False financial reporting of GoMechanic
After Zilingo, Bharatpe, and Tell, another Sequoia Capital India-backed startup GoMechanic admits to cooked books and auditing issues. The founder of GoMechanic Amit Bhasin took LinkedIn to admit to errors in financial reporting and governance. He mentioned in his post that the startup made errors in judgments to follow growth at all costs particularly relating to financial reporting which they regret and take full responsibility for. He also added that they have decided to restructure the business along with looking for ‘capital solutions’ and would be letting go 70 percent of the workforce.
GoMechanic is a garage-based startup, that offers auto services such as car washing, repairing, and more. Its founders established it in 2016 with the intention of bridging the gap between car owners and repair services. It also sells original spare parts and accessories for automobiles on its website. Besides Sequoia Capital, some other big-name investors like Tiger Global, Orios Venture, Chiratae Ventures, and others back it.
The startup has been found practicing unethical methods to boost its status, not for the first time. In the past, people have accused them of artificially boosting their ratings with fake reviews. One user took to the internet to make people aware of discrepancies they found in the review section of the app of GoMechanic Spares. The user suspected that the app developers might have committed foul play to raise their overall ratings. People found that while the default three reviews were all 1-star, many comments were singing the praise of the startup application and its success in serving its users. Most of the good reviews with high ratings were worded exactly the same, just with different names or profiles without any variations whatsoever. It sounds fishy, doesn’t it? The reviews were found on both Google Play Store and iOS App Store for GoMechanic and GoMechanic spares. Later, Google took down some of the said reviews, while some were deleted by the reviewers themselves. Such missteps raise a serious question about the professional ethics of the company. Now, the tide doesn’t look good for the start-up and its founders, with the news of their missteps in the auditing and financial reports.
The company was in talks with its existing investors Tiger Global to raise a $1.2 billion valuation while the investors were ready to agree on a $1 billion valuation. Tiger Global invested a big round of $ 42 million in December of 2021. While negotiating with them, GoMechanic was also in talks with SoftBank to raise about $ 35 million and also convinced some other investors for the capital flow. It was during this time that the errors of the company were brought to light. In negotiations with Soft Bank’s Vision Funds and Malaysia Sovereign Fund Khazzah Nasional with the participation of other investors, Soft Bank hired EY- an auditing firm to look into the financial reporting of the GoMechanics and do due diligence. During the due diligence, the EY came across some shocking findings unveiling that many centers of the company may have violated accounting norms and overstated revenues along with diverting funds. It also found GoMechanic reporting overinflated numbers and various fictitious garages.
The founders knowingly and intentionally misstated facts, deeply disappointing the investors. The company struggled to raise funds for over a year even after advanced-stage negotiations with many investors. The negotiations with the new round of investors understandably are no longer advancing with the various discrepancies and scores of issues found in the company’s governance and auditing reports. SoftBank and other prospective investors pulled out of the deals and also made the existing investors aware of the irregularities and missteps by the founders. Thinking it was the best move for defense, the founders also admitted to the accusations before the existing investors.
None of the investors saw it coming and we’re highly disappointed by the lack of diligence by people of such high potential. They were very shocked by the findings. The existing investors collectively appointed EY to conduct a detailed audit for them which is still in progress. Also, they have admitted to jointly appointing a third-party firm to strictly investigate the matter. There have been talks of sending off the founders of GoMechanic on leave after the results of the investigation prompted by the investors. Further legal actions and proceedings might follow the sending-off as the investors would deem fit.
KPMG audited the books of GoMechanic for the financial year 2021-2022 and did not issue any qualifications, despite the founders themselves confessing to discrepancies. Founder Bhasin wrote in his LinkedIn post that they made errors in judgment while pursuing growth at all costs, including in financial reporting, which they deeply regret. The company has reportedly asked its employees to work without pay for the next three months amid a serious cash crunch and loss of funds, capital, and investor trust while laying off 70 percent of its workforce.
Bhasin’s vaguely confessional post has thrown the internet into a state of chaos, in addition to shaking up the startup ecosystem. While some netizens applaud Bhasin for owning up to his errors and feel sympathy towards him, some also accuse him of acting as a fraud. GoMechanic had the advantage of being the first movers and also had educated IIM graduate founders with several big names backing them. It has also created a solid customer base network. But the errors in the judgment of the founders dragged the startup down. The existing investors are yet to decide on the future of the company with the reports from the EY being pending. In the past year, many famed startups with powerful investors have faced similar experiences which poses a great question of the investors overlooking the managerial system and books of the companies they are investing in.
