India’s booming tech sector takes a major hit with the Byju and Paytm crises

India’s booming tech sector has taken a major hit as startup darlings Byju and Paytm falls into crisis amid regulatory scrutiny and alleged mismanagement.

“There has been some reality check over the past few years in terms of how to maintain corporate governance practices at a level that is sustainable and at a world-class level,” said Karan Molla, general partner at venture capital firm B Capital Group.

Paytm, once a fintech star in India, has been mired in controversy since March 2022. after the Reserve Bank of India ordered the fintech giant’s banking arm to stop accepting new clients with immediate effect.

A subsequent audit “revealed persistent non-compliance and continuing material supervisory concerns at the bank”, the central bank said on 31 January.

Starting from March this year, Paytm was not allowed to continue accepting new deposits into its accounts or its digital wallet.

Still, Paytm is profitable is reportedly being investigated by the federal anti-fraud agency for possible violations of foreign exchange laws.

On February 26, One97 Communications, the parent company of Paytm, said in an exchange submission that founder and CEO Vijay Shekhar Sharma has resigned from the board of Paytm Payments Bank.

During the pandemic, Paytm is benefiting from the boom in digital payments in India, reporting 3.5 times growth in transactions. Investors like SoftBank, Alibaba Group and Ant Financial bet big on Paytm, but its share price has tumbled over 70% since its November 2021 IPO.

SoftBank and Ant Group is now reporting are reducing their shares in the payment company, according to local media.

“Venture investors and founders have a greater responsibility to make sure that the governance in the 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 struggling to survive. The Indian edtech startup has seen its valuation plummet from $22 billion to $1 billion and is facing a number of issues, including alleged accounting irregularities and alleged mismanagement.

The unprofitable company, which offers services ranging from online tutoring to offline learning, raised billions of dollars from investors during the pandemic when traditional classrooms were closed.

The company has come under scrutiny after the Indian government reportedly ordered an audit of Byju’s finances and accounting practices Bloomberg on July 11.

“I think the sector will be permanently affected because of the development with Byju’s because people will not see it as an isolated issue.” They will look at it as a bigger issue with the viability of edtech,” said Bhavish Sood, general partner at India-based venture capital firm Modulor Capital and former director of research at consulting firm Gartner.

The government recognized more than 14,000 new start-ups in 2021 – compared to just 733 between 2016 and 2017, according to Economic Survey of India for 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 — valued at $1 billion or more, bringing the total number of unicorns in India to 83.

According to the data, venture funding of Indian startups reached a record $41.6 billion in 2021 data from global startup data platform Tracxn.

But the tide has since turned.

Funding for Indian startups plunged 83% in 2023 from a record $7 billion in 2021 as global venture funding dried up amid growing macroeconomic uncertainty such as rising interest rates.

Byju’s valuation collapsed by 95% after investors cut stakes in several rounds. Most recently, it was reduced to $1 billion after BlackRock reduced its holdings in Byju last month, according to media reports.

The regulatory crackdown also hit Paytm hard, reducing its valuation to $3 billion as of March 7, according to LSEG data. That’s down sharply from a valuation of nearly $20 billion when it listed in November 2021.

“There’s no doubt that valuations were very stretched in 2021, early 2022,” said Wadhwani of IvyCap Ventures. “Some companies did IPOs at valuations that just weren’t acceptable, and that caused a lot of stress in the market.”

Byju’s is facing a financial crisis, having announced in January that it was raising a $200 million rights issue to clear “immediate liabilities” and for other operating expenses. It is reported that the firm struggling to pay off debts and payment of salaries to staff.

“Companies that don’t have cash are forced to do down rounds,” Wadhwani said, referring to funding rounds in which firms raise capital at a lower valuation than the previous round.

“Companies that don’t have a sustainable model will obviously go out of business because nobody will fund them at crazy valuations,” he added.

“But also again, the businesses that are driven by the fundamentals will continue to get funding.”