GoMechanic cooked the books, say investors as 70% staff is laid off

Investors of GoMechanic, India’s largest aftermarket automotive service and maintenance platform, have flagged accounting irregularities at the company, which has now decided to lay off 70 per cent of its workforce as it struggles to raise fresh funds. It is the third Sequoia-backed start-up in over a year, after Singapore-based Zilingo and fintech unicorn BharatPe, to report financial irregularities.
 

According to people in the know, investors may now ask GoMechanic founders to take leave of absence.
 

“We are deeply distressed by the fact that the founders knowingly mis-stated facts, including but not limited to the inflation of revenue, which the founders have acknowledged,” said GoMechanic’s investors in a joint statement.

“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 next steps for the company.”

EY is conducting a forensic audit of the company’s financials. An email sent to EY remained unanswered.

In a LinkedIn post on Wednesday, co-founder Amit Bhasin said: “…we made grave errors in judgement as we followed growth at all cost, particularly in regard to financial reporting, which we deeply regret.”

“We take full responsibility for this current situation and unanimously have decided to restructure the business while we look for capital solutions,” said Bhasin. “This restructuring is going to be painful and we will, unfortunately, need to let go of approximately 70 per cent of the workforce.”

GoMechanic, which according to Tracxn data, employed 1,230 people, has told the remaining 30 per cent of staff to work without pay for three months, according to the sources.

A source said: “The situation is very dynamic. But it seems like the company is highly unlikely to survive this crisis.” The company may survive if Sequoia, which holds around 27 per cent shares in the company, decides to recapitalise it. The Sequoia India team declined to comment on the development.

Financial irregularities at the company came to the fore at a time when SoftBank, Malaysia’s sovereign wealth fund Khazanah Nasional Berhad, and Norwest Venture Partners were in talks to lead a $75-million funding in GoMechanic, according to people familiar with the matter. SoftBank was in talks to invest about $30 million in GoMechanic. The company was expecting to raise funding at a $1-billion valuation.

They said this fundraise was to happen by Diwali last year, but negotiations continued. “At the peak of the conversation, the founders were asking for a valuation of $1.6 billion, but EY flagged concerns about its revenue,” said another source.

According to Tracxn data, the company claimed revenue of around $11.4 million and had raised $62 million, thus far, from investors like Sequoia, Chiratae Ventures and Orios Venture Partners, with a post-money valuation of $283 million.

Industry watchers believe investors are at fault, too, for the current situation at GoMechanic. “It is highly unlikely the early investors did not know that there were some grave errors, but they turned a blind eye. The due diligence exposed the fault lines,” said Shriram Subramanian, MD, Ingovern Research Services. He further said: “Blind pursuit of valuation at the cost of values has led to a repeat of such scenarios across many PE-funded companies.”

Another VC player said: “To say that they (investors) did not know is understandable since they have a huge playbook in India. But for a company that was seeking a unicorn valuation, the investors not knowing how the accounts look is a bit surprising. They should have seen this closely.”

A brainchild of four friends -- Kushal Karwa, Amit Bhasin, Rishabh Karwa and Nitin Rana -- GoMechanic is a 2016-founded Gurugram-based start-up. It is spread across 60 cities with a network of tech-enabled 1,500 workshops in India.

By the first quarter of 2023, GoMechanic aimed to expand to over 250 workshops in tier-2 and tier-3 cities, bringing its tally to 1,500 workshops across India.

Its competitors are Pitstop, GoBumpr, Carpathy, and Mahindra First Choice in the aftermarket automotive service.