The meteoric rise and spectacular fall of the two jewels of the Indian Startup Ecosystem

Their lives are symbolic of India’s evolution. Both grew up in non-metropolitan boroughs, away from the hustle-bustle of chaste English speaking cosmopolitan India. Byju in Kannur, a sleepy town in the backdrop of Kerala, and Sharma in Uttar Pradesh’s infamous Aligarh.

However these billion dollar babies who were once the toast of VCs across the length and breadth of the land were devastated by the same scourge. So intoxicated were they by the prospect of scaling up faster, that they forgot the rigours of due process and instead played fast and loose with the rules. The law of averages eventually catches up even the most brilliant of minds and so an identical fate waited both. They feared regret more than failure which made their ignominious crash a truly pitiful sight.

Their story is a cautionary tale for our times: while start-ups can dream big, they should remain rooted in good governance

What follows ladies and gentlemen is the fascinating story of these two icons whose companies were propelled to massive heights by blackswan events namely Demonetisation which sucked out cash from the economy in turn pushing the use of digital currency and COVID which fuelled an unprecedented boom in online education.

Sharma moved early into the digital space while he was a student at the prestigious Delhi College of Engineering (now DTU), offering content management systems to companies, a business he sold for about $1 million to a US company in 1999. By 2000, he had launched One97 Communications, which began as a phone directory search engine but blossomed into an array of digital financial services. This is what came to include Paytm—an acronym for ‘Pay through mobile’—in 2010.

Byju started off by teaching exam-bound friends informally one and a half decades ago. He was so good at explaining math that demand grew organically. From physical classes that filled auditoriums to talking to millions via video was a logical next step waiting to be taken. Byju incorporated his holding company, Think & Learn (T&L) Private Limited, in 2011 and launched its online education content engine, BYJU’S, in 2015.

PayTM got its major break after Demonetisation in 2016 where it took first mover advantage of its pre-existing specialised mobile wallets and FASTag services, onboarding consumers and businesses alike hitting the 100 million customer mark in absolutely no time.

Four years later when the pandemic struck it was Byju’s chance to strike gold. It onboarded nearly a 120 million students, offered a wide range of free and paid courses, drawing the attention of none other than Mark Zuckerberg, Priscilla Chang,Sequoia Capital and many more.

Between 2020 and 2023, Raveendran raised around $4.8 billion , which he used to acquire a chain of complementary companies. At its peak Byjus was valued at over 22 billion dollars , bringing in an annual revenue of nearly 6000 crores.

Sharma and Raveendran both debuted on the Forbes Billionaires list and hogged the limelight as torchbearers of a vibrant start-up ecosystem in the country, characterised by a crop of young go-getters who defied conventional rules in turn disrupting traditional generational businesses that were considered to be the norm till then.

They both had businesses with limitless potential and the world lay at their feet if only they had played by the book.

For Paytm, India’s relentless quest towards digitisation ultimately proved to be a double-edged sword. While it helped the company to massively scale up volumes initially, the subsequent advent of the United Payments Interface (UPI) rendered their primary wallet business structurally not very profitable. This was because using UPI which was a free utility offered by several of their well funded competitors like GPay and PhonePe, customers could make payments directly from their banks to businesses or another person’s account in absolutely no time.

To avoid running into the ground,PayTM began to heavily diversify. It launched the PayTM Payments Bank which Sharma reckoned would be the path to prosperity for the company. They issued zero savings accounts, offered fixed deposit services to its account holders, allowed credit transactions and in turn became India’s biggest UPI beneficiary bank.

They launched new verticals like Paytm Gold, Paytm Insider, Paytm Money which was a stock-broking firm, Paytm PostPaid and First Games. Backed by Softbank and Jack Ma’s ANT group their motive was to give birth to a host of value creating businesses which would run parallely. In 2019, Paytm also tied up with digital non-banking financial company (NBFC) Clix Finance to offer instant digital loans to customers and merchants on the Paytm platform.

Paytm primarily made money out of payment processing and subscription revenues. It made a net payment margin of 0.07-0.09% of gross merchandise value (GMV) on processing, of which UPI gives 0.03-0.04% and other instruments give 0.15-0.18%. Then, it made money on point of sale (PoS) devices among merchants, at an average monthly subscription charge of Rs 100 and Rs 250 for high-end devices. Through disbursement of loans, it made 2.5-3.5% of loan value upfront on disbursement and 0.5-1.5% of the current disbursement value on collection.

Yet the real picture was not so rosy as Paytm would like the world to believe. In an effort to get their fingers all over the financial services pie , their focus was ultimately diffused and they failed to create a service would guarantee them a certain amount of fixed income. The Paytm ‘Superapp’ was thus doomed to fail.

Then came the decision that ultimately started the downfall of PayTM.

Paytm went for an IPO in November 2021 to raise Rs 18,300 crore, the second biggest IPO so far in the history of the country. However the stock which was listed at Rs 1,955- a discount of around 9% on its original offer price closed at Rs 1,564 leading to investors facing losses to the tune of nearly Rs 5000cr. Several of Paytm’s most important investors lost hundreds of crores and the company came under public scrutiny like never before.

It is said that castles built out of thin air can only last so long and gradually PayTM’s narrative began to falter and a lot of murky truths started coming to light.

