Generally, the way that tech startups work is they raise money at a multiple of how much revenue they make, which they invest into their business to increase the revenue, which they then use to raise money at a higher valuation. This cycle goes on until they run out of people with money who agree with their valuation, at which point they usually go public, and promptly lose most of their valuation. In the past, I’ve likened this phase to foie-gras, where startups are fattened and the bulk of the value is extracted by private investors, while public markets get little. 

Anyway, Byju’s also follows a similar model, except it added steroids to the fattening phase. It did this by taking investor money and using it to drive acquisitions, which gave it a higher revenue overnight, which it used to raise money at a higher valuation—you get it. 

Cumulatively, in its lifetime, Byju’s raised somewhere around US$5 billion. 

As of June last year, it had spent over US$3 billion on acquisitions alone.

Of course, not all of these were in cash, but the playbook is simple. 

One example of this valuation arbitrage is WhiteHat Jr, the company that Byju’s acquired for around US$300 million (they later paid around US$235 million for it). 

At the time of the acquisition, WhiteHat Jr was making just over US$2 million in revenue. 

While the idea of a 100X revenue multiple for a company that teaches coding to kids sounds ludicrous for a private investor, from Byju’s standpoint, this was a financial decision that made sense because it would help boost their valuation even more, unlocking future capital (and cash flows) at favourable terms. 

But this stream of acquisitions meant that Byju’s needed capital to do two things—to buy companies and to finance their operations. The more acquisitions they made, the deeper both of these holes became, especially because most of the companies they were acquiring weren’t profitable. 

And then Byju’s went a step further, and went to the debt market. In November 2021, it went and raised US$1.2 billion as a term loan from some institutions. 

Term loans work a bit differently from bank loans. They don’t require the borrower to pay in instalments, and the bulk of the payout happens at the end of the tenure, which in Byju’s case was 2026. So lenders offset this risk by adding all kinds of covenants and riders which act as signals about whether the borrower is in a position to repay the loan at the end of the tenure. Typically, one of the things lenders do is to add a maintenance covenant, which sets an expectation that the borrower’s business will generate a certain amount of Ebitda, failing which the borrower must do a part-repayment or accept an increase in the interest rate.

We don’t know all of the maintenance covenants that Byju’s signed for this term loan, but we know one of them—and that one required Byju’s to get this term loan rated by a rating agency within nine months of the loan. Failure to do so would increase the interest rate of the loan.

Well, the months went by and Byju’s discovered that there was a problem. If it needed to get the loan rated, it needed to share its financials with the rating agency, which would help figure out how the business was doing. And well, last year, The Ken broke the story of why Byju’s auditors weren’t signing off on its financial statements. 

The nine-month deadline passed, and as far as we know, the term loan was unrated. 

By September, in the debt markets, Byju’s term loan was trading at 64 cents on the dollar. Term loans are often securitised, i.e., it’s packaged and sold and people can buy it from the original lenders. In fact, hedge funds love picking up distressed debt like this. Anyway, we don’t know who traded and who bought how much of Byju’s debt, but we do know what happened next. Some of the buyers insisted on an immediate repayment from Byju’s. 

Bond markets are interesting. If you buy on cents on the dollar, you make money only if you sell high. And the only way you can do that is if you are able to get the company to the table to make concessions that convince other buyers on the bond market that this company is less risky than it looks. It’s usually a negotiating tactic, but it can get messy. 

Of course, all of this came as a surprise for Byju’s, who probably didn’t expect to be sitting across the table negotiating with random people who picked up their term loan from the debt market when the price crashed because Byju’s hadn’t filed its results on time because Byju’s auditors hadn’t signed off on its results on time because it had done too many acquisitions because it wanted cash at a high valuation. Whew. What a domino effect. 

As the Bloomberg story notes, back in December, the Byju’s term loan was trading at 80 cents on the dollar. This is essentially the borderline of what is traditionally defined as a distressed debt asset. Yesterday, thanks to a source who has access to the market data, I found out that Byju’s term loan is still trading at 81 cents to the dollar mark, so it doesn’t look like much has changed on the lending side. 

Anyway, Byju's is in the market looking for cash, likely because the term loan is getting expensive and annoying and it wants to put a lid on it. It raised US$250 million in October last year, but most of that went in paying off Blackstone from whom it had bought Aakash Educational Services. And for a CEO who said last year that he could raise US$300 million “in a week”, well, things are getting harder. 

Which finally brings us to the one exception in Byju’s entire portfolio. 

Aakash Educational Services. 

Aakash is not like other edtech companies. In fact, one can even argue it’s not an ed-tech company at all. It’s mostly an offline business (my colleagues Olina and Vandana wrote about this) which gives it slow but predictable growth and profits. At a time like now, Aakash is the jewel in Byju’s crown. 

And Byju’s has been using this valuable asset to meet its funding goals. In fact, earlier this month, there were reports that Byju’s was looking to raise funding by offering convertible notes for… Aakash. This is telling because it indicates that for many investors, Aakash’s equity is much more valuable than Byju, because it represents a genuine possibility of an upside. So Byju’s is there, trading that off in order to get the cash it needs today. 

In this respect, the conversations with Unacademy make sense. The Moneycontrol story also reported that Byju’s would have received a cash infusion of US$100 million as a result of the deal—money that I imagine it really needs right now. In addition, the merger gives Byju’s the best of both worlds, an opportunity to list Aakash plus Unacademy together. Aakash’s physical business drives the cash flows and looks profitable. Unacademy’s digital story drives the valuation. It’s a good match. 

At any event, it’s possible that talks may have been held at some point, but for now, Byju’s appears to have staved off its cash requirements by doing two key things, both of which happened this week. 

Here’s the first one.