Keeping Up With GoMechanic
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Hello folks,
It’s been a wild week for the Indian ecosystem. The biggest news this week has unsurprisingly been GoMechanic. The story: “GoMechanic founder Amit Bhasin has admitted to financial reporting errors at the Sequoia-backed car repair startup and stated that the cash-strapped company will lay off roughly 70% of its workforce while also having its accounts audited by a third party.” When I read Bhasin’s LinkedIn post, I had to wonder what exactly happed. The mea culpa obviously didn’t spell it out in simple English, but it does seem likely that the books were cooked. And that indeed was the case.
According to reports, things came to the fore because GoMechanic was in talks to raise $75-80 million in a funding round led by SoftBank and Malaysian sovereign fund Khazanah Nasional. However, the due diligence process raised a bunch of red flags. Money Control reported “GoMechanic had reported overinflated numbers and fictitious garages. Some of its favored partner garages were found to be making disproportionately more money during due diligence,” The startup's investors in a joint statement said, "The investors of GoMechanic were recently made aware by the company’s founders of the serious inaccuracies in the company’s financial reporting. We are deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue, which the founders have acknowledged. All of this was kept from the investors."
It’s obviously not a great look for Sequoia, one of the company’s investors, that it seems to have a perennial problem with start-ups that play fast and loose with their numbers. But the bigger question for me is how does this keep happening, and how is this ok? I remember when I first moved to the US and was involved in conversations about funding, diligence etc. I was surprised at how easily investors what take founders’ words at face value. And I had to remind myself that I was coming from what is essentially a low trust society to one that is high trust. There isn’t a mindset that people are out to defraud you, and things largely work on trust.
Perhaps its unsurprising then that Venture Capital, which in its origin is American, has largely worked on trust, and that many venture investors have historically trusted what the entrepreneurs they have invested in tell them. Venture capital is no longer new in India, and like all businesses, there is a need to adjust to local contexts. Should there be more thorough due diligence? Of course. The fact that it was Softbank of all investors whose diligence process unearthed this, and who decided to walk away perhaps points to the go-go days of easy investing being well and truly over. But there’s an even greater onus on founders running a clean business, and not cheating and lying. It’s really that basic. Or it should be. I have written on a number of occasions about anything related to business and profit still being considered suspect in India. The businessmen are always out to get the consumers, many believe. This deep seated suspicion is so rooted in our psyche, and built upon some 250+ years of foreign rule that it should not be surprising. What is upsetting is when these notions get reinforced, especially by the start-up ecosystem that is supposed to be doing differently. I think we can only hope that investors become more diligent, and that boards actually probe more, and we have fewer GoMechanic like cases going forward.
Other stories we have been following
PhonePe is now a decacorn: India’s top payments app, which formally separated from Flipkart last year, has raised money from General Atlantic and is now valued at $12B. The company said it will deploy the new funds to make significant investments in infrastructure, including in the development of data centers and build more financial services. The company also plans to invest in new businesses, including Insurance, wealth management, and lending. Now that PhonePe is untethered from Flipkart, its going the full financial services business route, and can clearly become a big player in the space. It will be an interesting story to watch unfold
Even more layoffs are expected in Q1 2023: As if the news about layoffs over the last few months hasn’t been depressing enough, we should be gearing up for more cuts according to ET. This is of course not an India specific phenomena, like elsewhere many venture funded start-ups have to tighten their belts to prolong their runway, and the fact that everyone hired like crazy during Covid is now impacting employees. Of course, this is not a private company issue either. Big Tech — famous for its cushy jobs — has been tightening its belt and laying off people too to meet shareholder expectations. This is a good post and good view on how much the situation has changed in just the past one year.
What we are reading
I can’t speak for Anmol, but I’ve been engrossed in Prince Harry’s Spare which I finished earlier this week. Yes, I am one of the many millions of people who have made this the biggest blockbuster in publishing history. The book is … good!! J. R. Moehringer is an extraordinary writer and the book is actually full of pathos and very thoughtful. Of course there’s drama and gossip, and the Royals make the Roy family look half sane in comparison. Definitely recommend.