In today’s Finshots, we explain the ongoing rights issue at Byju’s’ HQ.

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The Story

In 2021, Byju’s was valued at a mammoth $22 billion!

Cut to today, and the once high-flying startup has slashed its own valuation by 99%!!! It needs money urgently and desperate times call for desperate measures, huh?

But here’s the thing. Investors have just committed $300 million to Byju’s. They seem to be willing to pump in more money even when everything screams, “Abandon ship!”.

So, the only question is — is there more to this fundraiser than meets the eye?

Okay, what options does a company have when it needs an infusion of cash?

It could always go to a bank and raise some debt.

But Byju’s had already tapped into this avenue quite a bit. In fact, things had gotten so dire at one point that the edtech’s founder had even pledged his shares in subsidiary companies to raise money and was on the verge of losing it because he couldn’t clear the dues. So a bank loan was probably out of the question now.

It could sell shares and raise money from external investors.

That seems like the simpler option. If you give new investors a discount on the last valuation, they might feel tempted to jump. They might think they’re getting a better deal than the others who came before them. And it’s a bit of an ego-booster.

But it looks like these new investors weren’t taking the bait. Maybe Byju’s was in such dire straits that no one wanted to catch this falling knife.

So, what’s the only thing left to do?

A rights issue!

You go back to the existing investors and tell them that you’re giving them the first right to buy the new shares. If they decide not to, the investor will have less of a stake in the company. For instance, let’s say the company had earlier issued a total of 100 shares for $10 each. And an investor bought 10 shares to own 10% of the company.

But now, if the company wants to raise more money, it will have to issue new shares. But, these shares will be issued at a discount. And they might have to issue another 100 shares at $1 to meet their target. This means the existing investor will suddenly see their stake halve to just 5%.

They may not want that to happen.

So, a rights issue* gives them the first right to buy the new shares if they want to salvage their stake in the company. If they buy 10 more shares, they’ll keep their 10% stake. And since the new shares are issued for peanuts, it gives the chance for every investor in the company to jump in — whether they were angel investors, came in towards the middle, or even the ones who jumped in at the very end. Everyone can potentially reduce the weighted average cost of their shares.

So that’s the route Byju’s finally chose this month. It’s quite a nifty trick to persuade existing investors to part with their money. And no wonder Byju’s claims to have raised $300 million already — higher than what they anticipated. It looks like these investors aren’t giving up on the company after all!

But wait…there’s a nuance we need to talk about here.

We don’t know how many of these existing investors are actually participating!

Yup, the thing is that existing investors can also sell their ‘rights entitlement’ to someone else. This can actually fetch them some money too.

Let us give you an example. See, Byju’s isn’t the first struggling startup to go down this route. A few months ago, the online drug seller Pharmeasy did the same thing too. They announced a rights issue at a massive discount. And as per The Ken, it didn’t seem like existing investors were enthusiastic about buying shares. In fact, many of them sold their ‘entitlements’ to an external investor just to get out of the company. They were happy to take the loss and lick their wounds.

Now we don’t know what actually transpired. But, all we can say is that a new investor Ranjan Pai — of Manipal Hospitals — came on board. So there was definitely an exchange of entitlements or shares, no?

And the kicker — out of the ₹4,000 crores that Pharmeasy raised, over 30% came from Mr Pai’s coffers. He saw the opportunity to pick up a hefty stake worth 14% at a steep discount. He jumped in.

So it doesn’t really indicate too much about the faith that existing investors have in the company.

Could that be the case with Byju’s too?

We don’t know yet. But all we can say is that Ranjan Pai might make an appearance here too. A few months ago, he invested $170 million in Byju’s’ subsidiary Aakash Educational Services. That infusion saved Byju’s some embarrassment. Otherwise, they might’ve lost the subsidiary to debtors.

And maybe he’ll jump in here too. After all, he’s said as much in an interview with Forbes about wanting to back distressed startups and give them a lifeline. Rather than go after new startups.

Will Byju’s get a lifeline from an opportunistic external investor? Or will the existing ones repose faith in the edtech?

Time will tell.

Until then…

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