In today's Finshots we see what went wrong with GoMechanic

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The Story

GoMechanic just laid off 70% of its workforce. And apparently (as reported by Morning Context), it told the remaining employees, “Hey, we want you here. But we can’t pay you for the next 3 months. Thanks for all the good work and keep at it!”

Yikes!

On the face of it, GoMechanic fits into the mould of a typical startup playbook — raise boatloads of money from VCs and then burn through it all in the quest for growth. In this case, nearly $55 million worth of it. They ran out of money and they just didn’t have any more.

You could ask — couldn’t they have raised more money?

Well, they could have. And they tried. They’ve been out in the market for a while trying to shore up a few more millions. They were demanding a $1.2 billion valuation. Nearly 4 times more than its valuation in 2021.

But…what if your investors stop trusting you?

Well, then you’re not going to get their money. Word spreads like wildfire. Every VC in the business quietly backs away.

And apparently, that’s what transpired at GoMechanic.

Now before we get too far ahead, we need a primer about the 7-year-old startup. And the simplest way to explain its business model is this — GoMechanic services cars. Yup, their target market is basically every car that has run past warranty. They try and get people to ditch the authorised service centres and choose local garages instead. And it’s quite evident from their blog posts. Like this one which says: 5 Ways Authorised Car Service Centres Are Cheating You! GoMechanic would simply work as an aggregator. It would lure local garages into an exclusive tie-up. It would rebrand them. A customer could simply fire up the app and demand a service. And GoMechanic’s promise to the customer was cost, convenience, quality, and accessibility every time. That the GoMechanic brand would oversee it all.

But the thing is, the car servicing business is not a walk in the park. The margins are wafer-thin, customers service their cars once maybe twice a year, and getting them to return is hard. For instance, Morning Context believes that only 40% of the customers return to GoMechanic. One reason could be that quality control isn’t really in the startup’s hands. It’s dependent on the garage’s manpower. So service levels could actually vary frequently.

And when GoMechanic has to spend ₹1,000 to acquire a customer and earn roughly only ₹750 from each bill, the unit economics just doesn’t work out.

The end result?

As of FY22, GoMechanic claimed revenues of ₹91 crores. It climbed 167% from the previous year. But the losses soared by 322% to ₹114 crores.

So yeah, GoMechanic needs more money to keep its dream alive. And that’s when things went downhill.

You see, a potential investor (the rumour is that it’s SoftBank) asked EY to conduct an audit of the startup’s financials. Make sure everything was in tip-top shape before they invested money. And EY found some glaring issues. They flagged it and the investor said, “Sorry, but we’ll pass on this deal.”

And the investor didn’t stop at that. It rang up Sequoia Capital to break the news. After all, Sequoia Capital was one of GoMechanic’s biggest backers. It had to know.

But what did EY find, you ask?

The fine print isn’t out yet. But apparently, the folks at GoMechanic inflated their revenues. So if they had ₹100 worth of real revenues, they might have fudged the books to show that they earned ₹150. They conjured up partner garages that existed only on paper. They wanted to be a unicorn and this seemed to be the quickest way to get there.

But you know what’s the craziest part about all this?

Amit Bhasin, the co-founder of GoMechanic, actually confessed to the crime on LinkedIn!!!

He said that they’d committed financial fraud. Okay, he didn’t exactly use those words. Instead, he said ‘grave errors in judgement, particularly in regard to financial reporting.’ Then he edited the post and deleted the word grave. It was just an error.

But we can read between the lines, no?

And he even had a reason as to why this transpired — ‘Passion’. Apparently, they got carried away by that emotion. It’s like a cricketer tampering with the ball and cheating because they’re passionate about winning. It’s a horrible excuse.

But the emotion that’s more apt to describe this is greed. The greed to inflate valuation and become a unicorn. Going back to the cricketing analogy — See, if a cricketer tampers the ball slyly and gets the ball to reverse swing without being caught. He or she will be revered. They’ll be put on a pedestal and worshipped. They’ll get invited to cricket leagues around the world. They’ll make a lot of money.

The startup valuation equivalent is to inflate the revenues. Show a fake list of partners and customers. Raise money and double and triple the valuation. And slowly wind down your stake in the company. You’ll pocket a tidy sum of money for each sale. And you can stash it away in a secret bank account. Or splurge on swanky cars. Or buy a fancy villa in a prestigious neighbourhood. Your money is safe.

It’s also greed mixed with hubris. The feeling that one can pull the wool over the eyes of investors. And get away with it.

We’re not saying that this is what happened at GoMechanic, but it’s the sombre reality of the startup ecosystem. People fake it till they make it.

Which brings us to VCs. The likes of Sequoia Capital and Tiger Global Management. How on earth do these veteran VC folks keep falling for startups that commit financial fraud?

Well, we don’t know what went wrong in this case. But let’s just say that sometimes, investors suffer a bad case of FOMO. The fear of missing out.

Remember Theranos, the American startup that promised to revolutionize blood testing but turned out to be a farce?

Well, here’s what the New York Times had found in their investigation:

In 2014, Dan Mosley, a lawyer and power broker among wealthy families, asked the entrepreneur Elizabeth Holmes for audited financial statements of Theranos, her blood-testing start-up. Theranos never produced any, but Mr Mosley invested $6 million in the company anyway — and wrote Ms Holmes a gushing thank-you email for the opportunity.

[…]

Ms Peterson [Lisa Peterson who handled investments for the DeVos family] testified that she was scared Ms Holmes would cut her firm out of the deal if they dug deeper into the details of Theranos’ business. “We were very careful not to circumvent things and upset Elizabeth,” she said. “If we did too much, we wouldn’t be invited back to invest.”

Investors don’t like the feeling of having passed on a party that everyone else had turned up to. So they quickly believe the tales that startups spin.

And in other more egregious cases, investors simply could look the other way.

Yup, they’ll turn a blind eye to all the white lies being peddled by the founders. They may not insist on an experienced board of governors who’re overseeing things. They want their startups to ‘move fast and break things’. Make a big bang and capture the market. That way, they can go to other investors and tell them to put their money to work in the company too. The early investors will sell the moon to new investors.. They’ll shout themselves hoarse about how their portfolio company is a disruptor that’s taking the world by storm. They’ll create FOMO for prospective investors to join the rocketship. And often, they’ll keep their head down and quietly head for the exit — pocketing their money and feeling pleased that they’re not left holding the parcel when the music stops.

Again, we’re not saying that this happened at GoMechanic, but we’re just telling you the ugly bits about the system.

For now, all we can say is that GoMechanic admitted to cooking up their books. And we’ll simply have to wait and see what the EY forensic audit finally reveals. Only then we’ll know how bad it really is.

Until then…

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Also, a quick sidenote. At Ditto we get a lot of questions on how to buy insurance for senior citizens - people who are older than 60. And while it's not as straightforward as buying a policy for somebody who's 30, it's still entirely possible. So we wrote 2 guides on the matter. One on understanding senior citizen policies and another  post explaining the best health insurance plans for senior citizens. Do check them out.