GoMechanic Financial Fraud: A Cautionary Tale for Startups

The Indian startup ecosystem was surprised by the revelation of financial irregularities in one of the recent EV startups recognized as GoMechanic, a well-known automobile servicing platform. It is one of the eye-opening events recently happening at the leading EV servicing company.  What started as a promising venture backed by major investors soon turned into a cautionary tale of corporate misgovernance, leading to mass layoffs and a significant loss of trust in the company.

The Rise of GoMechanic

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GoMechanic was founded in 2016 by extraordinary business-minded leaders, including Amit Bhasin, Kushal Karwa, Nitin Rana, and Rishabh Karwa, GoMechanic came to be a tech-driven solution for getting less cost and transparent car servicing and repairs. The firm grew fast and gained momentum with investments from large venture capital firms like Sequoia Capital and Tiger Global. With a 1,000-plus service station network, the company positioned itself to be the leader in the car repair sector. 

GoMechanics Rapid Fall: How Things Unfold?

From Jan - Feb 22, Softbank, an investment holding company that invests in technology companies and GoMechanic started talking with each other about funding raising.  On Feb 22, the Founders of GoMechanic met with Softbank’s CEO Masayoshi Son and finalized the deal.

On Mar 22, Softbank was ready to invest at a $850-$900 million valuation but the company asked for a $1.2 billion valuation. The Deal stalled due to the Global Tech Crunch.

On Aug 22, the company started running out of cash because of its high burn rate. Then GoMechanic approached Softbank and agreed to raise funds at a lower valuation even further than was offered by Softbank.

In Aug - Sept 22, Softbank agreed to invest $30-$35 million and the rest of the capital will come from another fund that is Malaysia’s sovereign fund called Khazanah. 

On Oct 22, both Softbank and Khazanah on board EY for the Due diligence before investing at $600-$650 million.

On Dec 22, EY raised multiple concerns regarding financial reporting. Both the investors have pulled out of the deal as the findings are rational. This is where the things were changed for the GoMechanic.

In Jan 2023, the Founders of GoMechanic also admitted the financial misconduct making some grave mistakes that resulted in massive layoffs about 70% of employees were fired to reduce the cost which is about 30% of total expenses. PwC, which is the financial auditor of GoMechanic for FY20, has further found that regulatory filings highlighted the discrepancies identified in their FY20 audit report. 

Three Big Red Flag Raised

Suspicious Expenses: ₹108 Cr. in "Other Expenses"

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​The company had classified a huge amount of ₹108 crore under 'Other Expenses' in its FY22 income statement without providing any additional details.

• Usually, companies give a full breakdown of major expenses, especially concerning their relative materiality (size).
• This non-transparency gives rise to doubts about these being either legitimate operational costs or inflated and false expenses created to hide financial irregularities.
• Such a huge amount under other unclassified expenses strongly indicates embezzlement of funds, fake transactions, and/or manipulation of accounts. 

Inconsistent Numbers in FY21 & FY22 Filings

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Profit After Tax (PAT) figures changed significantly:

• FY21 Filings (original): ₹ -27.4 Cr (reported loss)
• FY22 Filings (restated FY21 loss): ₹ -70.0 Cr

A restatement of financials is not uncommon, but it usually comes with a clear explanation—which was missing in this case.

Possible reasons for such an adjustment could include:

• Recognition of previously unaccounted losses
• Revenue or cost misstatements in prior filings
• Deliberate efforts to manipulate financial perception

Without an explanation, it raises concerns about financial integrity and whether past numbers were falsified.

Overstatement of Revenue & Possible Fund Diversion

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According to a forensic investigation by EY, around 60 centres (out of 1000) are believed to have violated the cost accounting norms to:

• Inflated revenues, apparently, by posting fictitious sales or premature revenue recognition.
• Divert funds – Indicating that the reported profit might have been inflated while the real cash flow was diverted somewhere else.

The implications:

• It could be a case of so-called "round-tripping" trans-actions-moving cash around in circles to inflate revenue.
• It suggests fraudulent revenue recognition practices to obtain investor funding or conceal ongoing losses from stakeholders.

Impact on Finances and Workforce

The exposure of financial misconduct led to immediate and severe consequences:

• Mass Layoffs: 70% of employees (around 1,050 people) were fired.

• Investor Pullout: Sequoia Capital and other backers stop further funding, causing a major liquidity crisis.

• Debt and Liabilities: The company faced outstanding debts exceeding $20 million, leading to severe cash flow issues.

  
  

Investors and Regulatory Reactions 

• Sequoia Capital’s Response: The firm distanced itself from GoMechanic due to lack of transparency and governance failures.

  
  

• Regulatory Scrutiny: India’s Enforcement Directorate (ED) and Securities and Exchange Board of India (SEBI) initiated probes into possible financial misconduct and investor fraud.

Aftermath

GoMechanic faces a huge liquidity crunch and increasing outstanding debt. As a result, Gomechanic approached car-selling marketplaces such as Cars 24 and Spinny among others for potential sales. Despite these efforts, they don’t find any immediate buyer which leads to a crisis. The lack of timely intervention from the founders, venture capitalists, or early investors further exacerbated the situation.

This situation raises critical questions: Could the founders have taken proactive measures to prevent financial mismanagement? Could venture capital firms have been more rigorous in the financial vetting of young startups? Lessons learned emphasize the need for vigilance, financial discipline, and transparency in fast-growing startups. 

Conclusion 

Both investors and business owners can take a lesson from the GoMechanic financial scams. The business is struggling to rise back in 2024-dipping into rumors of potential mergers and restructuring under fresh management. The case serves to highlight how critical robust audits, financial transparency, and ethical business conduct are to long-term profitability.