‘Growth at All Cost’ – believed Amit Bhasin, the co-founder of GoMechanic (a $285 million company). To achieve the motto, they ended up in a fraudulent practice which is today making headlines. So, what is the story of GoMechanic fraud? Let’s find out.
This is the story of another aspiring unicorn company that burned cash and chased hefty valuations!
This is the story of a company that took ‘Fake it till you make it’ way too seriously; hence cooked books and inflated their revenues!
Yes, this is the story of GoMechanic, the company that claimed to offer a seamless and best car service experience at the convenience of a tap.
But today, the company is going through a challenging phase. It has laid off 70% of its employees and has asked others to work for three months without pay.
Puzzled!? Wait, the worst is yet to come.
The company had raised millions of dollars in capital from giant venture capitalists like Sequoia, Tiger Global Management and a few others based on inflated revenue numbers. The co-founder, Amit Bhasin, himself admitted it.
He wrote a LinkedIn post which stated, ‘Our passion to survive the intrinsic challenges of this sector, and manage capital, took the better of us, and we made errors in judgment as we followed growth at all costs, including in regard to financial reporting, which we deeply regret.’
So, what went wrong with GoMechanic?
The Story
The story of GoMechanic is similar to many startups these days. To date, the company has raised close to $60 million through several rounds of funding from private equity and giant venture capital investors like Tiger Global, Sequoia Capital, Orios Venture Partners, Chiratae Ventures and a few others.
As soon as they fell short of capital, they started looking for options to raise more capital. According to Moneycontrol, in December 2021, the company was valued at $285 million and in early 2022, they were seeking a valuation of $1.2 billion! That’s precisely a 4.21x valuation in just a few months!
At the same time, they were also in talks with the SoftBank vision fund to raise about $35 million.
According to Moneycontrol, sources claimed that the company’s filings with the Ministry of Corporate Affairs (MCA) showed an operating revenue of Rs 90.5 crore or about $11.2 million for FY22 (2021-22).
The Bubble Burst
When GoMechanic approached SoftBank for funds, they hired an auditing firm, Ernst & Young Audit (EY), to do the financial due diligence. According to a report by Bloomberg, the company allegedly has 60 of the more than 1,000 GoMechanic service centres violating accounting norms to overstate revenue and divert funds.
SoftBank and other prospective investors immediately pulled out of the deal and informed existing investors about the findings.
According to Bloomberg, Sequoia and Chiratae Ventures said in a joint statement, ‘Deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue and all of this was kept from the investors’.
What Do We Learn From This Incident?
Since the start of 2022, this is the third popular case of allegations of financial irregularities after BharatPe and Zilingo. And surprisingly, all three startups were funded by Sequoia Capital.
The bottom line of the story is that the GoMechanic company lacked ethics and had weak corporate governance. Moreover, the founders knowingly cooked books to seek high valuations, proving that they had an itchy palm and were smart enough to fool big venture capitalists.
In the world of fraudulent practices, retail investors can learn the lesson of due diligence from the story. No matter how much the media hypes a stock or an upcoming IPO, we must always ignore the noise and focus on what the data has to say so that we don’t end up investing our hard-earned money in the wrong company.
That’s it for today. We hope you found this article insightful. Don’t forget to share it with your friends.
