GoMechanic’s founder acknowledges mistakes in financial reporting and plans to reduce employment by 70%: Report
Amit Bhasin, the founder of GoMechanic, has acknowledged that there have been financial reporting issues at the Sequoia-backed auto repair startup and announced that the cash-strapped business will lay off roughly 70% of its workforce in addition to having an external audit performed on its financial records.
“As business owners, we identify problems, provide solutions, and then seek out new methods to expand those solutions to meet market needs. But in this case, we got carried away, Bhasin wrote on LinkedIn on January 17.
As we pursued expansion at all costs, we made grave judgment errors, which we regret, said Bhasin. This was especially true in regard to financial reporting. “Our eagerness to manage funds and endure the inherent challenges of this business got the better of us.
The business would look for “capital solutions,” according to Bhasin. GoMechanic was in negotiations to obtain $75-80 million in a capital round led by SoftBank and the Malaysian sovereign fund Khazanah Nasional, but the deal was scrapped because of accounting issues, according to sources with knowledge of the situation.
With cooperation from Khazanah and numerous other parties, SoftBank was negotiating to invest around $35 million in the business through its vision fund. “GoMechanic had fabricated garages and overstated numbers. During due diligence, it was discovered that certain of its preferred partner garages were earning disproportionately more money, according to a source in the know.
GoMechanic, Sequoia, and other queries were left unanswered. SoftBank chose not to respond to the news. According to a joint statement from the startup’s investors, “GoMechanic’s founders recently informed the investors of the major mistakes in the company’s financial reporting.
We are quite upset by the founders’ known misstatements of the truth, including but not limited to the revenue inflation that they have admitted to. The investors were not made aware of anything. The investors have jointly hired a third-party firm to conduct a thorough investigation into the situation, and we will be working together to decide the company’s future course of action, they added.
The fourth business sponsored by Sequoia Capital to face criticism for accounting issues is GoMechanic. In 2022, the financial services unicorn BharatPe, the Singapore-based B2B e-commerce firm Zilingo, and the social commerce startup Trell were all charged with accounting fraud.
According to a Bloomberg story, 60 of the more than 1,000 GoMechanic service centres may have broken accounting rules in order to inflate revenue and divert funds, according to EY’s analysis, which was conducted.
GoMechanic is a company run by Kushal Karwa, Amit Bhasin, Rishabh Karwa, and Nitin Rana that was founded in 2016. It runs a network of partner garages or workshops that offer high-quality auto maintenance and repair at far lower costs than the service departments of automakers. These garages pay a commission to GoMechanic.
In more than 40 locations, it currently manages over 900 garages, according to media sources. Currently serving on the GoMechanic board of directors is Sequoia Capital partner Abhishek Mohan. Mohan is an IIM graduate, just like the other co-founders of the business, Karwa and Bhasin.
Prior to this investment, GoMechanic had planned to solicit Tiger Global for a comparable funding round in early 2022 at a valuation of between $1 and $1.2 billion; however, that plan was later shelved. Approximately $600-$650 million, or roughly half of its prior ask, was likely to be the valuation for the most recent round that SoftBank would lead.
In June 2021, Tiger Global Management, Sequoia Capital India, Orios Venture Partners, and Chiratae Ventures participated in a Series C round that secured roughly $42 million for the startup at a valuation of about $325 million.
How GoMechanic fraud dragged down a burgeoning firm by pursuing growth at all costs?
In a LinkedIn post, GoMechanic’s co-founder Amit Bhasin apologised for financial reporting mistakes made by the Sequoia-backed business and said that “our passion got the better of us.” He said that in an effort to grow the business at any cost, he and his three co-founders “got carried away” and committed “severe errors” in judgement.
The LinkedIn post went viral on the internet. Another incident of poor corporate governance at a well-funded company had people scratching their heads as they tried to process it. At least three significant corporate governance failures at firms BharatPe, Zilingo, and Trell have occurred in India since 2022.
Surprisingly, Sequoia Capital is the common investor in all three firms. With GoMechanic joining the list, a more important issue arose: Are private equity (PE) and venture capital (VC) investors unaware of what’s going on with the firms in their portfolio?
GoMechanic’s recent events were in great detail, only to discover that perhaps investors were unaware that the company had been falsifying its financial statements. To be clear, PwC audited GoMechanic’s financials for FY20 (2019–20), although throughout the company’s first few years, smaller accounting companies audited the company’s financials.
BSR & Co, a KPMG sub-licensee, audited GoMechanic’s books in FY21 (2020-21) and FY22 (2021-22). Despite the owners’ eventual admission of financial mistakes, sources claim that KPMG did not issue any qualifiers on GoMechanic’s accounts for FY22.
The company is rocked by due diligence discoveries.
The collapse took place as GoMechanic prepared to raise $75–80 million in a Series D investment that would have been led by SoftBank’s Vision Fund and Malaysian sovereign fund Khazanah Nasional, with participation from additional investors.
Like other investors, SoftBank recruited EY, an auditing firm, to perform the financial due diligence for the potential investment. When EY’s findings were revealed, everyone was astounded. According to a Bloomberg article, EY’s investigations indicated that up to 60 of the company’s more than 1,000 service centres may have broken accounting rules to inflate sales and shift money.
“GoMechanic has given false information on fictitious garages and inflated numbers. In-the-know sources told Moneycontrol that during due diligence, several of its preferred partner garages were discovered to be making disproportionately more money.
Sequoia and other GoMechanic shareholders, including Tiger Global Management, Orios Venture Partners, and Chiratae Ventures, were immediately notified of SoftBank and other potential investors’ withdrawal from the project. While this was going on, the GoMechanic founders admitted to the irregularities in front of their current investors.
