GoMechanic fiasco may be the end of honeymoon for Indian startups

The implosion at GoMechanic isn’t going to be the last of its kind. Too many startups have come to believe that in the absence of specific regulation, the numbers they put out are malleable. (Representative image)

Rishabh Karwa and Nitin Rana, who founded the startup GoMechanic six years back, have called it "grave errors” in judgment. Their soulful confession, though, is no more than a belated admission of an old-fashioned cooking of the books.

And it casts a dark shadow over all the participants in the fray. That includes the big-bulge investors, Sequoia and Tiger Global whose oversight is once again open to questioning, the media which rushed to celebrate their unrealised success (they were in Forbes 30 Under 30 list two years ago) and of course, the founders who may have even ignored warnings of financial irregularities from their auditors.

To that ignominious list must also be added the educational institutions from which such wannabe entrepreneurs emerged. A module on ethics is clearly either missing or not stressed enough at elite business schools. As much as these institutions take credit for the success of their wards, they also must also cop the blame for not instilling the right values in them.

Indeed, India’s much-mollycoddled startup ecosystem has had a free run for far too long. The consequences are upon us now. Shares of the few that managed to make it to the public markets have tanked precipitously over the last one year, taking down many retail investors with them. Others like GoMechanic are finding out that their sugar daddies, venture capital and private equity firms, are suddenly asking uncomfortable questions while slashing their valuations. The mood of the markets has changed.

Witness the outrage against the valuation of  Honasa Consumer which owns the  Mamaearth brand and has just filed its Draft Red Herring Prospectus (DRHP) for an IPO at a valuation of Rs 24,000 crore. Given its barely double-digit profits, it is already facing a backlash. At GoMechanic too founders' remorse set in after EY flagged financial misreporting. Till then, the big worry was raising the next round of funds since the company was running out of cash.

Over the last one year, GoMechanic has been unable to raise fresh capital at its desired valuation, a clear sign that the easy money era for these entities was drawing to close. With SoftBank and Malaysia’s Khazanah pulling the plug on its latest effort at funding after EY flagged issues like inflated revenues and fictitious garages, the founders realized they had no option but to come clean.

Like the non-banking finance companies boom of the late 1990s and the turn of the century dotcom euphoria, the exaggerated exuberance of most of the current set of digital startups was always irrational. A bust was only to be expected.

The surprise is that it took this long.

Perhaps, there was another, easier, distraction to vent about. Cryptocurrencies, the favorite whipping boy of regulators and legislators, imploded rather conveniently around the same time as startups. Their ambiguity and their forbidding complexity lent them easily to prefixes like scams. Not always without reason. As the crash of Terra in May 2021 showed, their values were indeed without basis.

Yet, despite a series of debacles at startups like BharatPe and Zilingo besides GoMechanic now, the overall startup system has been spared the same level of opprobrium despite destroying equal amounts of wealth and scalding gullible first-time retail investors. That may be because they have had more powerful backers, the world's biggest moneybags who appear to bend all the rules of business to accommodate their wards. The lure of exponential returns, almost guaranteed when a large investor gets in early, makes even basic due diligence an unnecessary headache.

Until now.

With their losses mounting and their own investors talking tough, the teflon is beginning to come off for VCs and investment banks. The result has been a far more careful scrutiny of potential and existing investee companies. Just last week, JPMorgan Chase Bank filed a lawsuit in the US against Charlie Javice, the founder of student finance startup Frank, accusing it of committing fraud to induce the bank to purchase the company for $175 million in 2021.

The implosion at GoMechanic isn’t going to be the last of its kind. Too many startups have come to believe that in the absence of specific regulation, the numbers they put out are malleable. That era of go-go entrepreneuring without adult supervision is over.