Investors Likely To Get Stricter With Startups Amid Byju's Turmoil

The crisis at edtech giant Byju’s has reportedly triggered scrutiny of revenue recognition practices among Indian edtech startups.

What Happened? Investors and advisors of India’s startups are now examining factors such as revenue recognition, treatment of discounts and cancellations, and the revenue mix between subscriptions and hardware sales, Moneycontrol reported, citing sources.

Concerns have arisen due to Byju’s aggressive revenue recognition, delayed audits, and a marginal revenue decline in FY21 despite COVID-19 pandemic-driven growth in that financial year. These issues have raised questions about the company’s financial practices and transparency.

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The biggest edtech company in the world has been hit hard by a string of high-level management exits and the resignation of its auditor, Deloitte, which cited a delay in the submission of the online tutoring company’s financial statements. At the same time, Byju’s has been wrestling with lenders of a large term loan, refusing to pay them $40 million (₹327.6 crore) in interest.

Meanwhile, the company’s valuation was also slashed by over 75% to $5.1 billion (₹41,735 crore) by Netherlands-listed investment firm Prosus.

In light of Byju’s troubles, Investors are reportedly shifting their focus to more trustworthy metrics such as net revenue, profitability, and EBITDA. Metrics like annualized revenue run rate (ARR) and gross bookings may lose prominence as investors prioritise more sustainable financial indicators.

The evaluation of edtech start-ups will also now likely consider cancellation rates and retention rates as critical factors, an investor told the business publication. High cancellation rates and low retention rates can impact the reliability of revenue figures and the overall financial health of the company.

The increased scrutiny on revenue recognition practices and financial metrics may lead to a lengthier fundraising process for edtech startups as investors become more cautious, and investment metrics are expected to undergo significant changes.

Moreover, the scrutiny of revenue recognition practices will also have implications for Indian start-up valuations as it could become more challenging for edtech start-ups to secure funding at inflated revenue multiples as investors seek transparency and sustainable financial performance.

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