Private Investors Suffer as GoMechanic Breaks Down
Created on 21 Feb 2023
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Updated on 22 Feb 2023
Currently, the story of GoMechanic sounds awfully familiar. A tech startup that seeks to disrupt an unorganised market and scales too quickly before cracks appear. GoMechanic is the latest Sequoia-backed startup to come under scrutiny for such discrepancies, with cofounder Amit Bhasin admitting to revenue fraud and announcing layoffs impacting 70% of the workforce.
GoMechanic is an India-based technology-enabled automobile service and repair company. Amit Bhasin and Kushal Karwa founded it in 2016, and it is headquartered in Gurgaon, India.
GoMechanic aims to provide car maintenance and repair services through a network of partner garages. Customers can book car services online or through the company's app and track the status of their service requests. The company provides various services, including routine maintenance, general repairs, and body work.
GoMechanic provides B2B solutions to businesses such as taxi fleets and car rental companies, in addition to B2C services, and has partnerships with leading insurance providers in India to offer cashless accident repairs. In addition, the company has launched GoMechanic Plus, a subscription-based service that offers customers free periodic maintenance and discounted repairs for an annual fee.
Ownership distribution at GoMechanic
Geomechanics’ largest shareholder, Sequoia Capital, still owns 27% of the business. Rishabh Karwa and Nitin Rana each own 1.66% of the company, while its co-founders Kushal Shailesh Karwa and Amit Bhasin each own 11.11%. The four co-founders jointly own 25.54% of the business, which is currently valued at $83 million. Orios and Chiratae, two of its early backers, control 17.14% and 10%, respectively. Tiger holds 10.54% of the stock, while Kunal Bahl and Rohit Bansal each hold 1.46%.
GoMechanic Current Scenario
GoMechanic recently laid off 70% of its workforce in 2023, citing a funding crunch caused by existing and prospective investors discovering that the founders had misrepresented facts. The decision comes after the company has been unable to raise funds for more than two years, despite reaching advanced stages of talks with several investors. This news has shocked and disappointed many employees, many of whom had persevered through difficult times and believed in the company's long-term potential.
According to reports, Orios Venture Partners has written down its investment in the troubled car servicing startup GoMechanic, in which it is the second-largest institutional stakeholder. The venture capital firm, which owns about 17.14% of the startup, informed its limited partners (LPs) of its decision. In addition, Sequoia India has already begun a forensic audit of the startup's books in order to control the fallout from one of the most promising startups imploding in this manner. It is also worth noting that both KPMG and PwC had previously audited the startup and found no flaws.
What Causes the GoMechanic's Doubtful Financial Situation?
There are numerous factors that make Gomechanics' finances appear untrustworthy. For example, the startup reported a loss of ₹27.4 crore in its FY21 financials. However, the same loss increased to ₹74 crore in FY22 financials, with no explanation provided by the startup.
As a result, Geomechanics’ investors, which include Sequoia India, Orios, Tiger Global, Chiratae Ventures, and others, have appointed EY to audit Geomechanics' financials after the founders recently informed them of financial reporting inaccuracies. The investors stated that they were unaware that the founders knowingly misrepresented facts, including but not limited to revenue inflation. This has created a major concern for the investors, and even though the founders claim that this was an oversight on their part, they could not provide any sufficient evidence to support their claims.
“The investors have jointly appointed a third-party firm to conduct an in-depth investigation of the matter, and we are working together to determine next steps for the company”, the group of investors said in a joint statement issued shortly after GoMechanic announced layoffs.
Morsebiz was at the heart of the GoMechanic founders' plan. A six-month-old startup that pitched itself as the “Alibaba for auto components” in presentations to investors across Delhi-NCR in an attempt to raise $4 million. While approaching investors to raise capital at an early stage is not uncommon for new ventures, the journey of Morsebiz, founded in March 2022, weaves into the story of GoMechanic.
Morsebiz was founded by Kushal Karwa's wife, Salonee Chitlangia, and her brother, Raunak Chitlangia, with Karwa and other GoMechanic co-founders, Rishabh Karwa and Nitin Rana, serving as strategic advisors. Morsebiz was also presenting to GoMechanic's investors, which included Sequoia Capital, Orios Venture Partners, and Chiratae Ventures. According to sources familiar with the developments, GoMechanic had planned to spin off its spare parts business, which it entered in October 2020, and merge it with Morsebiz for a 30% stake in the company. This proposed structure was a deal breaker for some potential Morsebiz investors.
Even as GoMechanic’s' investors work to find a buyer for the startup, the company's business has slowed significantly. Seven of the eleven garages listed as GoMechanic branded outlets on Google Maps in South Bengaluru do not exist. According to one of the car garage owners, the company also frequently sent payments in spare parts rather than cash.
The Bottom Line
Private equity (PE) and venture capital (VC) investments in Indian enterprises fell 29% year on year to $46 billion over 1,261 agreements in 2022, according to market data firm Venture Intelligence. In 2021, local companies had received over $65 billion in PE-VC investments via 1,362 transactions. In the startup industry, venture capital investments fell to $24 billion in 2022, down from $35.4 billion in 2021. This fall can be linked to a variety of factors, including the uncertainty surrounding the global pandemic, which has reduced risk-taking across industries. Mohalla Tech, the parent company of ShareChat, laid off 500 people, or 20% of its workforce, earlier this week, just months after collecting $255 million from a syndicate of investors.
According to sources, the company's founders have been requested to take a leave of absence until the EY financial forensics investigation is completed. Given the issues, GoMechanic's future might go one of two ways: acquisition by an OEM or a competitor for its existing technology or a change of management with a lower valuation fundraising. The main question is whether GoMechanic's lies and deception will be a deal-breaker in either case.
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