Is Byju’s revenue overstated?

The biggest newsmaker of the week has been the world’s most-valued Indian Ed-tech unicorn – Byjus. In this week’s newsletter we would analyze the reasons behind it. For brevity & readability, rather than quoting actual financial figures or terse accounting jargons, let us look at the underlying argument.

Byjus, started in 2011 as a CAT focused coaching institute which evolved into a full stack K12 education app, last raised ~$2.8 Bn at a valuation of ~$22 Bn. Byjus has made a series of acquisitions, the most notable of them being a billion dollar buy-out of physical JEE & NEET coaching brand Aakash Institute. This was on expected lines of other pure-play online players expanding their offline presence, after the pandemic induced enthusiasm and necessity for online learning had tapered off. Other big-ticket acquisitions in the past three years include Epic, Great learning, Toppr, GradeUp, Osmo, TutorVista, Whitehat Jr, LabinApp, Scholr, Tynker and GeoGebra.

From an investor standpoint, the growth story of Byjus or any other startup drills down to one single metric – IRR – Internal rate of return on the capital invested. IRR is dependent on the valuation jump the startup makes through successive fund raise rounds. In simple terms, investing 1 Cr at 10 Cr valuation brings me 10% stake in a business. In the next fundraise if the valuation jumps to 50 Cr, then simplistically, after dilution with let us say 8% stake, my 1 Cr becomes 4 Cr. The sooner it becomes, the merrier it is, as higher would be the IRR.

Valuation is the holy grail of the VC world as it is both an art and a science. Often, it is benchmarked as a multiple of the current revenue of the startup. SaaS platforms tend to command higher multiples as compared to operationally heavy service businesses. Thus, a software company with an ARR of ₹1 Cr, may command a valuation of ₹10 Cr (10x multiple) but a physical service business, such as a coaching institute, with an ARR of ₹1 Cr would not be valued the same.

Secondly, with a focus on hyper growth and scale, to command a dominant market position in the shortest possible time, profitability (unit economics) is given a miss. The focus on profitability is postponed to the future by founders & VCs alike, for short-term gains.

In the case of Byjus, both its revenue and costs (revenue drivers) for past financial years (FY 20 & 21) have been revised on the insistence of its auditor Deloitte. The old revenue figure for FY20 was reported to be ₹2800 Cr. The figures for FY21, due since Apr 21, also led to revision of FY20 figures, were released last Wednesday, hence the chatter in startup WhatsApp groups. The revised FY20 revenue is ₹2512 Cr and for FY21 is ₹2428 Cr. The total expenditure has increased from ₹2873 Cr in FY20 to ₹7028 Cr in FY21.

The expected reasons for the delay have been in the news since June as this report from The Ken argues.

At the heart of the matter is the accounting principle of revenue recognition. Should the revenue be booked completely as soon as sales happen or should it be spread over the delivery period of the services? E.g. If this newsletter was a paid subscription and I had taken an amount of ₹9000 from you for the next three years. As per the conventional accounting, INR 3k would be put as the revenue in the current financial year, as I have to write and ensure it reaches your mailbox every Sunday for the next two years. This entails a cost in terms of time & effort which goes beyond the current year.

On the other hand, if I was a tech startup, and had sold you a personalized AI newsletter bot for ₹90k for the next three years, which would have automatically sent a randomly generated newsletter to your contacts on your behalf, I would make an argument to book the whole or substantial part of the 90k amount in current financial year. I would argue the software is completely developed and works on an autopilot mode. Hence, there are no future efforts (costs) required to cater the offered service to the customer.

Byju, like other tech companies, made and persisted with a similar argument on revenue recognition. Specifically, for revenue classified as ‘education streaming services’. You can read Raveendran’s (Byjus’ founder) latest interview here. But Byjus’ argument becomes a bit unconvincing as ‘streaming services’ entails conducting live classes or sessions by teachers across grades. An operationally heavy service component.

Secondly, a major portion of Byjus’ subscriptions are financed through lending partners who transfer the complete subscription amount to Byjus after the down-payment made by parents. Byjus pays interest to the financiers on behalf of the parents and books the whole subscription amount as revenue whereas the interest paid is accounted as a finance cost. This has also been revised and now the interest component would be subtracted from the revenue figures itself.

Revenue recognition and its classification across various streams is of utmost importance. At ESV, as part of our startup scouting, investment due diligence, and long-term consulting engagements, we emphasize on segmenting revenue across identifiable streams and match direct costs attributable to each revenue stream. This makes the derived valuation multiple realistic. If one of the startup’s revenue streams is a low-margin business with significant direct cost, it should not be grouped together with a stream which isn’t.

Ecosystem Ventures This Week

Key Highlights – Events

We are happy to share that we were a part of the Central India Startup Summit, an event conducted by Headstart, a volunteer-driven organization supporting entrepreneurship and startups in India. Mr. Abhishek Sanghvi (Partner, Ecosystem Ventures) represented the jury and was also a speaker at the event, held in Indore (M.P.).

The major topics for discussion were how capital as a commodity is reachable in tier 2 cities and how experience is one of the major factors when a startup looks for funding.

Startup Funding Summary

Yulu, a Bangalore-based shared mobility startup, has raised $82 Mn in Series B funding from Magna International – Read More

DotPe, a Gurgaon-based fintech platform, has raised $55 Mn in a funding from Temasek, PayU Fintech Investment, Info Edge Ventures, MUFG Bank Ltd and Naya Global Investments – Read More

EPACK, a Noida-based outsourced design manufacturer, has raised $40 Mn in a funding from Affirma Capital – Read More

Nobel Hygiene, a Mumbai-based hygiene products manufacturer, has raised $17 Mn in a funding from Sixth Sense Ventures – Read More

Rephrase.ai, a Bangalore-based AI startup, has raised $11 Mn in Series A funding from Red Ventures, Silver Lake, 8VC and other HNIs – Read More

M&A Snippets

Mumbai-based beauty e-commerce platform Nykaa has acquired Delhi-based digital content platform Iluminar Media (LLB) for an undisclosed amount – Read More

Bangalore-based thrasio style startup Mensa Brands has acquired Silvassa-based peanut butter brand MyFitness for an undisclosed amount – Read More

Mumbai-based edtech startup upGrad has acquired Delhi-based corporate training platform Centum Learning for an undisclosed amount – Read More