Financial Fraud Rocks the Indian Startup World Again Following in the footsteps of Bharatpe, Trell and Ziliongo, GoMechanic has landed itself in the lap of grave financial misreporting allegations
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Another Sequoia Capital-backed startup has found itself in the midst of a financial scam, casting a shadow on the Indian startup story. Gurugram-based car repair startup GoMechanic has admitted to errors in financial reporting, as a result of which 70 per cent of its workforce is to be laid off as part of a business restructuring process to overcome the crisis.
The news comes at the heels of many other revelations of fraud and corporate governance lapses at Indian startups, such as Trell, Zilingo and BharatPe, all three of which, incidentally, also had Sequoia as a major investor. Let's take a deeper look at what went wrong at each of these companies.
January 2023: GoMechanic co-founder admits financial misreporting
As part of its upcoming Series D fundraise process, which was to be led by Japan's SoftBank, GoMechanic's 60 of the total 1,000 or more service centers were found to have possibly violated accounting norms to overstate revenue and divert funds by auditing firm EY, according to a Bloomberg report. While EY is conducting a separate forensic audit for existing investors Sequoia, Tiger Global and others, GoMechanic co-founder Amit Bhasin expressed regret in a LinkedIn post on Wednesday about the auto services company making "errors of judgement" in financial reporting to follow "growth at all costs". Stating that the co-founders got "carried away" while growing the business, Bhasin revealed that the company will let go of around 70 per cent of the staff to restructure the business, which will be audited by a third-party firm.
April 2022: Whistle-blower alleges fraud at Zilingo
After risk and financial advisory firm Kroll found financial wrongdoings at Zilingo during a due diligence process for a new funding round, the Singapore-based fashion startup's board first suspended (in March) and later fired (in May) its CEO Ankiti Bose for "insubordination", "neglect" and "failure" to produce relevant documents, curiously bypassing allegations of fraudulent transactions. In the intervening period, creditors reportedly began recalling loans and over a 100 employees left the company. The Zilingo board had instructed Kroll to investigate an "anonymous whistle-blower complaint" against her and "wrongfully" terminated her without giving a chance to address the charges levied, Bose, a tech celebrity speaker of sorts, said in a statement.
March 2022: Trell found guilty of irregularities
A March EY review alleging serious financial irregularities stalled lifestyle social commerce platform Trell's over $100 million funding round, talks for which had begun with Amazon and other investors in January 2022. Although co-founder Pulkit Agrawal refuted reports which claimed that the founders had siphoned off investor money and even sent a fiery note to the company's angel and existing investors alleging a 'witch hunt', Trell ultimately laid off over 300 of its 700 employees in a bid to do "some right-sizing within the firm", with several creators and influencers reportedly waiting in vain for their dues to be cleared.
January 2022: BharatPe accuses Ashneer Grover of misappropriation of funds
After a preliminary internal investigation by risk advisory firm Alvarez & Marsal flagged indications of financial fraud, consisting of recruitment irregularities and non-existent vendor payments, fintech unicorn BharatPe fired 15 employees, including co-founder Ashneer Grover's wife Madhuri Jain. Grover himself would be ousted from the company in March, with the payments firm accusing his family and relatives of engaging in extensive misappropriation of company funds. Last month, BharatPe filed a civil lawsuit as well as a criminal complaint against Grover and his family in the Delhi High Court, seeking INR 88.67 crores in damages. The case is still going on.
After reports of financial frauds at its portfolio companies surfaced, Sequoia broke its silence on the matter in April 2022, stating, "The allegations are deeply disturbing."
"We will respond strongly when we encounter wilful misconduct or fraud... We won't hesitate to act to protect the interest of the company and employees, even if it costs us financially... We will take proactive steps including, governance training for founders and senior management, implementation of whistleblower policies, more independent board representation and asking for more disclosure and rigorous adoption of internal audits and controls," said Sequoia.
