In a shocking turn of events, HSBC has revised its valuation of Indian edtech giant Byju’s to zero, a dramatic drop from its previous valuation of $22 billion. This development was revealed in a recent research note, signaling one of the most significant declines in startup valuations in recent memory. BlackRock, another major investor, has also written off its investment in the beleaguered company, compounding the severity of Byju’s financial troubles.
The Downfall of a Once-Mighty Startup
Byju’s, headquartered in Bengaluru, was once hailed as India’s most valuable startup. However, the past year has been tumultuous for the company. Financial mismanagement, missed reporting deadlines, and severe revenue shortfalls—falling more than 50% below projections—have plagued Byju’s. The situation was further aggravated by governance issues, leading to the resignation of both its auditor and several board members.
These problems severely impacted Byju’s ability to secure additional funding. A planned $1 billion fundraising round was derailed, leaving the company in a precarious financial position. In a desperate attempt to stay afloat, Byju’s managed to raise $200 million earlier this year. This funding came at a significantly reduced post-money valuation of approximately $250 million and has since become the subject of legal disputes among its major investors, including Prosus.
Investor Concerns and Legal Disputes
Prosus, a prominent investor in Byju’s, has been particularly vocal about its frustrations with the company. The investor accused Byju’s of regularly disregarding its advice, contributing to the current financial quagmire. Prosus, which holds a 10% stake in Byju’s, valued at zero by HSBC, has invested over $500 million in the startup over the years without selling a single share.
HSBC’s damning valuation note has added another layer of complexity to Byju’s struggles. The note also included revised valuations for several other startups, reflecting a broader trend of declining startup valuations in the face of market corrections. Among these were Pharmeasy, Meesho, DeHaat, and ElasticRun, all of which saw their valuations slashed significantly.
Broader Market Impact
HSBC’s valuation revisions highlight a broader trend of declining startup valuations amid market corrections and economic uncertainties. According to the bank, it applied a 50% discount to the latest funding rounds or acquisition prices for assets where the last round occurred more than six months ago. This approach aimed to account for the recent downturn in similar edtech and SaaS companies’ public sector multiples.
For instance, online pharmacy Pharmeasy, once valued at $5.6 billion, is now estimated to be worth $2.8 billion. Similarly, social commerce platform Meesho’s valuation has been cut from $4.9 billion to $2.5 billion, and agritech startup DeHaat’s valuation halved to $400 million.
Reflection and Analysis
From my perspective, Byju’s dramatic fall underscores the volatility and inherent risks in the startup ecosystem. The rapid shift from being a market darling to a cautionary tale highlights the importance of robust financial management and governance. For investors, this serves as a stark reminder of the potential pitfalls of high-stakes investments in rapidly growing sectors.
The broader implications for the Indian startup landscape are also significant. Byju’s downfall could lead to increased scrutiny and due diligence from investors, potentially slowing down the flow of capital into the ecosystem. However, it may also encourage startups to adopt more sustainable and transparent business practices, ultimately strengthening the sector.
As I see it, Byju’s predicament is a wake-up call for startups and investors alike. It emphasizes the need for a balanced approach that combines ambition with accountability. While the allure of rapid growth and high valuations is tempting, the foundation of any successful business must be built on sound financial principles and good governance.
