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 Morning Context reports) he said to the remaining employees, “Hey, we want you here. But we can’t pay you for the next 3 months. Thank you for all the good work and keep it up!”
Ouch!
At first glance, GoMechanic fits the mold of a typical starter book – collect tons of cash from VCs, then burn it all in the quest for growth. In this case, nearly $55 million. They had no more money and they had no more.
You might ask – couldn’t they have collected more money?
Well, they could have. And they tried. They’ve been on the market for a while trying to make a few million more. They were claiming a valuation of $1.2 billion. Almost 4 times more than its valuation in 2021.
But… what if your investors stop trusting you?
Well, then you won’t get their money. The news spread like wildfire. Every VC in the company is quietly backing down.
And apparently that’s what happened at GoMechanic.
Now, before we go too far, we need an introduction to the 7-year-old startup. And the easiest way to explain its business model is this – GoMechanic service cars. Yes, their target market is basically all cars that are out of warranty. They try to get people to ditch the authorized service centers and choose local garages instead. And that is pretty clear from their blog posts. Like this one that says: 5 Ways Authorized Auto Service Centers Fool You! GoMechanic would simply function as an aggregator. This would draw local garages into an exclusive link. It would rename them. A customer could simply launch the app and request a service. And GoMechanic’s promise to the customer was cost, convenience, quality and affordability every time. That the GoMechanic brand would oversee all of this.
But the fact is, the automotive service business is no walk in the park. Margins are slim, customers service their cars once or twice a year, and it’s hard to keep them coming back. For example, Morning Context estimates that only 40% of customers return to GoMechanic. One of the reasons could be that quality control is not really in the hands of the startup. It depends on the manpower of the garage. Service levels may therefore vary frequently.
And when GoMechanic has to spend ₹1,000 to acquire a customer and only earn around ₹750 on each bill, the unit economy just doesn’t work.
The final result ?
As of FY22, GoMechanic reported revenue of ₹91 crore. It climbed 167% over the previous year. But losses soared by 322% to ₹114 crore.
So yes, GoMechanic needs more money to keep its dream alive. And this is where things went downhill.
You see, a potential investor (rumor has it is SoftBank) asked EY to conduct an audit of the startup’s finances. Make sure everything was in perfect condition before investing any money. And EY found glaring problems. They reported it and the investor said, “Sorry, but we’re going to go through with this deal.”
And the investor did not stop there. He phoned Sequoia Capital to break the news. After all, Sequoia Capital was one of GoMechanic’s biggest backers. You had to know.
But what did EY find, you ask?
The fine print hasn’t come out yet. But apparently the folks at GoMechanic inflated their earnings. So if they had ₹100 in actual earnings, they might have falsified the books to show they earned ₹150. They mentioned partner garages that only existed on paper. They wanted to be a unicorn and this seemed like the quickest way to get there.
But you know what’s the craziest part of it all?
Amit Bhasin, the co-founder of GoMechanic, actually confessed to the crime on LinkedIn!!!
He said they had committed financial fraud. Okay, he didn’t exactly use those words. Instead, he said “serious errors in judgement, particularly with regard to financial reporting”. Then he edited the post and deleted the word serious. It was just a mistake.
But we can read between the lines, right?
And he even had a reason for why it happened – “Passion”. Apparently, they got carried away by this emotion. It’s like a cricketer handling the ball and cheating because he is passionate about winning. It’s an awful excuse.
But the emotion most apt to describe this is greed. The greed to inflate the valuation and become a unicorn. Going back to the cricket analogy – See, if a cricketer sneakily alters the ball and causes the ball to reverse without getting caught. He or she will be revered. They will be put on a pedestal and revered. They will be invited to cricket leagues around the world. They will earn a lot of money.
The equivalent of valuing startups is inflating revenue. Display a fake list of partners and customers. Raise funds and double and triple the valuation. And slowly reduce your stake in the business. You will pocket a nice sum of money for each sale. And you can hide it in a secret bank account. Or splurge on fancy cars. Or buy a luxury villa in a prestigious area. Your money is safe.
It is also greed mixed with pride. The feeling that can be drawn from the window dressing of investors. And get away with it.
We’re not saying that’s what happened at GoMechanic, but it’s the grim reality of the startup ecosystem. People pretend until they make it.
Which brings us to VCs. The likes of Sequoia Capital and Tiger Global Management. How on earth do these veteran venture capitalists continue to fall in love with 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 from 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 prank?
Well, here’s what the New York Times found in its investigation:
In 2014, Dan Mosley, a lawyer and power broker among wealthy families, asked entrepreneur Elizabeth Holmes for audited financial statements of Theranos, her blood-testing startup. Theranos never produced any, but Mr Mosley invested $6m in the company anyway – and wrote Ms Holmes a gushing thank-you email for the opportunity.
[…]
Mrs Peterson [Lisa Peterson who handled investments for the DeVos family] testified that she was afraid that Ms Holmes would exclude her business from the deal if they went into further details of Theranos’ business. “We were very careful not to sidestep things and upset Elizabeth,” she said. “If we overdid it, we wouldn’t be asked to invest again.”
Investors don’t like the feeling of having dropped a party that everyone had been to. So they quickly believe in the stories that startups tell.
And in other more egregious cases, investors might simply look the other way.
Yes, they will turn a blind eye to all the white lies peddled by the founders. They may not insist on an experienced board overseeing things. They want their startups to “move fast and break things.” Make a big bang and conquer the market. This way, they can reach out to other investors and tell them to put their money to work for the business as well. Early investors will sell the moon to new investors. They will shout at each other that their holding company is a disruptor taking the world by storm. They will create FOMO for potential investors to join the rocket. And often they keep their heads down and quietly make their way out – pocketing their money and feeling happy that they don’t have to hold the package when the music stops.
Again, we’re not saying this happened at GoMechanic, just telling you about the ugliest aspects of the system.
For now, all we can say is that GoMechanic has admitted to curating their books. And we’ll just have to wait and see what EY’s forensic audit finally reveals. Only then will we know how bad it really is.
Until there…
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Also, a quick note. At Ditto we get a lot of questions about how to get insurance for the elderly – people over 60. And while it’s not as simple as buying a policy for someone in their 30s, it’s definitely possible. We have therefore written 2 guides on the subject. One on understanding senior policies and another post explaining the best health insurance plans for seniors. Check them out.