Byju's Crisis Spurs Revenue Recognition Scrutiny for Edtech Firms

Investors and advisors are closely examining the revenue recognition practices of India's edtech start-ups in the wake of the crisis at Byju's, the world's most valued edtech company. They are particularly interested in understanding how revenue is accounted for when bookings are finalized, including factors such as the use of straight-line revenue recognition (dividing revenue by the subscription period), treatment of discounts and cancellations, and the proportion of revenue derived from subscriptions versus hardware sales. The scrutiny is driven by concerns over aggressive revenue recognition practices, which artificially inflate revenue figures.

Byju's, which experienced a significant delay in releasing its FY20-21 results, revealed a marginal decline in revenue during that year. This raised questions among investors about the company's revenue recognition practices, especially considering the strong growth observed in other edtech companies like Lido Learning. Byju's CEO, Byju Raveendran, acknowledged that approximately 40 percent of the FY20-21 revenue had been deferred to subsequent years based on the recommendation of the company's auditor at the time, Deloitte. Prior to this, Byju's was known for its aggressive revenue recognition strategies.

The increased scrutiny on revenue recognition practices is likely to impact fundraising efforts for edtech start-ups, as investors prioritize more rational metrics such as net revenue, profitability, and EBITDA. Metrics like annualized revenue run rate (ARR) and gross bookings may lose prominence as investors focus on factors such as cancellations and retention rates, which have become more relevant post-pandemic.

The heightened scrutiny will also affect the valuations of Indian edtech start-ups, making it more challenging to secure funding at inflated revenue multiples. Funding for Indian edtech start-ups has already plummeted over 97 percent in the first half of 2022 compared to the same period in 2021. Global edtech companies, including Coursera, Udemy, and Chegg Inc., have experienced significant declines in valuations over the past year, impacting the valuations of Indian edtech firms as well. US-based asset management companies have marked down the fair values of certain Indian edtech companies, including Byju's and Eruditus.

This increased scrutiny and adjustment of valuation metrics are likely to reshape the investment landscape for edtech start-ups in India, with a stronger emphasis on sustainable revenue recognition practices and realistic financial performance metrics.