The Indian start-up ecosystem continues to scale new heights.
Many start-ups that emerged less than a decade ago have become national players and are listed on the largest stock exchanges. Several others have attained unicorn status over the last decade. Disruptive models and technologies are creating new markets and enabling further innovation. In such a fast-moving atmosphere, it becomes imperative for start-ups and founding teams to become proactive and ensure that they do not stumble due to inadequate internal control systems.

5,000 startups have shut down in 2024. This is a scary revelation and harms the Indian startup ecosystem. This blog is focused on two specific aspects – one is an alarm that warns investors to see through these failures seriously, and the other is for the startups to embrace critical steps to fuel and safeguard their interests. Indonesia is another country that is witnessing a similar scenario. Indonesia’s startup ecosystem is bruised and battered, and everyone’s searching for a culprit. Over the past two years, several companies have faced closures or significant layoffs in the Indonesian startup ecosystem, including notable failures like JD.ID, Tokotalk, and Pitik highlight challenges in securing funding, scaling effectively, and adapting to market volatility.

In this blog, we pick two case studies: the downfall of India’s most successful ed-tech startup, Byju’s Fiasco, and the eFishery scandal that extends beyond financial losses. The latter has severely damaged public trust in Indonesian startups. Byju’s ruined a $22 billion EdTech empire. As for eFishery, a 2024 report revealed that it had reported profits of 260 billion IDR while incurring losses of 576 billion IDR. Both cases serve as a crucial lesson for aspiring entrepreneurs and investors alike.
Byju’s Fiasco – Hero to Zero

By 2020, the company boasted a remarkable valuation of $22 billion, securing its position as the ‘most valuable EdTech enterprise in the world’. Despite its initial success, Byju encountered a pivotal challenge as it veered from its core mission. Instead of steadfastly delivering high-quality education, the company shifted its focus to hardware sales. This strategic divergence was accompanied by pushy and unethical sales tactics, compromising the integrity of Byju’s initial commitment to educational excellence.

Byju’s journey from a promising ed-tech startup to a company facing financial, governance, and reputational challenges offers valuable lessons for the broader startup ecosystem. The significance of maintaining a focus on core values, implementing robust financial management practices, upholding strong governance, prioritizing ethical conduct, and fostering accountable leadership cannot be overstated. Byju’s is a typical example of poor risk management.

Byju’s 4-Step Recipe for Disaster

The Byju’s business model, centered on personalized, tech-driven education, seemed invincible until financial cracks appeared. This downfall is a hard lesson for all startups, EdTech startups specifically, and investors.

Core Mission Deviation
Byju’s initial core mission mainly focused on revolutionizing online education with interactive tests and video lectures. However, the company’s needless shift in focus towards selling hardware alienated their customers who were once drawn to their innovative education services. This move contradicted the edtech giant’s initial promise of making learning enjoyable. This shift, which was intended to attract new investors and buyers, strayed from the company’s original vision to provide a high-quality online learning experience.

Debt Overload
Byju’s faced substantial financial difficulties due to aggressive accounting practices, insufficient cash reserves, and loan defaults. The company relied heavily on multiple sources like banks, private equity firms, and venture capitalists with inadequate revenue generation to fulfill its debt obligations.

The inability to repay a $300 million loan from Redwood Global Investments and the breach of conditions of a $500 million loan in 2022 led to more financial strain, legal issues, and a decline in investor confidence.

Listless Acquisition Spree
Byju’s rushed into a rapid acquisition spree, acquiring companies like WhiteHat Jr, Aakash Educational Services, and several other prominent players in the EdTech industry. Byju’s growth strategy heavily relied on acquiring other EdTech startups to expand its user base and product offerings. The acquisitions aimed at expanding the company’s reach and portfolio came with numerous integration challenges. Moreover, the potential overvaluation of the acquired entities caused further financial strain on the company, eroding more of its profitability.

This emphasizes the need for thorough due diligence when it comes to making such acquisitions. A strategic approach is necessary to ensure acquisitions complement the business’s core values and support sustainable growth for all parties involved.