There were reports as to how the business correspondents and KYC agents of Paytm, who were given the mandate to help customers withdraw or deposit cash, would allegedly falsify such transactions to earn a commission. There were also cases of millions of “inactive” wallets, added on by such unscrupulous agents.

Sharma who was intoxicated by the prospect of unprecedented growth turned a blind eye to the compliance issues raised by his team. Gradually, the Reserve Bank of India began red-flagging issues where it found Paytm to be in violation of its licensing rules for payments banks. Paytm has been pulled up by the regulator on various charges of violations in licensing conditions, submission of false information and lapses in technology and cyber security.

Yet external audits of the Paytm Payments Bank revealed repeated non compliances, warranting further supervision.

Then RBI dropped a major bombshell and Paytm’s world came crashing down. RBI was concerned about the lax monitoring of payout transactions , including loans, and feared that there was a danger of fraud and money-laundering. When Paytm reportedly failed to address the central bank’s concerns on January 31, it asked PPB to cease new credit and deposit operations, fund transfers and all other banking operations by February 29 (later extended to March 15). The closure of the business would mean an average hit of Rs 300-500 crore on One97 Communications’ earnings before interest, tax, depreciation, etc resulting in a resounding blow to the company when its losses have already mounted to Rs 1,856 crore in FY23.

However the real blow was that the halo which hovered over Sharma who has on several occasions staked claim to becoming the Digital Banking Leader of Asia was now completely shattered. Paytm’s stock prices were dropping faster than you could blink and it is now trading at around Rs 350, a far cry from the Rs 2000 it originally started at. The company is now worth less than a 6th of what it was once valued at and investor and public sentiment are at an all time low. Its competitors meanwhile are relentlessly picking away at its customer base. Vijay Shekhar Sharma, its charismatic CEO who built the company out of the ground has also resigned as non-executive chairman and board member of Paytm Payments Bank.

The company though claims that is working closely with the authorities concerned at addressing compliance issues but the future looks very dark and murky. Once the face of Digital India , Paytm now is in serious danger of becoming redundant and running itself to the ground. Its original stakeholders have more or less fled the sinking ship and morale is at an all time low.

Only time will tell if the Sun has finally set on India’s first fintech unicorn

Meanwhile, Byju Raveendran and his company too had started feeling the heat.

An ardent devotee of the legendary Apple founder- Steve Jobs , the Black Tshirt toting Byju had gotten the likes of Shahrukh Khan and Lionel Messi onboard as Brand Ambassadors to sell courses to the public. The entire country was taken aback when Byju’s became the official sponsor of the 2022 Fifa World Cup shelling out over 40 million dollars on this gimmick. They also became the official Shirt sponsors of the Indian cricket Team but were eventually sued by BCCI over hundreds of crores of unpaid dues.

Raveendran had taken advantage of an increasingly immense appetite for foreign funds to come into India because China had shut down their edtech business.

In 2021, in a bid to expand its offline presence as well and flush with investor wealth, it bought educational giant Aakash in an all cash deal worth nearly a billion dollars. This and several more high profile takeovers resulted in Byju’s burning a lot of money it had raised and subsequently incurring heavy losses.

No one knows why neither Byju’s nor its parent company T&L did not have a CFO for 16 months between 2021 and 2023, including the time when the company’s audited financial statements for 2021-22 were delayed for over a year. Total financial liabilities had increased to Rs 17,678 crore in 2021-22, The situation was exacerbated by the sheer lack of transparency and Raveendran’s reclusiveness did not help matters either.

In 2022, Byju’s valuation dropped from a peak of 22 billion dollars to 6 billion in a mere matter of months. Tens of thousands of employees were laid off amid talks of a severe cash crunch.

Thus began an inexorable exodus of investors. The Chang Zuckerberg Initiative and Prosus had particularly scathing takes on the inefficient, rigid reporting and governance structures for a company of Byju’s scale. Prosus claimed that despite repeated efforts , the executive leadership at BYJU’S regularly disregarded advice and recommendations relating to strategic, operational, legal, and corporate governance matters.

However the final nail in Byju’s coffin was driven in February this year when a bunch of investors called an extraordinary general meeting (EGM) to remove the founder from control of the company. Raveendran refused to back down and instead was looking to raise money to fund operations via a $200 million (Rs 1,656 crore) rights issue that they floated in January this year at an enterprise valuation in the range of $220-250 million. The investors in turn approached the National Company Law Tribunal asking for a stay on the rights issue as it would reduce their shareholding if they didn’t subscribe to it. Some looked at it as a ploy of Raveendran to wrest back absolute control of his beloved company. Meanwhile the Karnataka HC declared an interim stay on the resolutions passed at the extraordinary general meeting (EGM) , preserving Byju Raveendran’s tenure as CEO for the time being. The NCLT also directed T&L, the parent company of Byju’s to keep the funds raised via the rights issue in a separate escrow account and not withdraw it. Employees, vendors and other service providers alike are jumping ship and a lot of them claim that they are owed months of unpaid dues.

The fall of what was once one of the world’s largest Ed-Tech companies is heart wrenching to watch.

The experiences of these two behemoths should serve as a wake-up call for the start-up universe. The importance of responsible corporate governance should be incorporated in the very ethos of a company. Blindly raising capital without the least regard for sustainability and profitability is a sure shot way of running yourself into the ground.

The key takeaway from this entire saga is while start-ups can dream big, they should remain rooted in good corporate governance lest they become the next victims of cowboy capitalism.