UNICORNS & HEAVENLY VALUATION

There is something brewing up in Byju’s. The news is not authenticated yet by the company or auditors or the investors. If rumours are true, it will not only hit Byju’s badly but tarnish the shaky Indian ‘edtech’ sector. We have also been reading such news about Vedantu, Unacademy etc.

Byju’s’ has an expensive edtech course which is sold to customers who cannot afford to purchase it by onetime payment. Therefore, it ties the customers with financing companies to facilitate a loan, to be repaid trough EMIs.

In Byju’s case, due to variety of reasons, there are huge EMI default by its customers. Normally lenders, who finance customers to buy products, try to validate the capability of the individual to pay back the loan. For risky loans, they make stringent approval criteria or raise the interest rates. But if the company that sells the product guarantees to repay some or all of the loan in case its customers default, the financing company would loosen its terms, thus facilitating  more sales. This guarantee is called the first loss default guarantee or FLDG.

Byju’s (and its Indian peers) gained immensely from this arrangements. This drove the company’s sales in India northward.

The challenge has been that the households that are barely making ends meet, have often not been to repay the loans. And there are hundreds of thousands of defaulters now that were compensated by Byju’s to the financiers. 

Byju’s has a challenge to show these refunds in the book and due to this, Deloitte, the auditors of the company is not signing its 2020-21 balance sheet (it is more than 15 months now). This has now triggered panic amongst the edtech’s investors and rival edtech leaders.

It is for these reasons that RBI wants to clamp down on FLDGs. If that happens, lots of edtech loans might come on the radar. That is the major risk for Byju’s. This also would affect the impending IPO of Byju’s, and that can have serious ramifications for the investing companies. 

Apparently, FLDG has the same characteristics of the Sub Prime Lending of 2008 that started a global economic collapse. 

One tend to argue that like most of the Unicorns is in the country, Byju's is also a flawed case of valuation. It is  not different from what happened during dot com bubble. Our penchant for "Unicorns" is heading us for another financial disaster. One is still wondering how some of the Indian startups could become a unicorn in just 6 months. 

The astonishing figures of losses these companies make are often shoved under the carpet and VCs make merry by selling them among each other and finally selling to unsuspected primary market investors to their peril ! In fact in Kerala, we are criticised for not having "valuable" unicorns but only profitable companies. It is hoped that proponents of startup ecosystem will soon come out of the mythical world of heavenly unicorns, most of whom are nothing but lame donkeys with an artificial overgrowth