How GoMechanic Defrauded Investors In Order To Achieve “Growth at All Costs”
It seems like we’ve heard the GoMechanic narrative before. A tech business quickly ramps up in an attempt to disrupt an unorganized market before the first cracks show. GoMechanic is the newest Sequoia-backed business to make headlines for similar irregularities after cofounder Amit Bhasin admitted to revenue fraud and announced layoffs that will affect 70% of the employees.
What distinguishes this case from others is the founder’s acknowledgment of the discrepancy and the fraudulent information provided to shareholders, and how reputable auditors like PwC, KPMG, and others were unaware of the incorrect information. Additionally, dishonesty raises concerns about deliberate fraud. Investors think that this imperils the reputations of other startup CEOs.
GoMechanic is the most recent company to come under fire after the significant scandals at Sequoia portfolio companies BharatPe, Zilingo, and Trell starting in early 2022. The future of the company is now uncertain since investors have demanded a forensic examination of its financials.
Let’s look at how GoMechanic’s business model has changed since its beginning and why the necessity for tighter control over the operations led to many of these revenue recognition issues before we get into how precisely these issues came to light.
The Expansion of GoMechanic
GoMechanic was founded in 2016 by Amit Bhasin, Kushal Karwa, Rishabh Karwa, and Nitin Rana with the goal of bringing technology and organization to the unorganized car repair market. You can call it the OYO model, but the aim was to collaborate with various car shops and introduce some standardization in terms of business practices and level of customer service.
While automakers have tried to accomplish this through their name-brand service centers, the market was open to disruption. By providing neighborhood garages with standard operating procedures, technical assistance, and genuine replacement parts, GoMechanic transformed them into workshops bearing the GoMechanic brand.
Essentially, it sought to reduce the backend friction that frequently results in subpar service quality and secrecy surrounding pricing or service fees. The two main supporting pillars for the startup were uniform pricing and standardized service quality. Similar to OYO, GoMechanic has struck revenue-sharing and exclusivity agreements with these garages.
It scaled up in more than five years with funding of over $55 million (or more than INR 440 crore) from influential investors like Tiger Global, Sequoia Capital India, Orios Venture Partners, and Chiratae Ventures. In 2016, the business opened its first garage in the Delhi-NCR region. By March 2021, GoMechanic was reportedly running 617+ facilities and had repaired more than 1 Lakh vehicles.
In order to distribute components directly to its authorized garages, it entered the spare parts market in October 2020. As an authorized GoMechanic distributor, it has previously only employed the services of over 1,000 parts retailers. After the initial Covid wave, it quickly introduced a private-label motorcycle and automobile engine oils before expanding its line of products to include brake fluid, coolants, wiper blades, and horns.
The business appeared to have constructed a vertical auto repair stack that would withstand the test of time. Later, GoMechanic entered the insurance market by introducing extended warranty plans for all makes and models of cars in India at the beginning of 2022.
Many people believed that this was the linchpin that would allow the repairs segment to acquire a larger portion of the customer lifecycle. But a year or so later, everything fell apart.
So, Why Everything fell apart?
GoMechanic overstretched itself during a difficult period as it expanded into new business sectors to create vertically integrated operations as it raised capital. Given the problems with revenue recognition in a cash-based industry, the scenario is comparable to Zilingo in many aspects.
“As soon as they started looking for replacement parts market, their problems started. That was a good strategy, however, the owner of a rival auto repair business said that because of the environment’s extreme disorganization, it can be challenging to alter old patterns.
Given his intimate ties to a GoMechanic cofounder, he asserted to have closely followed the development of the company’s model. Most dealings in the repair sector are conducted using hard currency, either for minor repairs or the acquisition of replacement components. The entrepreneur said that GoMechanic must comply with this because no one utilizes digital payments to buy new components.
The business allegedly used AI/ML at five warehouses in India to improve service providers’ overall experience with procurement and spare parts management. According to their brochure for the international trade show Messe Frankfurt, it also stated that it was shipping to “South Asian, South American, African, and Middle Eastern countries.”
In essence, the company, which had previously served as a sort of middleman between OEMs and garages, sought to challenge the OEMs themselves while still acting in that capacity. GoMechanic was making an effort to break through the strong networks that OEMs have within garages.
