Do You Also See Looming Tech Bubble?

Educomp Solutions, the once-celebrated EdTech firm, holds a lesson that needs revisiting. About a decade ago, it made eyes pop with its quick rise in revenues and a listing on the stock market. It moved from selling computers to schools to selling digital content to schools. 

Educomp made acquisitions and diversified into testing and skilling, blazing a trail that caught the attention of scores of EdTech startups. Then in 2020, riddled with debt and accused by the Serious Fraud Investigation Office of fund diversion and inflated deals, the company folded up. Pearson, which acquired TutorVista, another storied EdTech firm, wanted to sell it a few years after acquiring it. Byju’s, the legendary EdTech unicorn, was quick to snap up TutorVista. 

Now there are reports of mass layoffs in Byju’s. Last September, Byju’s missed a payment running into crores to a private equity firm for its acquisition of tutorial chain Aakash. Complaints from Byjus customers about the poor quality of learning material have been growing every day. 

The company reported a loss of Rs 4,588 crore in the FY ending March 31, 2021, which was 17 times greater than the previous fiscal year. Yet Byju’s is valued at USD 22 billion, prompting Harsh Goenka, Chairman, RPG Enterprises, to Tweet, “Nothing is making sense to me! Can anyone explain, please?” Goenka is not the only one who is foxed— anyone in any business would be. So, what is happening? 

The aggressive hustle in EdTech is a profound reflection of how awry the valuations of technology companies have gone. One may imagine that the EdTech space suddenly shot to stratospheric levels due to the pandemic.

Schools were forced to shut down, making technology and virtual classrooms the only practical way to deliver education to millions of children. However, even Byju’s was not convinced that virtual was the only way forward— the company bought brick-and-mortar-based Aakash to hedge against the uncertainty of virtual education! Investors should be worried about the confusing developments. 

As an entrepreneur in the technology space for the last 30 years, who watched the dotcom bust of 2000 from the inside, it is evident that investors themselves are driving valuations. Money is aggressively being thrown into branding and not as much into the fundamentals that build great businesses. The trend is to create a business with a capital deficit. The race is always on to raise capital before going bust— or quickly cashing in through an acquisition or a public listing. It isn’t just the investors who are complicit— even the entrepreneurs are. 

This is true of tech businesses across verticals, not just education. The cost of creating a minimum viable product is low, scaling takes large budgets while revenues stay limited, and operating costs mount. It is a recipe for financial disaster. 

Is no one looking at discounted cash flow, price-to-earnings ratio, a comparison with earlier ventures that were similar, market size, customer base, the ability to scale, or cost to duplicate? Does nobody want to know how long the growth will last, the soundness of the business model, the real-world tangible assets, the value of the company’s IPs, the lifecycle value of customers/ subscribers, the potential of partnerships for exponential growth, talent availability, the background and motivations of founders, dependency on investors, the sales, distribution, and marketing strategy, barriers to entry, differentiators, governance, and compliance hurdles? Has it boiled down to just brand hype and visibility? 

There is no precise science or mathematical equation behind investment decisions. At least none with proven worth. Investment decisions ultimately come down to a mysterious combination of experience, observation, furious analysis, and a lot of gut feel. Here, experience, observation, and gut feeling are signalling red flags. These businesses are racing downhill at an uncontrollable pace, and something is terribly wrong—none of the tenets of good business is being applied. 

At the very least, investors can look for diversity in the team. Diversity is a great soft indicator of underlying currents within an organization. If the team is diverse, we can assume the management is open to different ideas and will listen to a variety of voices, both cautious and optimistic. The balance cuts some of the risks of an investment. Investors know this but often ignore it willingly. 

Last year, a study examining 111 startups by CBInsights identified the top 12 reasons why startups collapse. The reasons include failure to raise capital (38 per cent), no market need (35 per cent), getting outcompeted (20 per cent), having a flawed business model (19 per cent), pricing/ cost issues (15 per cent), and not having the right team (14 per cent). 

Let us look at this from a clear, grounded view that has nothing to do with financial expertise or experience. Shouldn’t investors worry when a business shows triple-digit growth rates? Perhaps “worried” is the wrong word here. Shouldn’t they be curious about where the growth is coming from? 

The real problem could lie in there being a large increase in cash flow. A headline for early 2022 said, “Global Venture Funding And Unicorn Creation In 2021 Shattered All Records.” 

One study found that VC funding in the first half of 2021 had surpassed the total for all of 2020. VCs invested over USD 612 billion in 2021, an increase of 108 per cent over 2020. The trend reflected itself in India, where PE/VC investments in start-ups were recorded at USD 28.8, which is 4X that of USD 7.3 billion in 2020. 

The deals did not grow 4X, making more money available across fewer start-ups. Those that had invested in branding got the lion’s share. Everything says this bubble has to burst as soon as the money dries up.