The educational technology industry is rife with dramatic tales, and the story of Byju’s is no exception. Once valued at a staggering $22 billion, the edtech giant has found itself in a precarious position, slashing its valuation by 99% and seeking urgent capital infusion. This article takes a detailed look at the unfolding situation at Byju’s, the strategies it’s deploying to stay afloat, and the potential implications for its investors and the broader edtech market.
Contents
- An Overview of Byju’s
- The Rise and Rise of Byju’s
- The Valuation Dilemma
- The Desperate Need for Funds
- The Route to Fundraising
- The Rights Issue Explained
- The Investor’s Perspective
- The Possible Outcomes
- The Role of External Investors
- The Pharmeasy Precedent
- The Byju’s-Aakash Connection
- The Final Takeaway
An Overview of Byju’s
Founded by Byju Raveendran in 2008, Byju’s has grown to become one of India’s most prominent edtech companies. Known for its unique teaching methodologies and a diverse range of learning resources, Byju’s has made a significant impact on the Indian education sector.
The Rise and Rise of Byju’s
In 2021, Byju’s hit an all-time high, with its valuation reaching a whopping $22 billion. The company’s success was attributed to its innovative approach to learning, its technological prowess, and its ability to attract significant investments from global investors.
The Valuation Dilemma
Despite its success, Byju’s recently found itself in a precarious position, slashing its valuation by a shocking 99%. This drastic measure indicates a dire need for funds and signals potential trouble on the horizon for the edtech giant.
The Desperate Need for Funds
Given its precarious financial situation, Byju’s needs an influx of cash. While companies in such a dilemma could traditionally turn to banks for loans, Byju’s has already exhausted this avenue. The company’s founder even pledged his shares in subsidiary companies to raise funds, highlighting the severity of the situation.
The Route to Fundraising
With bank loans off the table and new investors seemingly uninterested, Byju’s turned to a rights issue. This strategy involves offering existing investors the first right to purchase new shares, thus giving them the opportunity to maintain their stake in the company.
The Rights Issue Explained
A rights issue works as follows: consider a company that has issued 100 shares at $10 each. If an investor purchases 10 shares, they own 10% of the company. If the company needs to raise more funds, it can issue additional shares at a discount. For example, it might issue another 100 shares at $1 each. This dilutes the existing investor’s stake in the company to 5%. To prevent this, the rights issue gives them the first right to buy the new shares and maintain their stake.
The Investor’s Perspective
From an investor’s perspective, a rights issue may seem like an opportunity. They can buy additional shares at a lower price and reduce the average cost of their shares. However, this strategy can be risky, especially if the company’s financial health continues to deteriorate.
The Possible Outcomes
Byju’s has reportedly raised $300 million through its rights issue, exceeding expectations. However, it’s important to note that the rights issue doesn’t necessarily reflect the faith of existing investors in the company. In many cases, existing investors may sell their rights entitlement to others, effectively exiting the company.
The Role of External Investors
The entrance of external investors can be a game-changer in such situations. For instance, in the case of online drug seller Pharmeasy, a new investor, Ranjan Pai of Manipal Hospitals, bought a significant stake during a rights issue. Similarly, Byju’s could attract external investors looking to acquire a stake at a discount.
The Pharmeasy Precedent
Pharmeasy’s rights issue provides an important precedent for Byju’s. Despite a significant discount on shares, many of Pharmeasy’s existing investors chose to sell their entitlements to an external investor and exit the company. This strategy allowed them to recover some funds, even if it meant taking a loss.
The Byju’s-Aakash Connection
Interestingly, Ranjan Pai, who emerged as a significant investor during Pharmeasy’s rights issue, had previously invested $170 million in Byju’s subsidiary, Aakash Educational Services. This investment saved Byju’s from losing the subsidiary to debtors and may suggest a potential role for Pai in Byju’s ongoing rights issue.
The Final Takeaway
The unfolding situation at Byju’s signals potential turbulence in the edtech industry. Whether Byju’s will secure a lifeline from opportunistic external investors or regain the faith of its existing investors remains to be seen. Regardless of the outcome, this case serves as a stark reminder of the volatility of startup valuations and the challenges of fundraising in a challenging economic environment.
