After more than a year of sporadic conversations, SoftBank is rumored to have withdrawn from a funding transaction in the vehicle repair startup GoMechanic after due diligence (DD) revealed major flaws in the company’s accounting and operations, according to sources with knowledge of the situation.
Several changes have been made at the firm over the past several weeks as a result of Malaysia’s sovereign fund, Khazanah, withdrawing from the Gurugram-based companies’ financing, for which it was co-leading the $70–80 million round. Amit Bhasin, one of the founders, admitted to financial mistakes on Wednesday, leading to the firm’s 70% worker layoff and the launch of an audit.
According to the persons described above, EY India’s investment research on behalf of SoftBank and Khazanah revealed problems with fictional garages, selective payments to specific garage units, and anomalies in revenue and user metrics at the Sequoia Capital and Tiger Global-backed firm. Early in 2022, the Japanese technology company and GoMechanic started talking about a prospective finance agreement, but the discussions broke down because of a disparity in valuations.
“The business met Masayoshi Son, the founder of SoftBank, and an agreement in principle was reached.” However, SoftBank was only ready to provide $850 million to $900 million, not the $1.2 billion valuation requirement, according to one source who spoke on the condition of anonymity since the negotiations were taking place in secret. According to reports, SoftBank reopened the negotiations approximately six months ago with a prospective investment of $30 million to $35 million at a significantly lower valuation of $600-650 million.
As of Wednesday afternoon, no one at GoMechanic, Sequoia Capital India, SoftBank, Khazanah, or EY India had responded to an email inquiry. This firm, along with BharatPe, Zilingo, and Trell, is Sequoia’s fourth where financial problems have surfaced after a due diligence process. In a post on LinkedIn published on Wednesday morning, Bhasin from GoMechanic stated, “Our passion to survive the inherent challenges of this sector, and maintain wealth, took the better of us and we managed to make grave wrong decisions as we followed growth at any cost, particularly about financial statements, which we deeply regret. He said that the firm’s founders “got carried away.”
We collectively resolved to reorganize the company while we search for financing alternatives and accept full responsibility for the current predicament. Unfortunately, we will have to lay off almost 70% of the employees as a result of this unpleasant reorganization. A third-party firm will also be auditing the company, according to Bhasin’s post. The term “grave” was later removed when he revised the message. The other GoMechanic co founders are Kushal Karwa, Nitin Rana, Rishabh Karwa, and Bhasin.
Sources with knowledge of the situation, however, revealed that Bhasin and his cofounders admitted to investors last week that they had given them false financial information. One in the know remarked, “The GoMechanic team indicated whatever figures they have been submitting to the board are not real and that they were exaggerated.”
Since the forensic audit report has not yet been submitted, GoMechanic’s founders have been placed on a leave of absence. The company also convened a town hall with its personnel on Wednesday to inform them of the changes at the company, including the layoffs, in response to Bhasin’s LinkedIn post. Investors still don’t fully comprehend the scope of financial theft. EY, the company behind the diligence report, is also doing the continuing forensic audit requested by the current investors.
These sources also stated that the audit’s conclusion is anticipated to occur soon. “Recently, the founders of GoMechanic informed the company’s investors of the major mistakes in its financial statements. We are quite upset by the founders’ deliberate misrepresentation of information, including but not limited to the inflating of income, which the founders have admitted to.Investors were kept in the dark about everything. We will work together to ascertain. The investors have jointly hired a third-party firm to thoroughly study the situation.
Sequoia Capital owns 27% of the business, followed by Tiger Global with 10%, Orios Venture Partners with 17%, and Chiratae Ventures with 10%. Strides Ventures, which has given the struggling firm finance, is also on the list of investors. According to Tracxn, data platforms for privately-held firms, among its well-known investors are The Pawan Munjal Family Trust. According to a Tuesday Morning Context article, GoMechanic sacked 70% of its employees even as its current backer Sequoia started a forensic investigation into the business.
Although the founders acknowledged misconduct last week, another individual with knowledge of the situation said that the startup’s advances were mostly the result of follow-up questions from possible investors like SoftBank and Khazanah after EY presented its report to them. It’s a disaster. Franchises for garages vary in how frequently they get payments. The EY team also discovered that many of the garages were made up, which prompted more inspection following the DD, according to a different source. “The firm realized the investment round is unlikely to conclude since they were unable to respond to the questions posed to them by prospective investors while the diligence process was underway. “This ultimately resulted in the confession,” the individual continued.
Since its founding in 2016, GoMechanic has raised over $62 million in investment, and in 2021, Tiger Global invested in the company at a valuation of about $300 million. According to documents with Tracxn, the company’s operating revenue for the fiscal year ended March 31, 2022, was Rs 90.5 crore, while losses came to Rs 114.3 crore. Its operational income for the fiscal year 2021 was Rs 34.2 crore, but it also had a loss of Rs 27.4 crore. People familiar with the company’s history claim that Sequoia Capital made its initial investment in the company in 2018 and joined the board of directors in September 2020.
On the condition of anonymity, the source stated that these data were audited annually. PwC evaluated the company’s financial report in 2021 and found no deficiencies or warning signs. KPMG audited it again in 2022, and this time there were no objections. In reality, FY22 audits weren’t finished until September 2022, according to a person with knowledge of the situation. A new term sheet was not signed until after the financial year audits were completed; it required new due diligence, which was carried out by EY India.
edited and proofread by nikita sharma