GoMechanic founder Amit Bhasin has admitted to financial reporting errors at the car repair startup and will have its accounts audited by a third party.
Nearly two years after it raised a mammoth $42 million in funding, it emerged that GoMechanic cooked its financial books by inflating revenues.
A forensic audit has been ordered to gauge the magnitude of the financial misreporting.
Coming clean
Bhasin wrote in a LinkedIn post, “As entrepreneurs, we identify problems, come up with solutions, and explore every opportunity to grow those solutions to meet unmet needs.
But in this instance, we got carried away.
Our passion to survive the intrinsic challenges of this sector and manage capital, took the better of us and we made grave errors in judgment as we followed growth at all costs, particularly in regard to financial reporting, which we deeply regret.”
Funding woes
The company will seek “capital solutions” as it was in talks to raise $75-80 million in a funding round led by SoftBank and Malaysian sovereign fund Khazanah Nasional.
However, the deal was called off due to accounting irregularities.
SoftBank was in talks to invest about $35 million in the company through its vision fund, with participation from Khazanah and several others.
Prior to this round, GoMechanic was looking to raise a similar funding round from Tiger Global in early 2022 at a valuation of around $1-1.2 billion, which was subsequently cancelled.
The latest round was expected to happen at a valuation of about $600-$650 million, or nearly half of its previous ask.
Fudging the numbers
A person in the know said that GoMechanic had reported overinflated numbers and fictitious garages.
“Some of its favored partner garages were found to be making disproportionately more money during due diligence,” the source said.
EY’s research suggested that 60 of the more than 1,000 GoMechanic service centres may have violated accounting standards to overstate revenue and divert funds.
Investors appoint third party auditor
In a joint statement, the startup’s investors said, “The investors of GoMechanic were recently made aware by the company’s founders of the serious inaccuracies in the company’s financial reporting.
We are deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue, which the founders have acknowledged. 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,” they added.
Other startups’ dubious actions
GoMechanic will be the fourth Sequoia Capital-backed startup to come under fire for accounting irregularities.
On previous occasions, Sequoia had ordered forensic audits at multiple portfolio startups, including big names such as BharatPe, Trell and Zilingo.
Layoffs due to lack of adequate cash
Bhasin had also said that the cash-strapped company will lay off roughly 70% of the 1,000-odd workforce.
The startup has reportedly asked the remaining employees to work without pay for the next three months.
With loans of ₹ 120 crore and repayments of about a third due, the Gurugram-based startup will have to raise funds to survive.
“This restructuring is going to be painful and we will, unfortunately, need to let go of approx. 70 per cent of the workforce.
In addition, a third-party firm will be conducting an audit of the business.”
Stating that while the situation is far from anything the founders could have ever imagined, GoMechanic is working on a plan which would be most viable under the circumstances.
About the company
Founded in 2016 by Kushal Karwa, Amit Bhasin, Rishabh Karwa, and Nitin Rana, GoMechanic operates a network of partner garages or workshops that provide quality car repairing and servicing at much lower rates than automakers’ official service centres.
It also sells original spare parts and accessories for automobiles on its website.
As per media reports, it currently runs over 900 garages in more than 40 cities.
