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Race to value Indian startups should not be reckless

As a popular saying goes, a crisis is all you need to separate the strong from the weak. The economic crisis in the form of rising interest rates and dwindling systemic liquidity is wreaking havoc on tech startups that have fed on years of easy money and tidal waves of investment abroad in the form of private equity and venture capital (PE/VC) inflows. One unicorn after another in India has withered under the pressure, but the woes in the spotlight are those of edtech leader Byju. The company’s results for 2020-21 were finally released last week after an 18-month delay. His auditor had demanded changes and two disturbing facts came to light. First, the company had happily recorded unearned income, due in the future but not yet earned, thus inflating its turnover and valuation. Byju’s has now recorded losses of 4,589 crores for 2020-21, based on consolidated revenue of only 2,428 crores, reflecting a recovery from previous years. He took other accounting liberties. It was also negligent, for example, in its treatment of the interest component paid to it to be passed on to associated lenders by underwriters who had taken out loans to cover their costs.

The second annoying thing about Byju’s account overhaul is the obvious lack of basic governance standards among unicorns that seem to have found favor with many legendary PE/VCs. In a surprising number of startups, institutional investors seem to have been willing to tolerate accounting indiscretions, human resources policy violations, or willful misconduct by the board of directors (sometimes extending even to the recklessness in financial flows) as long as the executive manages to maintain revenue growth at all costs, which would then result in higher business valuations. It would seem then that a profitable exit is the sole objective of their investment, even if such short-termism leaves the organization in ruins. Byju’s website boasts of a long list of top investors – Sequoia Capital, BlackRock, General Atlantic, Tiger Global, Tencent, Naspers Ventures, International Finance Corporation, among others – and yet not all of them have succeeded. to spot his bookkeeping quirks. or use their authority as big financiers to force a course correction.

The unfortunate outcome of the Byju episode will be the repercussions felt not only in the edtech sector, but throughout the startup universe. It goes without saying that India’s education sector, especially at the primary and secondary levels, needs significant investment; poor state and central governments unwilling or unable to invest the necessary sums have left a vacuum for the private sector to exploit. However, private players, especially edtech startups, displayed a confused sense of priorities. By using a hybrid platform to deliver education modules and even working with the state, they could provide a partial solution to a national problem by filling a gaping void in our social infrastructure. This newspaper is not against companies making profits on crucial services, but warns against a ruinous race for valuations that invites instability, hurts quality and lets other stakeholders down. The stock market listing revealed the inherent structural weakness of many unicorns, which includes suspicions of deliberate price inflation. The tech startup universe is supposed to thrive on innovation and the last thing it needs is the heavy hand of regulatory intervention.

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