“Our passion got the better of us,” said Amit Bhasin, Co-founder at GoMechanic, in a LinkedIn post admitting to financial reporting errors at the Sequoia-backed car repair startup. He said that he, along with his three co-founders, “got carried away” while trying to grow at all costs and made “grave errors” in judgment.
The LinkedIn post took the internet by storm. People were scratching their heads, trying to digest another instance of weak corporate governance at a heavily-funded startup.
Since 2022, India has seen at least three major instances of corporate governance lapses at startups BharatPe, Zilingo and Trell.
Interestingly, all three startups have Sequoia Capital as their common backer. With GoMechanic joining the list, the bigger question that was asked was are private equity (PE) and venture capital (VC) investors not aware of what’s happening with their portfolio startups?
Moneycontrol delved into the granular details of the happenings at GoMechanic over the last one year, only to figure out that perhaps investors had no clue about the company cooking up its books.
To be sure, while for the first few years, GoMechanic’s financials were audited by smaller auditing firms, the company’s financials for FY20 (2019-20) were audited by PwC. In FY21 (2020-21) and FY22 (2021-22), BSR & Co, a sub-licensee of KPMG audited GoMechanic’s books. According to sources, KPMG issued no qualifications on GoMechanic’s books in FY22, even as the founders themselves later admitted to financial errors.
Due diligence findings rock the firm
The unravelling happened when GoMechanic was in the process of raising $75-80 million in a Series D round to be led by SoftBank’s Vision Fund and Malaysian sovereign fund Khazanah Nasional, along with participation from others.
Just like most investors, SoftBank hired an auditing firm, EY, to do the financial due diligence for the prospective investment, and the findings of EY shocked one and all. According to a Bloomberg report, EY’s findings suggested that about 60 of more than 1,000 GoMechanic service centres might have violated accounting norms to overstate revenue and divert funds.
“GoMechanic had reported over-inflated numbers and fictitious garages. Some of its favoured partner garages were found to be making disproportionately more money during due diligence,” sources in the know told Moneycontrol.
SoftBank and other prospective investors immediately pulled out of the deal and informed Sequoia and other existing investors of GoMechanic, which include Tiger Global Management, Orios Venture Partners and Chiratae Ventures. While this was happening, the founders of GoMechanic, themselves confessed in front of their existing investors about the irregularities.
“All the investors were shocked. No one knew about it. No one had seen it coming. It was sudden. It is very disappointing when people (founders of GoMechanic) of such calibre do something like this,” said a person with direct knowledge of the matter.
On the very day after listening to the founders and to SoftBank on EY’s findings, Sequoia Capital, and Tiger Global, along with others, appointed EY to conduct a separate forensic audit for them, according to sources. The audit is still in process and the findings are not out yet, sources said. These developments have happened over the first two weeks of January.
“The investors of GoMechanic were recently made aware by the company’s founders of the serious inaccuracies in the company’s financial reporting. We are deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue, which the founders have acknowledged,” said ‘major investors’ of GoMechanic in a statement on January 18.
“All of this was kept from the investors. The investors have jointly appointed a third-party firm to investigate the matter in detail, and we will be working together to determine the next steps for the company,” the investors added.
According to sources, the investors might be considering sending the founders on leave, depending on further findings. There might also be legal recourse, depending on the findings, sources said.
Queries sent to the founders of GoMechanic, SoftBank, PwC, KPMG and EY remained unanswered. Sequoia Capital had no comment for the story.
Trying to be a unicorn
GoMechanic has raised more than $60 million in funding to date from a clutch of global investors, including Tiger Global, Sequoia Capital, Orios Venture Partners, and Chiratae Ventures, among others. GoMechanic also counts Pawan Munjal, Managing Director of Hero Moto CorpHero Moto Corp, as its backer. Munjal’s family trust owns about 0.5 percent stake in GoMechanic, according to private market data provider, Tracxn.
The company raised its last big round in December 2021, when Tiger Global Management, along with the company’s existing investors, invested about $42 million, as part of its Series C funding round. According to Tracxn, GoMechanic was valued at about $285 million then.
Soon after that, in early 2022, when the startup ecosystem was not feeling the chills of the funding winter, GoMechanic was seeking a large fundraise at a unicorn valuation. The company had good investor interest from both, existing and new investors, according to sources.
GoMechanic was actively involved in talks with its existing investor, New York-based Tiger Global Management, which was planning to lead a $75-80 million round. While Tiger was ready to come in at a valuation of $1 billion, the company’s founders were pushing for a slightly higher valuation of about $1.2 billion.
“The founders of GoMechanic were adamant about the $1.2 billion valuation. They were negotiating hard for that valuation. While Tiger Global was offering them a valuation of $1 billion, they were pushing very hard for $1.2 billion,” a source in the know told Moneycontrol.
While the deliberations with Tiger Global were ongoing, GoMechanic was also talking to SoftBank, another prolific private market investor in India, to raise about $35 million from its Vision Fund. SoftBank, however, was willing to come in at a valuation of about $800-900 million.
Funding winter spoils the party
While GoMechanic’s founders were negotiating hard with SoftBank and Tiger Global over valuation, the much-talked-about funding winter rocked the country’s startup ecosystem. From new unicorns getting minted almost every week, the country witnessed no new unicorn in the month of April, for the first time in almost 19 months.
Macroeconomic headwinds, such as rising inflation, and the war in Europe, compelled central banks across the globe to raise rates, which resulted in capital becoming expensive. Naturally, PE/VC firms started pulling out of deals. Due diligence for investors started taking longer. Investors also got choosier over valuations.
Consequently, GoMechanic’s prospective investors turned cautious. SoftBank was now willing to come in only at a valuation of about $600-700 million. While it was a lot less than what the founders of GoMechanic were seeking, they ended up signing the term sheet with SoftBank at a valuation of $650 million, as they were running out of cash.
According to sources, GoMechanic claimed that the company would have gross annual revenue of $40 million for FY23 (2022-23). The company’s filings with the Ministry of Corporate Affairs (MCA) show that GoMechanic had an operating revenue of Rs 90.5 crore or about $11.2 million for FY22 (2021-22).
Trials and tribulations
GoMechanic’s episode has once again shaken India’s startup ecosystem, currently the third-largest in the world, as it has put the spotlight on corporate governance lapses at the country’s startups.
GoMechanic had all the right mix to be a pioneer in the garage services business. It had the first-mover advantage, IIM A-graduate founders, who is who of the VC world either invested or interested, a strong customer base, and a network of nearly 1,000 garages across 40 cities in place. Yet things went downhill.
As things now stand, the startup is undergoing a forensic probe by EY, after it closed a due diligence report for the deal, which took nearly six months to be completed.
“GoMechanic had a unique business model. No other big player was in this or doing something similar in India. So, it was also difficult for EY initially to find the right market comparisons to peg certain metrics to and understand the macro challenges. That’s why it took them months to properly vet the company,” another source aware of the developments, said.
The founders might be asked to go on leave soon, but depending on the details of the ongoing investigation there might be legal action as well, sources said.
"The EY report isn't out yet. So, technically the existing investors do not have anything with them as of now. Once the EY report is out, investors will be sitting down with the lenders and deciding what next can be done. Legal action, ousting of founders, company shutting down, all these are contemplated as of now, but it’s too early to comment on anything," said one of the sources cited above.
Even if legal recourse is taken, this wouldn’t be the first time for one of GoMechanic’s prominent early-stage investors Sequoia Capital India, which had similar experiences with its other famed co-founders like BharatPe’s Ashneer Grover and Zilingo’s Ankiti Bose.
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