On Byju’s and the Man Who Did Not Buy Bitcoin in 2012...But Bought…

“Boy, I got vision, and the rest of the world wears bifocals.” — William Goldman, Butch Cassidy and the Sundance Kid, 1969.

Earlier this month, the news agency Bloomberg reported that the education technology company Byju’s is looking to raise $100 million from its existing investors through the issue of fresh shares. These shares are likely to be sold at a price that values the company at less than $2 billion, Bloomberg said.

The company had last raised $250 million from its investors in October 2022 at a price that valued the company at $22 billion, meaning that in a period of a little over 15 months it’s valuation has fallen by more than 90%. This fall of more than 90% does raise some interesting points.

1) The fact that Byju’s is in a mess has been well-known for a while now. But despite this, it has taken the company and its investors a while to recognize that the $22 billion valuation doesn’t make any sense. The fiction lasted as long as it did.

As John Kenneth Galbraith writes in A Short History of Financial Euphoria: “The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich.”

Clearly, it was in the interest of Byju’s and its investors to continue maintaining the fiction of its very high valuation for as long as they could. Unlisted companies backed by investors who happen to be venture capitalists, can do that. But then the company started to run out of money and investors needed to invest more money into it to keep it going, forcing them to recognize the fact that it did not have the prospects they thought that it did, leading to a much lower valuation. The reality finally caught up with them.

2) Now, this might very well be the last throw of the dice for the company. Nonetheless, I would resist from making a definitive statement here. Let me explain why through the example of Apple, a company quite a few management gurus make a living out of analyzing.

The company had three founders—Steve Jobs, Steve Wozniak and Ronald Wayne (honestly, I had never heard about him until yesterday). None of these three founders had any idea of how big their company, which was founded in 1976, would eventually become.

As Michael Kemp writes in The Ulysses Contract—How to Never Worry About the Share Market Again: “By 1985 Steve Jobs had reduced his stake in Apple to just one solitary share. After being unceremoniously sacked from Apple’s board, he maintained that token ownership so that he could keep an eye on how things were going inside the company that he founded.”

Steve Wozniak owned 8.7% of the company at the time of its IPO in 1980. As Kemp writes, Wozniak also sold his Apple stocks early on. But it’s Wayne’s story that is the real shocker here. He sold his 10% stake in the company for $2,300 just days after it was founded in 1976. As Kemp writes: “Wayne has since stated that it was ‘the best decision with the information available to me at the time’. He has also stated that he could see ‘significant bumps along the way and I couldn’t risk it’.”

In 1997, Apple was just a few weeks away from bankruptcy. And this was more than two decades after it was founded. Of course, our thinking about Apple is totally influenced by what has happened since then. And that helps quite a few management gurus to make a living.

Alison Schroeder asks an interesting question in her book An Economist Walks into a Brothel: Would you have bought Apple’s stocks in 1993? In 1993, it was impossible to know that Apple would become the success that it eventually did.

As Schroeder writes: “Steve Jobs was four years away from his return to the company, and the iPhone was not even a twinkle in his eye. Apple’s stock went down more than 75% after 1993, before it took off.” Of course, Apple is now worth $3 trillion, almost the same as India’s GDP in 2022 (in 2015 constant US dollars). If Ronald Wayne had held on to his stake, he would be worth $300 billion today. But back in 1976, there was no way of knowing this.

3) So, what’s it that I am trying to say here? Companies can come back from the brink of bankruptcy. In fact, other than Apple, Nike is another good example here. The company was facing a severe cash flow problem in 1970. As Kemp recounts: “At the time, [Phil] Knight tried to sell 30% of the company in an effort to raise $300,000. No one was interested. An employee and his mother pitched in a combined $300.” Nike is currently worth around $153 billion.

So, am I suggesting that something similar will happen to Byju’s? Will it rise like a Phoenix? The simple answer here is that I don’t know. But things are looking more difficult by the day.

In fact, as Ranjani Raghavan’s newsreport in the Mint points out: “Overseas lenders of online tutor Byju’s have filed an insolvency petition against its parent company Think & Learn Pvt. Ltd in Bengaluru to recover a $1.2 billion loan.”

Nonetheless, the most important point that I wanted to make here is that, when even those who start a company have very little idea of how big a success their company will become, it’s next to impossible for an outsider to figure out where the company will eventually end up.

There is another example that I would like to offer here: Google. As Duncan J Watts writes in Everything is Obvious Once You Know the Answer: “In the late 1990s the founders of Google, Sergey Brin and Larry Page, tried to sell their company for $1.6 million.” One story goes that Brin and Page did not find a buyer. Another story goes that the prospective buyer thought they were asking for too high a price. Whatever the reason may have been, thankfully, they didn’t sell. The company is now worth $1.91 trillion and the stakes of Brin and Page are worth billions of dollars on their own.

