to build a reputation and 5
00:19:53
minutes to ruin it if you think about
00:19:55
that you will do things differently in
00:19:57
this case days we saw how things shaped
00:19:59
up with BYU its investors and its
00:20:01
customers due to its practices this is
00:20:04
the story of BYU and I just hope you
00:20:06
learn something valuable from this case
00:20:08
study that's all for my side for today
00:20:10
guys if you learn something valuable
00:20:11
please make sure to hit the like button
00:20:13
in order to make you baba happy and for
00:20:15
more such insightful business and
00:20:16
political case studies please subscribe
00:20:18
to our Channel thank you so much for
00:20:19
watching I will see you in the next one
00:20:27
bye-bye
00:20:29
[Music]
00:20:34
n
