Car workshop and auto spare parts platform, GoMechanic is going to let go of approximately 70% of its workforce. This was announced by co-founder Amit Bhasin in a long LinkedIn post. GoMechanic, which offers everything from mechanics to carwashing services on an app, bills itself as having India’s largest auto service center network. With its funding round in jeopardy, the startup is now facing a cash crunch, the people said.
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[00:00:00] Namaskar, this is Akhilesh Bhairkar. Welcome to Tit-Bits on Business and Finance with me.
[00:00:07] The latest scam in the startup world is that in a company called Target One Innovations Private Limited,
[00:00:14] which operates under the brand name Go Mechanic.
[00:00:18] The dubious affairs of this company came out in the open when its promoters were forced to come clean
[00:00:24] after incriminating findings were found out and unearthed by the audit firm EY,
[00:00:30] which conducted a due diligence into the affairs of the company at the behest of potential new investors
[00:00:37] who had been approached by the struggling company for more equity funds.
[00:00:42] Ironically, the loss-making company loaded with skeletons on its balance sheet
[00:00:48] was seeking to raise further capital from the lives of SoftBank and Khazana
[00:00:53] at a mega entity valuation of about 600-650 million dollars,
[00:00:59] which is a huge jump from its last round of valuation of about 285 million dollars,
[00:01:06] both of which now appear to be an utter farce.
[00:01:10] Like in the case of many startups, the company was bleeding tons of cash year after year
[00:01:16] and yet its investment value towards going up year after year.
[00:01:22] The fact is that the irrational investors who were willing to fund the Go Mechanic story year after year
[00:01:30] seem to be unaware of its mounting losses, of its rising cash burn
[00:01:36] and of its apparent accounting manipulations since they paid little attention
[00:01:41] to the affairs of Go Mechanic and also to its books of account.
[00:01:46] When the company approached a new set of investors for raising more funds,
[00:01:51] these potentially new investors, before they took a call on investment,
[00:01:56] they commissioned EY to look into the accounts of Go Mechanic
[00:02:00] and EY found out glaring lapses in its books of accounts and in its operations
[00:02:06] and the audit firm raised red flags in terms of fictitious garages,
[00:02:10] in terms of inflated revenue on the books of accounts of the company,
[00:02:15] in terms of revenue discrepancies and a potential siphoning of funds
[00:02:20] by the promoters of the company.
[00:02:22] That was the end of the story of getting more and more investors on board
[00:02:27] by this murky entity.
[00:02:30] All this has cascaded into the start of a forensic investigation
[00:02:35] into the books of accounts of the company,
[00:02:36] the dismissal of 70% of the employees of the company
[00:02:41] and it will also make the promoters to come out with a forced confession
[00:02:47] of what was going on.
[00:02:49] With a cat out of the bag, his co-founder Amit Bhasin wrote on LinkedIn
[00:02:54] about the company's murky affairs and its state and what all they had done.
[00:03:00] He wrote on his page that we take full responsibility for this current situation
[00:03:06] and have unanimously decided to restructure its business
[00:03:11] while we look for capital solutions.
[00:03:14] The fact is they have no choice to do that but to do that.
[00:03:18] He further writes that we got carried away,
[00:03:21] our passion to survive the intrinsic challenges of this sector
[00:03:25] and to manage capital took the better of us
[00:03:29] and it caused errors and judgment as we followed growth at any cost
[00:03:34] including in regard to financial reporting which we deeply regret.
[00:03:41] This was the statement that he made and his speech volumes about what was going on.
[00:03:47] He further writes that there is going to be a third party forensic audit
[00:03:52] in the books of accounts of the company.
[00:03:54] In other words, now there will be a complete audit
[00:03:58] and investigation and of course all the red flags that have been raised by EY
[00:04:02] perhaps will come out to be true.
[00:04:05] In response to this statement, the economic times rightly remarked
[00:04:10] that startups are fighting a tough financial environment.
[00:04:13] They are finding it difficult to survive but that does not discount
[00:04:17] the necessity to maintain proper governance standards.