4) Another point here is that how do you value a business which doesn’t make any money as yet, and at the same time is perhaps a slightly new way of doing things. As Roger Lowenstein writes about the British rail mania of the 1840s in Origins of the Crash – The Greatest Bubble and Its Undoing: “In 1844, to gauge demand for the Manchester & Southington Railroad, a traffic taker counted the number of sheep on a fair day, doubled it to account for projected development and thus arrived at an estimate of daily-average freight.”

The point is that founders/owners of such businesses and their investors—both venture capitalists and retail investors who bail out everyone else—have no idea about how to value such businesses. Of course, that’s not how venture capitalists portray things in the public domain. As Kemp puts it, “There is nothing like an exciting new idea to embolden investor fanaticism and to stoke the speculative fires.”

Stories are told. Narratives are sold. The maths is done and offered. And an environment of surety is built. In fact, the purveyors of new technology are usually the ones hard-selling it and telling us that one hell of a future is in store for us, which both the media and its readers tend to lap up. Byju’s is an excellent example of this phenomenon.

But then as history tells us, most loss-making startups built around so-called new technologies eventually fail. As Kemp puts it: “Few investors, even professional investors, are capable of determining the true economic merit of the new technology or to pin a realistic value on it.” It’s very difficult to make this assessment in advance.

Take the example of the dotcom bubble of the 1990s. Everyone likes to talk about Amazon, that one big survivor that emerged after so many other businesses were destroyed. As Pulak Prasad writes in What I Learned About Investing From Darwin: “Only a handful of businesses from the 1995-2000 bubble have prospered. To give you a sense of the scale of destruction, 546 IPOs successfully raised $69 billion in 1999 alone. What would have been the probability of finding the next winner?”

Given this, it is well worth asking if such companies should really be allowed to list on the stock market—where ill-informed retail investors are ready to be taken in by any story that is hard-sold to them. As Galbraith writes: “Speculation buys up, in a very practical way, the intelligence of those involved.”

Also, as Prasad further writes: “The path to creating wealth in rapidly evolving industries is treacherous.” The good thing is that with Byju’s being in trouble, at least there is some talk around the issue.

5) Financial markets have a very short-term memory. Over the last few years, venture capitalists have poured billions of dollars into untested startups with loss-making technology-led business models, despite the dotcom bust in the US being only around two decades old.

As Galbraith puts it: “Financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world.”

Or if I were to look at this in a slightly different way—if one is in the business of trying to make money out of the future and how it is likely to play out—optimism is an essential part of the toolkit. In that sense, bad memory seems like a feature and not a bug when it comes to being in the financial markets

Of course, there was another lesson that venture capitalists drew from the dotcom bubble and the bust that followed—if you can sell out your share of a dodgy investment to retail investors who have been primed for a very positive future, through an initial public offering—you can take your money and leave. Every party lasts only for a certain time, and after-parties, where almost everyone is drunk and perhaps even vomiting, may not be as exciting.

Or to put it simply, there is always a greater fool out there. In the Indian case, this part of the formula is still work-in-progress. A few dodgy IPOs of loss-making startups have managed to sell a part of their stake to retail investors, allowing venture capitalists and existing investors to exit, but many haven’t. But their hopes are still alive.

Open-air dining in Mumbai can happen only in January and sometimes in February, given that the humidity, the heat and the pollution make it impossible to do so in other months. So, there I was, a few days ago, sitting with a few ex-colleagues, on the roof of what is Mumbai’s Press Club. It was a very pleasant night. The moon was clearly visible and the pollution, for once, had disappeared. And we were munching what is now known as finger food, and reminiscing the old times—talking about this and that and all that. Nostalgia had become a midnight snack.

In all this, someone said something like, in 2012 I had the chance to invest ₹1 lakh in bitcoin, but I didn’t. He then went on to do a mental calculation and say that if he had invested in bitcoin and had stayed invested all these years, it would now be worth... well, I googled the historical data for bitcoin and in March 2012, it was worth around $5.

The trouble with the it-would-now-have-been-worth-so-much argument is that in 2012 there was no way of knowing that bitcoin would eventually become the phenomenon that it did. Like in 1993, there was no way of knowing that Apple would become the phenomenon that it did. Or that Infosys would become the phenomenon that it did.

Also, even if this gentleman had the vision to invest in bitcoin in March 2012, would he have had the nerve to continue holding on to his investment once it had gone up 20 times and crossed $100 in April 2013? Perhaps no. And that’s simply because back then the narrative around bitcoin that would eventually take hold simply wasn’t there.

So, he told us the story of the crores that he had lost, the possibilities that could have been, the fact that he had learnt how to drive during the pandemic years, decided to get married, and of the eco-friendly house that he wants to build near Pune. And then came the clincher: “Do you know what I invested in instead?” After a longish pause that seemed to last for an eternity, he said, “Reliance Power”.

Note: Easynomics was adjudged the Best Newsletter at the Digital Media Awards South Asia 2023 by the World Association of News Publishers (WAN-IFRA).

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Written by Vivek Kaul

Edited by Feroze Jamal

Memes by Nirmalya Dutta

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