Now that the Byju’s chapter has come to a sad close with the founder himself declaring that the company is worthless, it is time to examine what went wrong with juggernaut ? What does this teacher’s journey teach us? Are there any early warning signals to watch for in the future to avoid such episodes from recurring, which leave a lot of employees unemployed, a lot of debts unpaid and several investors a lot poorer?

The damage and repercussions of such big failures are not yet fully understood by the sector but readers must keep in mind that while it might be the most prominent, Byju’s is far from alone: many companies in the K12 edtech space have shut shop post pandemic and several have been in a rocky boat including large players like Unacademy and Vedantu. Layoffs have been a daily feature and several companies have been scrambling to keep themselves afloat. As per industry estimates, at least 25 Indian edtech startups, including all seven edtech unicorns, have fired close to 15,000 employees in the last couple of years.

Now that the Byju’s chapter has come to a sad close with the founder himself declaring that the company is worthless, it is time to examine what went wrong with juggernaut ? What does this teacher’s journey teach us? Are there any early warning signals to watch for in the future to avoid such episodes from recurring, which leave a lot of employees unemployed, a lot of debts unpaid and several investors a lot poorer?

The damage and repercussions of such big failures are not yet fully understood by the sector but readers must keep in mind that while it might be the most prominent, Byju’s is far from alone: many companies in the K12 edtech space have shut shop post pandemic and several have been in a rocky boat including large players like Unacademy and Vedantu. Layoffs have been a daily feature and several companies have been scrambling to keep themselves afloat. As per industry estimates, at least 25 Indian edtech startups, including all seven edtech unicorns, have fired close to 15,000 employees in the last couple of years.

This is a dramatic change from 2020 and 2021 when these very same businesses were the darlings of the media and money was flowing like water into the sector. The more aggressive players went onto a frenzied growth trip and on a shopping spree. But the bubble burst after the pandemic ended and many are now struggling with the new reality. It is worth examining how much of this debacle is self created and how much is outside anyone’s control. Are there steps new entrepreneurs can take early in the game to ensure they don’t end up the Byju’s way or are debacles such as this inevitable?

As the pandemic tightened its grip on India and the world in 2020, a lot of the K12 companies stared at a never before opportunity. Here was a country with 250-odd million school going children at home staring at a future ahead with no avenues for learning or entertainment. No matter which segment a company was previously operating in, this was too juicy an opportunity to let go by.

A few things happened in combination to set off what we witnessed. The availability of cheap money made it possible so practically everyone entered every possible space and segment available: companies that were specialising in tutoring jumped headlong and with virtually no preparation into test prep or those who were focussed on math and science learning enhancement honed into coding and other fields. Buy, buy, buy became the mantra. In the case of Byju’s for instance it bought White Hat Jr., Akash and Great Learning and while the latter two do have value even today, the first was probably not the ideal buy for the company in hindsight. Similar mistakes were made by almost everyone vested in the game.

Sum of many small parts

Almost all the players who have been in trouble have three or four factors in common. One, almost all started out with the kernel of a strong idea or proposition, which attracted a lot of easy money that was available at the time. It is the hunger to grow faster that has led some players astray or made them lose focus on their core proposition.

As a result, a chunk of the free cash in the hands of the founders went into securing or buying businesses which they felt could help them achieve a far higher revenue than organic growth would allow. Some of these buys added value and some boomeranged. Several of them were egged on by investors who had little on their mind barring how to quadruple their investment in as short a time frame as possible. Even at the time this frenzy was unfolding, many in the space warned that these good times may not last but these were brushed aside or ignored by those who could only see dollar bills.

A large chunk of the money was also spent on indiscriminate hiring with extravagant salary packages, which had little to do with the new recruits previous experience or expertise. Industry representatives and others point out that even as one feels some sympathy for fired employees, they too are culpable as many of them left their more stable and perhaps lower paid jobs for the lure of better pay packages and ESOPs even as they knew that the boats they were boarding were rockier and in some cases far less ethical in approach.