[00:04:20] We would further add to say that the deep regret expressed by the founders
[00:04:25] of Go Mechanic for their misconduct will neither restore the erosion
[00:04:28] of trust in startups and will neither redeem the tens or millions
[00:04:33] of dollars lost by the investors because of the business, financial
[00:04:37] and accounting malpractices that have taken place at Go Mechanic.
[00:04:42] Speaking about the company, a report in money control says
[00:04:46] that it was founded in 2016 and that it operates a network
[00:04:50] of partner garages and workshops which claim to provide quality car repairing services
[00:04:56] at much lower rates than the authorized repair centres of the automobile companies.
[00:05:03] Go Mechanic claims to have over a thousand partner garages across 40 cities in India
[00:05:10] and it also supplies spare parts and accessories both taken from OEMs
[00:05:16] and also under its own brand.
[00:05:18] The company said to earn the commission of about 5% from the garages
[00:05:22] to whom it refers its customers to.
[00:05:26] Go Mechanic soon got onto the startup irrational exuberance bandwagon
[00:05:33] with this business model and it managed to attract investments
[00:05:37] from venture funds at enormous premiums in multiple rounds of investing each year.
[00:05:43] Interestingly, as its losses mounted year after year and it burnt investor funds
[00:05:48] so did the valuation premium that they charge from the investors
[00:05:53] shoot up in every investment and valuation round.
[00:05:57] Between 2019 to 2022, the company raised about 400 crores
[00:06:03] from investment funds at huge premiums by allotting CCPS
[00:06:08] which is compulsorily convertible preferences to the unsuspecting investors.
[00:06:14] While it incurred the loss of about Rs 5 crores on the turnover of about Rs 18 crores in 2019
[00:06:22] it yet managed to raise about Rs 34 crores from the investors that year
[00:06:28] by allotting shares of Rs 10 each at a premium of Rs 17,545 per share in round 1
[00:06:37] and then in round 2 in the same financial year
[00:06:40] it allotted shares at a premium of Rs 33,619 per share
[00:06:46] the premium double within a year despite losses going up.
[00:06:50] The next year which is in financial year 2020
[00:06:54] even though the company incurred a staggering loss of about Rs 59 crores
[00:06:58] on the turnover of Rs 25 crores
[00:07:01] it yet managed to raise about Rs 105 crores from investors
[00:07:05] by allotting shares of Rs 10 each at a shocking premium of Rs
[00:07:10] 1,9867 per share of Rs 10.
[00:07:15] The company further incurred loss of about Rs 27 crores on the income of Rs 47 crores in 2021
[00:07:24] and despite that and also despite further loss of about Rs 114 crores in 2022
[00:07:31] on the turnover of about Rs 97 crores
[00:07:33] the company managed to raise Rs 255 crores from large investor funds
[00:07:40] at an unbelievable premium of Rs 5,41,061 per share of just Rs 10.
[00:07:48] Just to recap the company started raising funds at a premium of Rs 17,545 per share in 2019
[00:07:58] and its losses kept mounting at the cost of investors
[00:08:01] it yet managed to raise humongous funds in 2022
[00:08:06] at an inexplicable premium of Rs 5,41,061 per share of Rs 10.
[00:08:15] It is more a case of incompetent and indifferent fund managers
[00:08:20] who took the investment decision than one of a stealthy and smart fraudster at play
[00:08:25] who tricked and could win these investors.
[00:08:27] These rounds of rising losses, rising valuations and rising premiums would have perhaps continued
[00:08:36] but for the sharp deterioration in the funding environment for the start-ups
[00:08:41] making money not available on the tap anymore as it used to be in the frenzy to build
[00:08:46] fanciful unicorns and unsustainable businesses.
[00:08:50] It is just that the investors got more choosier and more circumspect
[00:08:54] which got this round of mindless valuations and premiums for start-ups
[00:09:00] to a grinding halt in the case of Go Mechanic at least.
[00:09:04] Hoping to attract further investment at foolish valuations and premiums
[00:09:09] Go Mechanic had approached Softbank and Khazana, the sovereign fund of Malaysia
[00:09:15] with a jacked up enterprise valuation of about Rs 600 to 650 million
[00:09:21] only to hit a dead end after these incriminating findings of EY into its affairs.
