GoMechanic: The Perils of Growing By All Means A tale of growth pressures, inflated revenue and unicorn aspirations, the GoMechanic scam appears to contain in equal measure sordid details as well as lessons for the future

The year 2009 began on a note of scandal: "It was like riding a tiger, not knowing how to get off without being eaten," stated then-Satyam Computers chairman Ramalinga Raju's resignation letter, confessing to a financial fraud of over INR 8,000 crore, which sent shockwaves across the country. Over a decade later, Amit Bhasin, the co-founder of another prominent company, GoMechanic, has admitted to financial misreporting, a grave and inexcusable sin in business. A tale of growth pressures, inflated revenue and unicorn aspirations, the GoMechanic scam appears to contain in equal measure sordid details as well as lessons for the future.

The fund bobby trap

Aiming to raise a Series D funding round, car repair startup GoMechanic began meeting internal and prospective investors in early 2022. Upon agreeing to co-lead the round, Japan's SoftBank and Malaysian sovereign fund Khazanah Nasional jointly employed accounting firm EY in October to conduct the financial due diligence process, which ended months later in shocking findings: fictitious garages, selective payments to certain garage units and discrepancies in revenue and user metrics.

"...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 errors in judgment as we followed growth at all costs, including in regard to financial reporting, which we deeply regret," Bhasin wrote in a LinkedIn post on January 18, 2023.

Though the macroeconomic environment has changed significantly over the last year, with profitability becoming a key aspiration amid a raging funding crunch in the ecosystem, many startups, at least until early 2022, were indeed chasing growth at all costs to continue raising capital from large VC funds, which in turn promise high returns—about four times with a seven-year period, on average—to their own investors (limited partners).

"New-age businesses, which build their core product—technology—in the absence of physical assets (buildings, machinery, etc.) that often accompany traditional businesses, struggle to access enough capital through banks or government schemes. These businesses aim to build a new category and disrupt the market, investing not in physical assets but in people and tech, which are categorised as revenue expenditures under the present accounting norms in the country. It is here that VCs enter the game as they are willing to put money into these loss-making tech companies and accept the inevitable cash burn required for scaling up for they expect that a large scale will cover the losses and generate high returns for their investors," explained a partner at EY who did not wish to be named.

Notably, VCs make money for themselves and their investors on the basis of their investee companies' rising valuations rather than profits (which are absent). In order to raise their valuations, startups burn cash to grow rapidly until they run out of money and need to raise another funding round. While subsequent fundraises work to everyone's advantage, they put a certain pressure on founders to continue growing their companies by leaps and bounds. According to Bhasin, this growth-at-all-costs mentality clouded their judgement, rendering them capable even of financial fraud.

True as this may be, growth pressures were probably not all that led GoMechanic to unravel. The co-founders' adamant insistence on turning their startup into a unicorn at a valuation of no less than $1.2 billion might have been an equal (if not a greater) motivation for cooking the books, which was possibly done over the last few years. According to media reports, in February 2022, the founders struck an in-principle deal for a Series D round with SoftBank following a meeting with the investment giant's CEO, Masayoshi Son. However, the deal was stalled due to a valuation mismatch (SoftBank offered to invest at $800-950 million valuation while GoMechanic demanded $1.2 billion valuation). Talks resumed between August and September when the startup began to run out of cash and acquiesced to a much lower valuation of $600-650 million. Given the glamour, celebration and validation attached to unicornhood in the startup ecosystem—with regular updates on the highs and lows of the country's unicorn population size—it would appear that GoMechanic's aspirations to be a part of this elite group might have got the better of them.

Fraud: The forbidden fruit

"The financial inspections of a startup are of different kinds: an internal 'audit' evaluates the company's financial statements alone and is provided for by the company itself; 'due diligence' is an investigative appraisal of the business as a whole by a prospective investor; and a 'forensic probe' investigates the veracity of an alleged fraud or criminal activity in the company," explained the EY partner.

Thus far, major financial scams at startups, including video app Trell, have been detected in the due diligence processes given that the latter's scope of enquiry extends beyond a company's self-prepared—and occasionally inaccurate, deliberately or not­—account books to physical verification and more. Notably, audit reports are more or less accepted without examination as internal investors claim to have a limited role in the matter.

"As an investor representative, one serves on the board, and boards can only work with the information shared with them—the less transparency there is to the board the lesser their ability to truly unearth errant behaviours," stated Sequoia in a blog after news about alleged financial misconduct at investee fintech BharatPe broke out in April 2022. "The board is not responsible to investigate on an ongoing basis unless something formally is brought up with them, which is often through a whistleblower," it added.

According to a report in Mint, GoMechanic's auditors, PwC India and a KPMG affiliate, had identified non-compliance with accounting standards in FY20, FY21 and FY22—red flags that the company reportedly addressed internally to some extent. The investors, who appear to have missed taking a note of critical remarks in the audit reports, may not have had access to the requisite information, though the Mint report suggests otherwise, quoting Yashojit Mitra, partner, Economic Laws Practice: "Auditor qualifications are typically discussed with the management before they are finalized. Sophisticated investors also have information rights as part of investment agreements."

Now that GoMechanic's fraudulent activities have come to light following the financial due diligence conducted by EY and the founders themselves have admitted to misreporting, the company's existing investors, including Sequoia Capital, Tiger Global, Orios Venture Partners and Chiratae Ventures, have jointly appointed a third-party firm to conduct a detailed forensic probe into the matter.

There's no looking back

The GoMechanic scam is the fourth high-profile case of corporate governance lapses among Sequoia Capital's portfolio companies, following grave allegations surfacing against Zilingo (April), Trell (March) and BharatPe (January) in 2022. The VC firm is now considering special audits of its various investments in South Asia. According to Bloomberg, the fund will work with EY on some of these audits and will boost budget allotment to assist investee companies to put governance guardrails in place. More proactive fraud-monitoring, governance training and risk assessment, especially by large and experienced VC funds, might be on the horizon at a time when the frenzy to invest has fizzled out and investors are exercising more caution in making big bets. That might be the only good thing to come out of the latest financial fraud.

"Investors need to pursue better internal audit mechanisms more strongly but we're seeing these conversations happening at a lot of startups. The transition is coming, slowly but yes," said a vice-president at a Mumbai-based early-stage VC fund.

As for GoMechanic, its future looks grim: 70 per cent of its workforce has already been laid off and the rest has been asked to work without pay for the next three months while the business is being restructured. Satyam Computers was merged with Tech Mahindra and with Singapore-based Zilingo gearing up for liquidation to pay off creditors (as per Bloomberg), GoMechanic might be headed down a similar path. "The firm will either liquidate or someone might buy it out at a low price," said the EY partner. Another lauded company's aspiration for growth has come crashing down, leaving disgruntled investors and aggrieved employees in its wake.