A closer look at revenue recognition in India’s edtech firm maps

Investors are interested in how revenue is accounted for when bookings are completed, such as whether straight-line revenue recognition is used (dividing revenue by the subscription period), how discounts and cancellations are accounted for, and the portion of revenue derived from subscriptions. against hardware sales.

After the crisis at Byju’s, the world’s top-rated edtech company, investors and advisors are increasingly focusing on examining the revenue recognition practices of Indian edtech startups in their portfolios.

They are particularly interested in how revenue is accounted for when bookings are completed, such as whether straight-line revenue recognition is used (dividing revenue by the subscription period), how discounts and cancellations are accounted for, and the share of revenue derived from subscription versus hardware. sales (if applicable), several industry representatives said Money control.

“Byju’s has not been able to provide monthly business updates to its lenders. FY20-21 audit was delayed and so was FY21-22. It has been very aggressive in revenue recognition and most of it is to capture large amounts without diluting equity,” said the edtech founder , requesting anonymity.

“So it feels like most of their problems are related to the way they recognize revenue. One of our investors, who is also an investor in Byju’s, asked me about how we recognize our revenue and whether we have aggressively shown it in the past, raising money,โ€ the founder added.

In September 2022, Byju finally published its FY20-21 results after a considerable delay of around 18 months. The results revealed a slight decline in Byju’s revenue over the year, which came as a surprise to many given that 2020-21 2018 was the first full year of the pandemic, which significantly boosted India’s edtech sector. In contrast, other edtech companies, such as Lido Learning, which has since declared bankruptcy, 20-21. experienced significant revenue growth in the financial year.

At the time, Byju Raveendran, co-founder and CEO of Byju’s, had said Money control in an interview, the company had to set aside around 40 percent of its FY20-21 revenue for future years. This decision was made based on the recommendation of their auditor at the time, Deloitte. Before that, Byju’s was known for its aggressive revenue recognition practices.

Aggressive revenue recognition refers to a company’s strategy to increase revenue figures by reporting gross revenue while deferring expenses that artificially reduce losses on paper. This approach is used to hide losses and present a cleaner financial picture.

Increased investor scrutiny of the revenue recognition practices of edtech startups may lengthen the fundraising process for these companies. This transition is expected as investment figures are likely to experience significant changes.

Vanity metrics like annual revenue run rate (ARR) and gross bookings may lose their meaning as investors increasingly opt for more rational metrics like net revenue (excluding cancellations and discounts), profitability, EBITDA and others.

“I understand the great potential of the Indian edtech market, but these are some of the pressing issues that companies need to address,” said the edtech-focused investor, whose portfolio includes five of India’s seven unicorns.

โ€œA metric like ARR and everything is fine, but if the cancellation rate is high and the retention rate is low, then such metrics are meaningless. Very little of that money will actually end up on your books. These issues have only come to the fore post-pandemic, because that’s when these companies really expanded, and their retention rates, cancellations, etc. became more relevant than before,” the investor added.

Additionally, increased scrutiny will also increase the focus on Indian startup valuations, making it more difficult for edtech startups to secure funding with increased revenue. Data collected by Money control Tracxn reveals that funding for Indian edtech startups has already fallen by more than 97 percent to $45 million in the first half of 2022 (the same period in 2021).

Assessments in the global edtech landscape have also declined significantly, with companies such as Coursera, Udemy and Chegg Inc. experienced a drop of 20 to 50 percent in the last year. This bearish trend has also affected valuations of edtech companies in India, forcing US-based asset management companies (AMCs) to downgrade the fair values โ€‹โ€‹of certain Indian edtech companies.

For example, Blackrock, the world’s largest AMC, has pegged Byju’s fair value at $8.4 billion as of March 31, 2023, while Byju’s largest investor, Prosus, has pegged the company’s fair value at $5.1 billion. Byju’s was last valued at $22 billion. Edtech unicorn Eruditus also saw its fair value cut by US-based Private Shares Fund by 9 percent to $2.9 billion.

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