The company was shocked by the due diligence results.
Like the majority of investors, SoftBank hired the auditing company EY to perform the financial due diligence for the potential investment, and the results of EY’s investigation astonished everyone. In about 60 of the more than 1,000 GoMechanic service centers, EY’s findings, according to a Bloomberg article, may have breached accounting standards to inflate sales and siphon funds.
For example, “GoMechanic made up garages and inflated their statistics. For example, “GoMechanic made up garages and inflated their statistics. During due diligence, it was found that a few of its favored partner garages have been trying to make a significant amount of cash than they should have been, say sources who spoke with Moneycontrol.
SoftBank and other potential investors alerted Sequoia and other GoMechanic investors, including Tiger Global Management, Orios Venture Partners, and Chiratae Ventures, that they were pulling out of the deal right away. The GoMechanic founders acknowledged the discrepancies while this was going on in front of their existing investors.
“Every investor was stunned. Nobody was aware of it. Nobody had predicted it. It came out of nowhere. An individual with intimate knowledge of the situation remarked, “It is quite disheartening when people (the founders of GoMechanic) of such caliber do something like this.
According to reports, Sequoia Capital, Tiger Global, and other investors asked EY to carry out a second forensic audit for them the same day after listening to the founders and SoftBank about the firm’s conclusions. According to reports, the audit is still ongoing and the results have not yet been released. These changes took place during the first two weeks of January.
“The owners of GoMechanic have just told the firm’s shareholders that the firm’s financial statements include significant errors. Big shareholders in GoMechanic issued an announcement on January 18 stating, “We are deeply worried by the founders’ willful misrepresentation of facts, notably but not confined to the inflating of earnings, which is something the founders have admitted.
“No information about this was revealed to the investors. According to the investors, “We would work together to decide the firm’s next course of action and have jointly recruited a third-party firm to thoroughly examine the matter..”
Aiming to become a unicorn
A number of international investors, including Tiger Global, Sequoia Capital, Orios Venture Partners, and Chiratae Ventures, have contributed more than $60 million to GoMechanic’s fundraising to date. Approximately 0.5 percent of GoMechanic is owned by Munjal’s family trust, according to private market data source Tracxn.
Major investors in GoMechanic issued a statement on January 18 stating, “We are deeply worried by the entrepreneurs’ wilful misrepresentation of facts, including but not limited to the inflating of revenue, which the founders have admitted.
GoMechanic was looking for a sizable fundraise at a unicorn valuation shortly after that, in early 2022, when the startup environment was not experiencing the cold of the financial winter. According to sources, both new and old investors showed a strong interest in the company.
“The GoMechanic founders insisted on the $1.2 billion valuation. They were battling hard to get that price. They were pushing hard for $1.2 billion even though Tiger Global was only willing to value them at $1 billion, a person close to the situation told Moneycontrol.
GoMechanic was negotiating with SoftBank, another well-known private market investor in India, to borrow around $35 million from its Vision Fund while talks with Tiger Global were still underway. However, SoftBank was ready to enter at a valuation of between $800 and $900 million.
For GoMechanic, What Does The Future Hold?
According to sources, the founders of the company have been told to take a leave of absence until the EY financial forensics study is complete. According to a source close to GoMechanic’s investors, “when the Softbank DD was going on, we questioned them why this round was not closing and we asked the founders to answer their (Softbank’s) queries so we can all go on.”
Moreover, the source said that GoMechanic also provided management information systems (MIS) to its shareholders and that they were reconciled with auditor reports on the accounts on a quarterly basis. Without a prospective infusion of cash, GoMechanic’s future is undoubtedly uncertain. Even though it’s likely that the company will have to close some garages it can’t afford to keep open, it’s not clear if it will even be able to stay in business.
GoMechanic’s future is uncertain in light of the issues it faces, although it might involve either an acquisition by an original equipment manufacturer (OEM) or a competitor for its existing technology, or a change in management followed by fundraising at a lower valuation. The biggest question is whether or not GoMechanic’s lies and deceit will make it impossible to do business with them.
edited and proofread by nikita sharma