GoMechanic’s Fall From Grace As The Startup And Its Co Founders Battle Allegations Of Financial Fraud, Hinting Once Again That Corporate Governance Is A Major Issue In Indian Startup Ecosystem

The Economic Offences Wing of the Delhi Police has initiated a formal First Information Report (FIR) against not only the four co-founders of GoMechanic but also key management personnel in response to allegations of fraud and deceit.

This legal action was prompted by a complaint filed by the startup’s prominent investors in June of the current year; the joint complaint was lodged by Orios Venture Partners, Peak XV Partners (affiliated with Sequoia Capital), and Chiratae Ventures.

In August, it was revealed that GoMechanic’s major investors had sought the intervention of the EOW to investigate the role of the four co-founders in misrepresenting financial data and any potential misallocation of funds.

The EOW formally registered this complaint as an FIR on October 20, 2023, invoking various sections of the Indian Penal Code, 1860, including Section 120-B, 409, 420, Sections 465, 467, 468, 471, and 477-A, which pertain to offenses such as fraud, dishonesty, and cheating.

The FIR, names the founders Amit Bhasin, Kushal Karwa, Rishabh Karwa, and Nitin Rana, as well as several senior officials, including Prateek Jain (VP, finance), Yogesh Narnawat (senior executive, finance), Vishambar Sharma (VP, admin), and others, as the accused parties.

What is of significant importance is that, for the first time, a clearer picture is emerging of the events that transpired at GoMechanic in the lead-up to the founders’ admission of inaccuracies in financial reporting and manipulation of account statements.

Curiously, the FIR does not specify the total amount implicated in the alleged fraudulent activities; however, the three complainants have emphasized the necessity for a comprehensive investigation to ascertain the extent to which financial records were distorted and falsified.

The FIR documents state, “Instead of utilizing our substantial investment of over Rs 200 crore for the legitimate business operations of the company, the accused individuals have unscrupulously misused their positions as directors, agents, and employees of the company, leading to a criminal breach of trust by diverting and misappropriating capital and funds for personal and concealed purposes”.

The Genesis of the Alleged Fraud
The FIR reveals that the alleged fraud at GoMechanic traces its roots back to 2017, a year after the company’s inception. During discussions with investors for a seed funding round, the founders purportedly misrepresented the company’s financials, inflating revenues to secure investments.

This discrepancy emerged in early 2023 when controversy erupted, raising questions about GoMechanic’s financial integrity.

Falsification of Financial Statements
The alleged fraud at GoMechanic extended to the falsification of bank statements, as stated in the FIR.

A senior executives in the finance team, including Yogesh Narnawat, are accused of sending misleading bank statements to investors; these documents misrepresented the company’s financial health, indicating a positive balance when, in reality, the company faced substantial financial troubles.

The extent of manipulation is staggering, with the balance being inflated by approximately INR 30 crores, painting a rosier picture than the actual situation.

Audited Financial Statements
Investors also pointed to the manipulation of audited financial statements, highlighting the inclusion of fictitious entries and round-tripping of cash.

For instance, GoMechanic’s audited FY22 financial statement reported significant “market support income,” a considerable portion of which was found to lack supporting evidence through a forensic audit ordered by investors.

These discrepancies raise serious questions about the accuracy and reliability of GoMechanic’s financial reporting.

Financial Performance
An analysis of GoMechanic’s financial performance reveals a stark contrast between reported figures and actual results; while the company reported impressive revenue growth, increasing from INR 34.1 Cr in FY21 to INR 90.5 Cr in FY22, its expenses outpaced revenue, leading to substantial losses; hence indicating
at the alleged financial manipulation and the cost of pursuing rapid growth at any cost.

Investor Awareness and Due Diligence
The GoMechanic story unravelled during a fundraising effort as SoftBank and others conducted financial due diligence, and shockingly, it was revealed that a significant number of service centers had violated accounting norms to inflate revenue figures and divert funds.