[00:09:29] The company now faces a forensic investigation amidst allegations of inflated sales, fictitious garages,
[00:09:37] discrepancies in the revenue figures, contravention of accounting disclosure norms
[00:09:43] and a potential siphoning of funds all leading to suspect transactions
[00:09:48] and suspect accounts and suspect financial statements.
[00:09:54] It raises a pertinent question which is as to how did this dubious operation go on for so long
[00:10:01] despite several obvious signals that all was not good in Go Mechanic
[00:10:07] and despite the best of brains sitting in the funds, the best of brains sitting in the auditors
[00:10:12] and the investment advisors etc. who were dealing with the company
[00:10:18] and its now disgraced promoters. These obvious signals to us were mounting receivables on the books of accounts
[00:10:26] showing that perhaps the states are not genuine. Were they increasing delayed debts and the bad debts?
[00:10:32] Certainly showing that the debts were not new. Rising number of short-term loans and advances
[00:10:37] given by the company not connected with its business.
[00:10:41] Mounting losses despite an expansion of the garage network and an increase in its revenue
[00:10:47] and inadequacy of records and systems as was pointed out by the then auditors PWC in 2020.
[00:10:55] Interestingly, while the company auditors did not give it a clean chit in 2020
[00:11:01] though not for reasons of detection of accounting and financial misconduct as have been revealed now
[00:11:07] they were led to a change in the auditor of the company that year
[00:11:11] and the new auditors who happened to be a KPMG affiliate gave it a clean chit report for the years 2021 and 2022
[00:11:20] during which period its losses shot up and huge funds were raised from these investors.
[00:11:27] This saga raises a large number of points and issues to ponder over.
[00:11:31] The first one, funds often deal with public money and the managers of these funds
[00:11:38] recklessly invested in go mechanic at ridiculous valuations despite continued losses year after year.
[00:11:46] The second point to ponder over, these investors put in little effort to protect their interest
[00:11:53] perhaps just depending on perfunctory audit reports and just letting it go by.
[00:11:58] If they are just a bit more vigilant and express the required diligence then such malpractices can be nipped in the bud itself.
[00:12:09] The third issue, these investors perhaps simply depend on the auditors
[00:12:14] and are thus blind to the most obvious warning signals for them to see and ignore them all the time.
[00:12:21] The next one, this is another shining case or startup mania of investment on baseless valuations
[00:12:28] and ignoring that ultimately it is positive cash flows and profits that build enterprise value
[00:12:35] which were completely missing in the case of go mechanic and yet the investors kept pouring huge sums of money into it.
[00:12:43] The next point, in these valuations only the top line has been considered even if it was bogus
[00:12:50] ignoring that the real foundation of an enterprise lies in the bottom line
[00:12:55] which is in this ability to generate profits and build positive cash flows
[00:13:00] such as the condition of go mechanic that its investors have realized that they have been taken for jolly good ride
[00:13:06] and they are already talking to other companies for sale of the company
[00:13:12] to salvage whatever pitons of a value they can now get.
[00:13:16] They are reported to have already written off their investments
[00:13:19] and they have put the company on the block in a distressed sale.
[00:13:23] Sikoya capital which owns 27% of the company has had a rude awakening
[00:13:29] and it is now considering special audits of startups where it has been investors in all cases
[00:13:36] An expert remark that this startup scam rightly hurts the entire startup ecosystem
[00:13:44] it puts everyone in bad light investors, customers, auditors will trust less
[00:13:52] trust will come down and new divisions will go up and perhaps so will the demand
[00:13:57] that auditors need to be investigators too and that they must honor fraud
[00:14:02] which incidentally they said in their go mechanics audit reports that they were none
[00:14:08] the findings of VY say that perhaps they were numerous of them which were conceived year after year
[00:14:15] the startup ecosystem is bound to have another shake out with this kind of development
[00:14:21] this is Akhil H. Vargarh signing off till we meet again. Namaskar
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