A year ago, automobile services network start-up GoMechanic was in talks with Tokyo-based SoftBank to raise funds at a valuation of over $1 billion and become a unicorn. And now, it is staring at the possibility of shutting down after announcing the decision to lay off 70 per cent of its workforce.
In addition, Singapore-based fashion tech start-up, Zilingo has begun its liquidation process if rumours are to be believed. Zilingo was a popular name not just in India but also in Southeast Asia start-up circles. The start-up which was valued at $1 billion had been struggling for survival for quite sometime now. Its founder, Ankiti Bose, was ousted from the company in May last year amid charges of financial wrongdoings.
Zilingo aside, how did GoMechanic get to a place where it is now? It had top investors, co-founders from premium Indian institutes, and a sector which is hot?
From zero to 'soonicorn'
GoMechanic was founded by four co-founders, all of whom were from the coveted Indian Institute of Management, Ahmedabad. The Gurugram-based company was launched in 2016 by Kushal Karwa, Amit Bhasin, Rishabh Karwa, and Nitin Rana. In 2019, it started getting prominent and top investors onboard beginning with Sequoia Capital, Orios Venture Partners, SoftBank Vision Fund, Tiger Global, Pawan Munjal, Managing Director of Hero Moto Corp, and more.
The company also onboarded actor Sharman Joshi and WWE wrestler The Great Khali for brand endorsements.
Meanwhile, in the years 2016-2019, auto tech start-ups were witnessing immense investor interest as well. Start-ups operating in the segment including CarDekho, Truebil GoMechanic, Spareshub, and Boodmo raised more than $130 million in 2019. What was attracting investors was how these companies were converting an unorganised sector into an organised one by connecting buyers and sellers with technology as the base. And they were helping both parties clinch the best deals as well.
GoMechanic was no different. Its presence quickly grew to over 1,000 centres across India providing a host of services including AC service, car repair, batteries, denting and painting, and more.
While it was present in major cities of the country like Delhi NCR, Mumbai, Pune, Hyderabad, Bangalore, Chennai, Jaipur, Kalyan, Chandigarh, and Ahmedabad, according to the company’s website, it also forayed into the Nigerian market. "Changing the ecosystem" of car repair and maintenance while offering these services at an affordable price was the main pitch of the co-founders and it seemed promising.
In short, things were looking up for GoMechanic.
Troubles start brewing
At the beginning of 2022, the company commenced talks with the Tokyo-based SoftBank Vision Fund to lead a funding round. According to a media report, the co-founders met SoftBank boss Masayoshi Son who was ready to invest $850-900 million. If this deal would have worked out, GoMechanic would have become a unicorn. A unicorn is a company with a valuation of over $1 billion.
However, within the company, a lot of cracks were beginning to show. The company was running out of cash and troubles were brewing up. Business Today spoke to a few vendors who claimed that they have not got their dues. A vendor who did not wish to be named said 50 per cent of his dues plus GST are pending with GoMechanic. He has written around 30 emails to the company since 2020 to Karwa and others but hasn’t received any response. “The company was into aggressive marketing and advertising activities.” Another vendor whose dues haven’t been paid said that they came onboard but were regretting the decision. “I thought that they are paying celebrities so they have money. However, I realised that they have money to pay celebrities but not us.”
Several sources told BT that lack of checks before tying up with garage partners often widened the gap between what they were offering in terms of services and what was available.
“Some of the garages did not even have basic machines for car servicing which were being promised on the website,” the source said.
On the investor front, SoftBank started showing hesitation to invest in the company after audit reports observed discrepancies within the company and Malaysian sovereign fund, Khazanah Nasional Bhd, came on board to lead the investment, according to reports.
The media reports also suggested that Tiger Global was ready to come on board for a $1 billion valuation but the co-founders were pushing for a $1.2 billion valuation.
Fall of the house of cards
Operational problems aside, the real cracks within the start-up were starting to show up prominently. SoftBank and Khazanah Nasional Bhd., hired Ernst & Young to carry out due diligence within the firm before infusing funds.
However, Bloomberg reported that both these investors pulled the plug on their investments in GoMechanic and informed other investors including Sequoia about the lapses.
Bloomberg’s report revealed that EY’s research alleged that about 60 of the more than 1,000 GoMechanic service centers may have violated accounting norms to overstate revenue and divert funds, according to people with knowledge of the matter, who asked not to be identified discussing sensitive information.
Investors including Sequoia and Chiratae Ventures issued a joint statement sharing that GoMechanic’s investors are “deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue.”
On Wednesday, Bhasin took to LinkedIn to share that they are laying off 70 per cent of the workforce. He also confessed to committing financial reporting errors. “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 errors in judgment as we followed growth at all costs, including regarding financial reporting, which we deeply regret.”
Business Today reached out to GoMechanic for a comment but failed to get one.
Are investors at fault too?
GoMechanic is not an exception but it definitely puts the spotlight on the larger issues, such as growth at all costs, lack of transparency between the stakeholders of a company (employees, investors, founders), corporate governance issues, that beset the start-up ecosystem.
While fintech unicorn BharatPe is caught in a courtroom battle with its co-founders, Zilingo is in the process of liquidation. A founder and angel investor who is also one of the most well-known voices in the Indian start-up ecosystem told BT that to some extent, investors are also to be blamed. “They are after the founders to give them 10x returns and look at making an exit within 10 years. What will the founder do in such cases when they want to run the company sustainably for 20 years or more?"
He said that because founders are under so much pressure to offer promised returns to investors, they have no option but to resort to a “growth-at-all-costs” mindset.
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