This revelation led to an immediate withdrawal of prospective investments and the initiation of a forensic audit by the existing investors.

Corporate Governance Concerns
The GoMechanic case again highlights the broader concerns regarding corporate governance within the startup ecosystem.

The Indian startup ecosystem is continually throwing up cases where corporate governance has gone for a toss, as seen in startups such as Byju’s, more recently, BharatPe, Zilingo, and Trell, to name a few and in many cases despite red flags many of these startups are actually lining up for IPOs.

The Explosive Due Diligence Revelations
The unravelling of GoMechanic’s tumultuous journey occurred during a critical juncture when the company was in the midst of raising $75-80 million in a Series D funding round, anticipated to be spearheaded by SoftBank’s Vision Fund and Malaysia’s sovereign fund, Khazanah Nasional. A multitude of prospective investors were poised to partake in this financial endeavour.

As is customary for most investors, SoftBank, eager to conduct rigorous financial scrutiny before making an investment commitment, engaged the services of the auditing firm EY.

However, the outcome of this due diligence sent shockwaves through the corporate corridors.

According to a Bloomberg report, EY’s findings indicated that more than 60 out of over 1,000 GoMechanic service centers may have transgressed accounting norms, exaggerating revenue figures and diverting funds.

What ensued was nothing short of an earthquake in the business world; SoftBank, along with other prospective investors, immediately withdrew from the deal, leaving existing stakeholders, including Sequoia Capital, Tiger Global Management, Orios Venture Partners, and Chiratae Ventures, in a state of disbelief.

But the events did not stop there; on the very same day that the founders and SoftBank confronted the alarming findings of EY, Sequoia Capital and Tiger Global, among others, took a pivotal step; they appointed EY to conduct a separate forensic audit, unravelling the complexity of this financial puzzle.

Shocking Confessions and Investor Response
The investors, major players in the GoMechanic story, were dealt a thunderous blow as the founders of the startup made shocking confessions regarding the alleged financial irregularities; their admissions left the investors bewildered and profoundly disappointed.

In a bid to address the distressing situation, the major investors of GoMechanic issued a statement on January 18, expressing their deep concern over the founders’ deliberate misrepresentation of facts, particularly the inflation of revenue.

The magnitude of this deception left the investors dumbfounded, and to rectify the matter and to ascertain the truth behind these allegations, the investors jointly appointed a third-party firm to conduct an exhaustive investigation.

Potential Ramifications And The Quest For A Unicorn
In the wake of these startling revelations, the future of GoMechanic hangs in the balance.

GoMechanic, which has garnered over $60 million in funding from a diverse group of global investors, including Tiger Global, Sequoia Capital, Orios Venture Partners, and Chiratae Ventures, has endured a rough journey.

As it navigated the turbulent waters of the startup ecosystem, GoMechanic’s valuation fluctuated, with its most recent round in December 2021 reaching a valuation of approximately $285 million.

The company’s pursuit of unicorn status, exemplified by negotiations with investors for valuations of $1 billion and beyond, seems to have been derailed by a funding winter that swept across the startup landscape.

This chilling funding environment, driven by macroeconomic forces such as inflation and global conflicts, led to hesitancy among investors; the result was a significant reduction in the valuations proposed by prospective investors. As a consequence, GoMechanic, once envisioning itself as a unicorn, had to make concessions on its valuation targets.

The Last Bit,
GoMechanic’s explosive due diligence findings have not only exposed the vulnerabilities in corporate governance but have also raised pertinent questions about the integrity and transparency within the startup ecosystem.

As investigators dig deeper to uncover the extent of financial misconduct, the story leaves us with numerous questions.

How did a promising startup, backed by marquee investors, resort to such practices?

Were the warning signs overlooked, or was the manipulation so well-concealed that even reputable auditors failed to detect it?

How did a company that seemed to have it all spiral into such ethical and financial turmoil?

What role did investors, auditors, and the company’s leadership play in allowing this alleged deception to persist for so long?