When 'Fake it Till You Make It' goes wrong

When ‘Fake it Till You Make It’ goes wrong

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

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The history

GoMechanic just laid off 70% of their workforce. And apparently (as reported by Morning Context), he 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 it up!”

Oh!

At first glance, GoMechanic fits the mold of a typical startup playbook: raising loads of money from VCs, then spending it all in pursuit of growth. In this case, almost 55 million dollars. They ran out of money and simply had no more.

You might ask: couldn’t they have raised more money?

Well, they could have. And they tried. They’ve been on the market for a while trying to shore up a few more millions. They demanded 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 his money. The news spreads like wildfire. Every VC in the business quietly backs down.

And apparently, that’s what happened at GoMechanic.

Now, before we get too far, we need an introduction to the 7-year-old startup. And the easiest way to explain their business model is this: GoMechanic service cars. Yes, your target market is basically all cars that are out of warranty. They try to get people to leave authorized service centers and choose local garages. And it’s quite evident in his blog posts. Like this one that says: 5 Ways Authorized Car Service Centers Are Cheating You! GoMechanic would simply function as an aggregator. It would attract local workshops to an exclusive bond. I would change brands. A client could simply launch the application and request a service. And GoMechanic’s promise to the customer was cost, convenience, quality and affordability at all times. That the GoMechanic brand would oversee everything.

But the thing is, the car maintenance business is not a walk in the park. Margins are slim, customers get their cars serviced once or twice a year, and getting them to come back is tough. For example, Morning Context believes that only 40% of customers return to GoMechanic. One reason could be that quality control is not really in the hands of the startup. It depends on the manpower of the garage. Therefore, service levels may 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 don’t work.

Did the end work?

As of FY22, GoMechanic claimed revenue of ₹91 crore. It rose 167% over the previous year. But the losses skyrocketed by 322% to ₹114 crore.

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

You see, a potential investor (rumor has it it’s SoftBank) asked EY to conduct an audit of the startup’s financials. Make sure everything is in top condition before investing money. And EY found some glaring problems. They flagged it, and the investor said, “I’m sorry, but we’ll approve this deal.”

And the investor did not stop at that. He called Sequoia Capital to break the news. After all, Sequoia Capital was one of GoMechanic’s biggest backers. He had to know.

But what did EY find?

The fine print hasn’t come out yet. But apparently, the folks at GoMechanic inflated their income. So if they had actual income worth 100 rupees, they could have falsified the books to show that they earned 150 rupees. They evoked associated garages that only existed on paper. They wanted to be a unicorn and this seemed like the fastest way to get there.

But do you know what the craziest part of all this is?

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 judgment, particularly with respect to financial reporting.” He then edited the post and removed the word serious. It was just a mistake.

But we can read between the lines, right?

And he even had a reason why this happened: ‘Passion’. Apparently, they were carried away by that emotion. He is like a cricketer who manipulates the ball and cheats because he is passionate about winning. It’s a horrible excuse.

But the emotion that is 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 cleverly manipulates the ball and causes the ball to spin in reverse without getting caught. He or she will be revered. They will be put on a pedestal and worshipped. They will be invited to cricket leagues around the world. They will earn a lot of money.

The startup valuation equivalent is inflating income. Show a false list of partners and clients. Raise money and double and triple the valuation. And slowly reduce your stake in the company. You will pocket a good sum of money for each sale. And you can keep it in a secret bank account. Or splurge on fancy cars. Or buy a luxurious villa in a prestigious neighborhood. Your money is safe.

It is also greed mixed with arrogance. The feeling that one can fool the eyes of investors. And get away with it.

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

Which brings us to venture capitalists. The likes of Sequoia Capital and Tiger Global Management. How the heck do these VC veterans 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 get a bad case of FOMO. The fear of missing out.

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

Well, this is what the New York Times found in its investigation:

In 2014, Dan Mosley, a lawyer and power broker among wealthy families, asked businesswoman Elizabeth Holmes for the audited financial statements of Theranos, his new blood-testing company. Theranos never produced any, but Mosley invested $6 million in the company anyway and wrote Holmes an email thanking him for the opportunity.

[…]

Mrs. Peterson [Lisa Peterson who handled investments for the DeVos family] he testified that he was afraid that Ms. Holmes would pull his company out of the deal if they delved into the details of the Theranos business. “We were very careful not to skirt things and upset Elizabeth,” she said. “If we did too much, they wouldn’t invite us to invest again.”

Investors don’t like the feeling of having gone from a party that everyone else had gone to. So quickly believe the tales that startups tell.

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

Yes, they will turn a blind eye to all the white lies the founders sell. They may not insist on an experienced board of governors 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 the new investors. They will scream themselves hoarse about how their holding company is a disruptor taking the world by storm. They will create FOMO for potential investors to jump on the rocket ship. And oftentimes, they’ll keep their heads down and quietly head for the exit, pocketing their money and being glad they didn’t keep the package when the music stops.

Again, we’re not saying this happened on GoMechanic, just telling you the ugly parts of the system.

For now, all we can say is that GoMechanic has admitted to tampering with his books. And we’ll just have to wait and see what EY’s forensic audit ultimately reveals. Only then will we know how bad it really is.

Until then…

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