Depleting customer retention
Despite Byju’s initially attracting a massive user base, it struggled to retain its customers. The platform’s heavy reliance on promotional offers and discounts to lure new users created a trend of short-term engagements. As competitors introduced innovative and more personalized learning solutions, Byju failed to keep its audience engaged in the long run.

Takeaways
Byju’s downfall was contributed to by many factors, such as financial mismanagement, core value deviation, lack of effective management, and poor customer retention. Poor financial and effective management hindered the company’s decision-making, leading to questionable acquisition and financial strain. This serves as a warning for startups and investors alike, emphasizing the need for financial prudence, strong governance, and a commitment to core values for sustainable success.

The Rise and Fall of eFishery
The startup ecosystem in Southeast Asia has been subjected to a funding winter over the past few years, and the recent allegations involving eFishery could have potentially worsened the investor sentiment in the region. Over the years, Indonesian agritech unicorn eFishery grew into a major player in the aquaculture industry. Backed by investors like SoftBank Group and Temasek Holdings, the company ranked among Indonesia’s leading startups. However, a preliminary probe revealed the company may have been involved in financial malpractices. The company is found to have inflated its revenue for the first nine months of 2024 by 75% – $157 million in actual revenue as opposed to the $752 million reported. This $595 million discrepancy turned what was presented as a $16 million profit into a $35.4 million loss. eFishery’s downfall emphasizes the importance of financial integrity, governance, and transparency in startups. Unethical business practices for the sake of rapid growth have led the company to its inevitable downfall.

Financial manipulation
The company is accused of keeping two separate accounting books: one for investors and another for internal records. They reportedly engaged in various unethical practices, such as inflating revenue figures to attract investors and creating shell companies to manipulate funds and artificially boost revenue. Moreover, eFishery inflated its financial performance by fabricating its transactions with fake suppliers and misled stakeholders by overstating expenditures to cover up low cash reserves.

Poor Governance
eFishery’s leadership was found to allow fraudulent malpractices to go on unchecked for years. One of the co-founders himself allegedly maintained two sets of records – one for the investors and the other maintained on the company’s resource planning system, even going to the extent of hiring a high-level executive to maintain the inflated records. Poor oversight and financial controls led to the malpractices going unchecked.

Misallocation of Capital
eFishery’s financial challenges became apparent during the company’s Series D funding in 2023. While the company struggled to raise $4 million in 2018, it successfully secured $200 million in 2023 at a valuation of $1.33 billion, earning it the status of a unicorn. However, reports suggest that these funds, which were intended to support the company’s growth, were allegedly misused. Investors were misled about the company’s financial situation, leading to an unsustainable valuation of $1.33 billion.

Investor Fallout
The company’s discrepancies were uncovered during its ERP system migration by a former employee with access to its financial records. This revelation led to the dismissal of the company’s co-founders.

Takeaways
eFishery is a reminder of the effects of financial mismanagement, governance failures, poor leadership, and the pursuit of unsustainable growth. Once a promising startup revolutionizing aquaculture, eFishery has become a cautionary story of inflated figures, fraudulent financial records, and poor decision-making. This episode has not only led to the downfall of eFisheries but has also shaken investor confidence in the Southeast Asian startup ecosystem as a whole.

Lessons for Investors

• Due Diligence is Non-negotiable
  Investors must conduct thorough financial and operational due diligence beyond what is presented by the company. Relying on data offered by the management alone is extremely risky.
  
• Governance over Growth
  In both the cases, the companies chased after growth while overlooking governance. Investors should prioritize companies that have a broad oversight, independent audits, and a culture of accountability.
  
• Prioritize Sustainable Business Models
  Assessing whether the startup’s revenue model is built on genuine value creation or artificial growth tactics is important for investors to make informed decisions.
  
• Ethical Leadership is Critical
  Founders play a big role in shaping the trajectory of a company. Investors must assess leadership integrity and not just their ability to scale their business.
  Insights for Startups and Investors
  
  Both the debacles serve as cautionary tales for startups and investors alike. A company’s long-term success is determined by their sustainable business practices, financial transparency, ethical leadership, and good governance. In such an environment, investors must remain vigilant and prioritize organic growth and risk management.