Unacademy turns CodeChef into a for-profit and gives away 70% of it for free

Or how sometimes your non-profit might just be a marketing arm that outlived its usefulness

CodeChef falling off a cliff

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The entire reason for a company to exist is to earn money and make a profit. But sometimes a company that earns too much money might start a non-profit to spend some of that money. Large industrial houses like Reliance, Tata, Bajaj, etc. all have associated non-profits.

One reason to have such a non-profit is that it’s good PR. You might organise a blood donation camp and people will come along to donate blood and eat biscuits. The media will report on the blood donation and biscuits, and it’s nice to have your brand shown alongside all the goody stuff. The government might like you better too.¹

This is standard stuff. Your company earns money. Your non-profit earns good PR. Over time, this PR gives your company a good name and you might do more business. The usefulness of the non-profit is indirect. It doesn’t increase your company’s sales in any measurable way.

Another type of running a non-profit could be where the non-profit does stuff in the same or similar space that your company operates in. That way, the potential usefulness of the non-profit is easier to notice. If you’re a tech company, you might run a non-profit for students to compete with each other on coding challenges or whatever. Maybe doing this then makes it easier to hire these students when they graduate. Or maybe your company gets to be known in your industry because of it.

Here’s a report from Moneycontrol last week:

SoftBank-backed Unacademy has hived off coding platform CodeChef into a separate entity, a move that will help the edtech unicorn in trimming non-core expenses as it looks to turn profitable.

Unacademy will make a one-time investment into CodeChef and the company, with effect from April 1, will be an independent company owned and run by the current team and not under the umbrella of any organisation, the coding platform said in a tweet.

Unacademy’s one-time investment will be of Rs 3 crore and the company will hold a 30 percent stake in CodeChef, according to a person with direct knowledge of the matter.

“In the past, we never really focused on the financial viability of CodeChef, but being generously supported by Directi, and later by Unacademy, allowed us to keep doing our work without worrying about the financials,” the coding platform said in the tweet.

In 2020, edtech startup Unacademy acquired CodeChef, a non-profit that ran coding competitions, from Directi, a company with a number of tech businesses. Last week, Unacademy announced that CodeChef was now becoming a regular for-profit company. Unacademy also invested ₹3 crore ($375,000) for 30% of this new company.

Okay, first off—”acquiring” a non-profit is odd? A company’s goal is to make money and non-profits usually don’t make a lot of money. But CodeChef was clearly the second type of non-profit I described above. Both Directi and Unacademy saw value in CodeChef because they’re both tech companies and CodeChef is a coding platform with a lot of engineers competing with each other. So even though CodeChef itself was a non-profit, it had the potential to add to Unacademy’s profits.

Another way to look at it is that CodeChef was a marketing arm of Directi.² Marketing is an expense, and in that sense, CodeChef was a “non-profit”. But Directi was (is) a reasonably unknown company. It doesn’t put out ads in newspapers, and its brands aren’t plastered on billboards. Unacademy, on the other hand, has spent many millions on marketing, even sponsoring the most watched sporting event in India. It’s a very known company. At some point in the last few months, Unacademy decided that it already had enough of its own non-profit marketing arms and didn’t need this one.

Letting go

Here’s how the break-off seems to have happened:

1. Directi owns 100% of CodeChef the non-profit

2. Unacademy “buys” 100% of CodeChef the non-profit from Directi

3. CodeChef the non-profit becomes CodeChef the for-profit. Unacademy gives it ₹3 crore for 30%

Unacademy somehow went from owning 100% of CodeChef to owning 30%. The remaining has apparently gone to the CodeChef team running the company, who’ll be the new owners.

How it usually goes is that if you’re a company that wants to spin-off part of your business into another entity, you can either:

1. Do a lot of paperwork, ensure that there is clarity of what the new company owns, what its debts are, etc., and then end up with 100% of the new company. You can now play around with this new company without it directly affecting your original company

2. Do a lot of paperwork, ensure that there is clarity of the new company’s assets and liabilities, etc., and then invite outside investors to invest in this new entity. You agree on a valuation and how much stake you want to sell, and then end up jointly owning the new company

Unacademy seems to have done (2) but instead of asking outside investors to chip in cash to buy a portion of the new CodeChef, it gave away 70% of the company to its management for free.

This entire transaction from the acquisition of a non-profit to the conversion to a for-profit, and the free equity to the management is confusing. The way I’m seeing it is that Unacademy had a marketing arm that it wanted to get rid of. So it paid ₹3 crore as severance to the team to leave. But instead of giving them a straightforward cheque at one go, the money will get to them slowly (as salaries) over the course of the next year or two. And, sure, if CodeChef happens to succeed in making profits (or raising funding from other investors) during that time, Unacademy might just have made a successful accidental investment.³

1. To some extent, the government forces large companies to spend money doing goody stuff.

2. That isn’t to say that CodeChef itself even hired any marketers. The non-profit mostly comprised engineers, but its function, in the context of Directi and later Unacademy, was marketing.

3. Another way to look at it is that Unacademy didn’t give ₹3 crore as severance but was a genuine investment with the hope of making a return. Instead it was the 70% of the new CodeChef that was the severance. Giving away free equity keeps the new owners motivated to work to ensure the company succeeds.