Turmoil at Byju’s highlights hurdles for India startup scene

June 28, 2023 Bruce Langford

Even as India is being hailed as the next global growth story, a crucial building block for that success — its startup ecosystem — is getting pummeled.
Already stuck in a 15-month funding slump, India’s young companies are in danger of becoming collateral damage to the country’s highest-profile startup crisis in years.

Byju’s, India’s most valuable upstart, is in turmoil after missing a deadline on financial statements, skipping payments on a $1.2 billion loan and losing its auditor and some of its board members.

The imbroglio reveals some of the unique challenges faced by India’s entrepreneurs and may spook global investors.

The consumer market in India is characterised by more than a billion people with fast-growing but still relatively limited spending power, resulting in intense price competition that makes it harder for startups to reach profitability.

And domestic venture capital is scarce, meaning founders need to attract foreign investors who can stomach the market’s risks.

It also highlights shortcomings in corporate governance, especially during a years-long startup boom that fizzled in early 2022.

As venture funding was abundant and India was creating unicorns at an accelerating clip, Byju’s was among companies that enjoyed easy access to capital to spend on acquisitions and expansion, with their venture backers more focused on growth than earnings potential.
After that funding dried up, attention has turned to lapses in oversight at companies such as Byju’s, said Ronnie Screwvala, founder of rival UpGrad Education Pvt.

Governance and diligence has been low from all points of view,” Screwvala said.

Of course, it reflects on the entire entrepreneurial and investment ecosystem in India.

A Byju’s spokesperson declined to comment.

Other prominent startups that got entangled in recent scandals include fintech firm BharatPe, which sued its co-founder and his wife for allegedly embezzling and misusing company money, and auto-services provider GoMechanic, which faced allegations of revenue inflation.

The BharatPe case is pending and the people it sued have denied wrongdoing, while a GoMechanic founder has stated management “made errors in judgment as we followed growth at all costs.”

Sequoia Capital’s regional arm early this year started auditing its startup investments after such lapses rose, and this month, the US venture capital giant split off the unit into a separate firm.

Meanwhile, Prime Minister Narendra Modi’s push to make India a tech powerhouse is gaining traction on many other fronts — global firms from Apple Inc. to Samsung Electronics Co. are moving manufacturing to the country, while internet leaders Meta Platforms Inc. and Google are after its hundreds of millions of online users.

There are few signs, however, that startups are yet benefiting from that trend.

A sudden decline in tech valuations last year, coupled with rising interest rates and slowing economies, caused venture capital firms to push the brakes on new funding rounds, with emerging markets like India getting hit hard
For Byju’s, adding to that challenge was a sudden slowdown in demand for online education services.

While signups jumped during the pandemic, India’s cost-conscious consumers were quick to curb spending on its services once schools, universities and offices reopened.

Some moved to cheaper rivals
Cut-throat competition in India’s consumer market is an all-too-familiar problem for Apoorva Mishra, founder of Dusminute, whose app connects apartment-complex residents and office tenants with electricians and plumbers and lets users order groceries.

After relentless discounting by rivals made it hard to retain customers, the company decided to shut down and lay off its 200 workers late last year — only to be saved at the last moment by a group of angel investors.

By:ET

insidesmarket.com

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