“All of the investors expressed shock. It was unknown to anyone. Nobody anticipated its arrival. The change came quickly. The GoMechanic founders’ actions are extremely disheartening, according to a source with firsthand knowledge of the situation.
According to insiders, Sequoia Capital, Tiger Global, and other investors hired EY to carry out a separate forensic audit for them the same day after the firm presented its findings to the founders and to SoftBank. The audit is still ongoing, and the results have not yet been released, according to sources. Over the first two weeks of January, several developments took place.
“GoMechanic’s founders recently informed the company’s investors of the severe mistakes in the company’s financial statements. Major investors in GoMechanic released a statement on January 18 in which they expressed their “great discomfort” over the founders’ admission that they intentionally misrepresented facts, including but not limited to the inflation of revenue.
Investors were kept in the dark about everything. We will be working together to decide the future steps for the company, and the investors have jointly chosen a third-party firm to conduct a thorough investigation into the problem,” they stated.
According to insiders, depending on additional information, the investors may contemplate placing the founders on leave. Depending on the results, sources indicated there might potentially be legal action. Emails addressed to the GoMechanic, SoftBank, PwC, KPMG, and EY founders went unanswered. Sequoia Capital declined to comment on the news.
Becoming a unicorn in vain
Tiger Global, Sequoia Capital, Orios Venture Partners, and Chiratae Ventures are just a few of the several international investors who have contributed to GoMechanic’s funding total of more than $60 million. Managing Director of Hero Moto Corp. Pawan Munjal is another supporter of GoMechanic. According to private market data source Tracxn, Munjal’s family trust owns around a 0.5 per cent stake in GoMechanic.
In December 2021, as part of its Series C investment round, the company raised its last significant tranche of funding from Tiger Global Management and its existing investors, totalling around $42 million. GoMechanic had a market value of around $285 million at the time, according to Tracxn.
In early 2022, not long after that, when the startup ecosystem was not experiencing the chills of the fundraising winter, GoMechanic was looking to raise a sizable amount of money at a unicorn value. According to insiders, the company had strong investor interest from both new and existing investors.
Talks between GoMechanic and its current investor, New York-based Tiger Global Management, who intended to lead a $75-80 million round, were ongoing. The founders of the company were arguing for a somewhat higher valuation of roughly $1.2 billion, even though Tiger was prepared to enter the market with a valuation of $1 billion.
“The $1.2 billion valuation was fixed by the GoMechanic founders. They fought tooth and nail to get that price. Tiger Global was valuing them at $1 billion, but they were pushing hard for $1.2 billion, a source with knowledge of the matter.
GoMechanic was in discussions with SoftBank, another well-known private market investor in India, to raise roughly $35 million from its Vision Fund at the same time as talks with Tiger Global. SoftBank, on the other hand, was prepared to enter at a valuation of between $800 and $900 million.
Funding winter ruins the celebration
The much-discussed fundraising round was being negotiated by GoMechanic’s founders with SoftBank and Tiger Global. The startup ecosystem in the nation was shaken by winter. For the first time in nearly 19 months, there were no new unicorns minted in the country during the month of April, when previously they were produced on average once a week.
The war in Europe and other macroeconomic headwinds forced central banks all around the world to boost interest rates, which made capital more expensive. Naturally, PE/VC firms began to back out of negotiations. Investor due diligence started to take longer. Additionally, investors were pickier about valuations.
As a result, potential investors in GoMechanic became wary. Now, SoftBank would only enter the market at a valuation of $600-700 million. Going out of cash forced the GoMechanic founders to sign the term sheet with SoftBank at a valuation of $650 million, which was far less than what they had originally requested.
GoMechanic stated that it would generate $40 million in gross annual income for FY23, according to sources (2022-23). GoMechanic reported operating revenue of Rs 90.5 crore, or around $11.2 million, for FY22, according to the company’s filings with the Ministry of Corporate Affairs (MCA) (2021-22).
Obstacles and challenges
The GoMechanic incident has once again rocked India’s startup ecosystem, which is currently the third largest in the world, by drawing attention to corporate governance failures in the nation’s businesses.
To lead the way in the garage services industry, GoMechanic has all the necessary ingredients. It possessed the first-mover advantage, IIM A-graduate founders, a who’s who of VCs either invested in it or showed interest, a solid client base, and an established network of about 1,000 garages spread across 40 cities. But things deteriorated.
As of right now, the startup is facing a forensic investigation by EY, which followed the completion of a due diligence study for the transaction that took close to six months to complete.
“GoMechanic has a special business strategy. In India, no other significant company was involved or engaged in similar activity. Therefore, it was initially challenging for EY to identify the appropriate market comparisons to relate specific indicators to and comprehend the macro concerns. According to a second individual familiar with the situation, this is why it took them months to thoroughly investigate the company.
The founders may be asked to depart soon, but according to sources, legal action may also be considered based on the specifics of the ongoing inquiry.
The EY report is still forthcoming. Therefore, technically, the current investors have nothing with them at this time. Investors and lenders will meet after the EY report is out to discuss the next steps. It’s too soon to remark on anything, one of the people listed above stated, adding that legal action, the ouster of the business’s founders, and corporate closure are all currently being considered.
Even if legal action is taken, Sequoia Capital India, one of GoMechanic’s notable early investors, has had similar experiences with other well-known co-founders like BharatPe’s Ashneer Grover and Zilingo’s Ankiti Bose.
edited and proofread by nikita sharma