An almost equally large amount was being spent by these companies on drumming up decibel levels so full page advertisements in dailies, sponsoring events that got them the maximum eyeballs like the IPL and other cricket related event, and videos and short clips on YouTube and other platforms exhorting customers to try their offerings became quite the rage. The fuzzier the business model and weaker the proposition on offer, the higher the amounts squandered on advertising and luring customers.

Then, almost all these businesses were losing money, almost like it was going out of fashion. In many cases, the losses were so many multiples of the revenue of the company and many serious players in the sector and external observers were circumspect even back then on how such losses could ever be covered. They never were.

An indiscriminate quest for growth led to them spending large amounts on acquiring businesses. Where they couldn’t add a new vertical they saw a rival doing well in, these companies bought smaller fish to fill any possible gaps, often at valuations that made little sense.

As these companies kept going in for a new series of funding at stratospheric valuations, the promoters or founders fell prey to their own game, began to believe in their own invincibility and felt that they were “too big to fail”. Lower revenues, poor returns and other uncomfortable truths were brushed under the carpet with an overriding belief that all these small problems could be fixed at some stage. The hype that had been created around whatever they were offering strengthened this belief.

Adding fuel to fire

Some external factors too have added to the pain of the K-12 edtech industry. Other than the drying up of easy money, a return to the normal world of physical classes and interaction has made many parents aware of how important social and peer interaction is for any learning to happen. The same is true for tutoring and test prep. This has meant a return to physical classes across segments and many pure online players have ventured into physical classes, albeit belatedly.

Another reason why higher ed edtech players don’t face the same problems as K-12 is their market reach and accessibility. Many of the players can offer their programmes and courses across the globe with equal ease as syllabus or language barriers are far lower. Players like Simplilearn and Emeritus have 60% and 75% of their present learners overseas. This is also a luxury K12 doesn’t enjoy since children typically follow the national curriculums and pedagogies and these vary widely across countries.

Even before the pandemic, the value proposition for this segment was weaker since a lot of high quality free content (Khan Academy and similar offerings) is also available, both through a range of government and private platforms. Many experts in the education sector believe that the K12 dilemmas and problems have not been solved effectively by any player in India or globally as yet.

Last but not the least, children are by nature more fickle and harder to discipline than those in the age groups that the higher-ed players target. Getting a child hooked and remaining there is a Herculean task as any parent will testify. Word of mouth only takes you so far unlike with an adult who sees his contemporary better his situation after finishing an upskilling course or learning a new one. Neither are children interested in keeping up with the Joneses especially when it comes to learning math nor are they beset with anxieties for the future to the same degree. This ensures that the cost of acquiring and retaining a new learner is much higher for the K12 space.

Can it be avoided in the future?

The bubble that was created in the edtech sector was the sum of many parts and it is unlikely that all the same parts will come together to create a similar situation. However, founders and new entrepreneurs need to keep a few things in mind.

A good idea is the biggest security you have. Sell your idea only when you have absolutely no other avenues for organic growth. Bring on an investor who sees value in the core proposition and is not looking only to grow his money 5X or 10X in as quick a time frame as possible. Use the money raised to grow in a disciplined fashion, finding a healthy rate of growth that doesn’t make you trip upon your own pace. Bring on board a truly “independent board”, not just kith and kin, family members and yes men. Buy a smaller fish by all means but avoid indiscriminate purchases : let your rival buy everything in sight!

Will similar bubbles build up in the future, will failures of this magnitude occur again and what are some of the lessons to be learnt ? The answer is yes, yes and the best thing a founder can do is to make his or her own moves with circumspection. As Bill Gates famously said : success is a lousy teacher; it seduces smart people into thinking they can’t lose.

Anjuli Bhargava writes on governance, infrastructure and the social sector. The views expressed are personal.