Workers inspect smartphone components in the visual inspection area of the surface mount technology workshop inside the Realme factory in Greater Noida, India: Anindito Mukerjee | Bloomberg | Getty Images
Aninditu Mukerji | Bloomberg | Getty Images
India's booming technology sector has taken a major hit this year with startup Darlings Darlings Byju's and one of its subsidiaries. It is done It fell into crisis amid regulatory scrutiny.
“There has been little reality check over the last couple of years in terms of how to maintain corporate governance practices at a sustainable and world-class level,” said Karan Mohla, general partner at venture capital firm B. Capital Group.
Paytm Payments Bank has become mired in controversy after the Reserve Bank of India ordered the unit to stop taking on new customers with immediate effect. In fact, larger fintech company Paytm on Friday cut some ties with the struggling banking unit in an attempt to address compliance concerns.
The central bank said on January 31 that a subsequent audit “revealed continued non-compliance and continued material supervisory concerns at the bank.”
Starting from March this year, the banking unit was not allowed to continue accepting new deposits into its accounts or digital wallets.
To be profitable, the unit is said to be under investigation by the federal anti-fraud agency for potential violations of foreign exchange laws.
On February 26, One97 Communications, Paytm's parent company, said in an exchange filing that founder and CEO Vijay Shekhar Sharma had resigned from the board of Paytm Payments Bank.
“VC investors and founders have a greater responsibility to ensure the governance of a company is sound,” said Ashish Wadhwani, co-founder and managing partner of IvyCap Ventures.
Byju's, India's most valuable startup at one point, is also facing difficulties. The Indian edtech startup has seen its value drop from $22 billion to $1 billion, and is facing a series of problems including alleged accounting irregularities and alleged mismanagement.
The unprofitable company, which offers services ranging from online tutorials to offline training, attracted billions of dollars from investors during the pandemic when traditional classrooms were closed.
The company is under scrutiny after the Indian government ordered an examination of Byju's financial and accounting practices, according to Bloomberg on July 11.
“I think the sector will be permanently damaged by the development that happened with Byju's, because people will not look at this as an isolated issue. They will look at it as a larger issue of edtech viability,” Bhavesh Sood said. A general partner at India-based venture capital firm Modulor Capital and former research director at consulting firm Gartner.
Inflated valuations
The COVID-19 pandemic has accelerated the digital revolution in India.
From online education and food delivery to online shopping, technology companies have seen an increase in demand for their products and services.
The government recognized more than 14,000 new startups in 2021, compared to just 733 companies between 2016 and 2017, according to the Indian Economic Survey 2021-2022.
As a result, India has become the third largest startup ecosystem in the world after the US and China, the survey showed.
In 2021, a record 44 Indian startups achieved unicorn status – worth $1 billion or more, taking the total number of unicorns in India to 83.
Venture funding in Indian startups reached a record high of $41.6 billion in 2021, according to data from global startup data platform Tracxn.
But the tide has since turned.
Indian startup funding fell by 83% in 2023 from a record $7 billion in 2021, with global venture funding drying up amid growing macroeconomic uncertainties, such as rising interest rates.
Byju's valuation fell by 95% after investors reduced their stakes in multiple rounds. It was recently reduced to $1 billion, after BlackRock trimmed its holdings in Byju's last month, according to media reports.
The regulatory crackdown on Paytm Payments Bank had hit Paytm hard earlier this year, cutting $2.5 billion off its market value by early February. This is a sharp decline from the near $20 billion valuation when it listed in November 2021.
“There's no doubt that valuations were very stretched in 2021, early 2022,” IvyCap Ventures' Wadhwani said. “Some companies did IPOs at valuations that were untenable and that caused a lot of pressure in the market.”
Byju's is facing a cash crunch, having announced in January that it would raise $200 million worth of equity to clear “immediate liabilities” and for other operating costs. The company is reportedly struggling to repay debts and pay employees.
“Companies that are illiquid are forced to do down rounds,” Wadhwani said, referring to financing rounds in which companies raise capital at a lower valuation than the previous round.
He added: “Obviously companies that don't have a sustainable model will go out of business because no one will fund them at crazy valuations.”
“But also again, companies that are working on the fundamentals will continue to get funding.”
Correction: This story has been updated to clarify that Paytm Payments Bank has been ordered to stop onboarding new customers and is reportedly being investigated by the federal anti-fraud agency.
