Edtech giant BYJU’S is facing a deepening crisis as major investors have called for an extraordinary general meeting (EGM) seeking to remove founder Byju Raveendran as director, while its US subsidiary has filed for Chapter 11 bankruptcy protection.
Investors Call for Removal of Founders from Board
Several major investors in BYJU’S, including Prosus Ventures, Oxshott Ventures, Edelweiss, Verlinvest and others representing 22% of shareholding have sent a notice calling for an EGM to vote on removing Byju Raveendran and his wife Divya Gokulnath from the company’s board of directors.
The investors allege “persistent governance issues” and “lack of transparency” from BYJU’S founders, citing the company’s “[extremely delayed] financial reports” and valuation markdown from $22 billion to $5.5 billion as reasons for seeking their ouster.
BYJU’S has defended the founders, stating they enjoy the support of 80% of shareholders. As per their shareholder agreement, only a 75% supermajority vote can make changes to board composition.
However, the growing chorus of investor dissent indicates eroding confidence in the founders’ leadership amidst BYJU’S severe cash crunch issues. Employees faced delayed salary payments in January, with CEO Byju Raveendran apologizing and stating he is “moving mountains” to resolve the crisis.
US Subsidiary Files Chapter 11 Bankruptcy
Exacerbating BYJU’S troubles, its US subsidiary BYJU’S Alpha filed for Chapter 11 bankruptcy protection on February 1st.
BYJU’S had acquired Epic! Inc and rebranded it to BYJU’S FutureSchool in 2021. But the unit has been struggling financially, with liabilities exceeding assets by nearly $400 million as per its bankruptcy filing.
BYJU’S blamed its decision to optimize marketing spends and integrate Epic with its India business as reasons for Future School’s falling revenue.
But the bankruptcy indicates deeper troubles for BYJU’S global expansion plans. This comes right after BYJU’S had committed over $1 billion to acquire US-based reading platform Epic last year.
The Chapter 11 filing allows the company protection from creditors while it restructures debts and operations. But it remains unclear if BYJU’S will continue supporting the troubled US unit.
Financial Troubles Mounting
BYJU’S financial position has deteriorated rapidly after its hyper-growth and global acquisition spree was fueled by easy access to capital over the past few years.
But with funding drying up in the current environment, BYJU’S is facing a severe cash crunch.
- The company has delayed payments to creditors and partners for months. Employees only received 50% of their July-September salaries till December.
- BYJU’S is reportedly looking to raise $200 million equity capital via a rights issue, but at a valuation slashed nearly 95% to $2 billion compared to last year’s peak.
- Revenue growth has slowed to just 5% last fiscal year, while losses tripled to Rs 4,500 crore as per unaudited financials.
With accumulated losses exceeding its net worth, BYJU’S auditors have reportedly raised going concern risks over its ability to operate as a solvent firm.
The company however maintains it has reined in costs with measures like optimize media spends and job cuts. BYJU’S claims it has achieved profitability and will share audited financials soon.
But the severity of its troubles evident in the growing chorus of complaints from employees and creditors over late payments indicates BYJU’S liquidity position remains under stress.
What Next For BYJU’S?
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Leadership Change? – With investors seeking the founder’s removal, BYJU’S governance and transparency issues could worsen if their demands are not addressed. But effecting any CEO change may be difficult given founder Raveendran’s controlling stake.
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Raising Funds Critical – BYJU’S urgent priority is to raise capital and shore up its fast depleting cash reserves. But its plummeting valuation may make it difficult and expensive to attract investor interest.
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Cutting Costs – BYJU’S will need to optimize its inflated cost structure to align with slowing revenue growth. But the scope for drastic cuts remains limited given its high fixed costs.
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M&A Strategy Rejig – The US bankruptcy reveals flaws in BYJU’S global expansion strategy funded by easy capital. It may require substantial restructuring of its past acquisitions.
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Competitive Pressures – BYJU’S market share losses to rivals could accelerate as its brand image takes a beating amidst negative publicity over its financial troubles.
While BYJU’S still retains significant brand value and leadership in India’s promising edtech space, its founders face an uphill battle to regain investor trust and stabilize the sinking ship.
How the crisis unfolds in the coming weeks and months will determine the future course for the once high-flying unicorn.
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