GoMechanic Acquisition: The Fraud, Funding Crunch & VC-Led Turnaround

GoMechanic acquisition is one of the most trending headlines in the Indian startup world. Take a moment and guess what is the most important thing for a startup other than creating a superb product. It is funding! In order to execute your idea in the market you need to have a strong team with the necessary skills and expertise. You can achieve it only if you have a proper backup for funding.

But what if your product doesn’t perform well and you still need considerable funds? You need to boast the financial earnings of your company. However, if you are caught in this dirty game then you will lose the trust of your investors. Eventually, you won’t be left with any choice other than to sell off your company at a very low price. Much lower than the valuation. 

This same thing has happened to GoMechanic, a seven-year-old startup! We have detangled the whole story of GoMechanic in this article. Here we go!

A Brief Overview of GoMechanic

GoMechanic is a technology-enabled automotive servicing platform that offers car maintenance and repair services across India. It operates a network of over 500+ partner workshops across 35+ cities in India. You can book services through the company’s website or mobile app, and get your cars picked up from their doorstep and serviced at a partner workshop. 

In simple words, we can say that it aggregates car-servicing garages on its platform. Just like Oyo aggregates hotels. The GoMechanic company offers a range of services including regular maintenance, repairs, wheel alignment, and detailing, with prices that are typically 30-40% lower than traditional service centers. Their target market is the four-wheelers (mainly cars) that have surpassed their warranty period. They tie up local garages and rebrand them.

Details

Let’s look into some details-

GoMechanic uses technology to improve the customer experience and streamline operations. The company has developed proprietary tools and software to help manage customer bookings, partner workshops, and inventory. It also uses data analytics to optimize pricing and inventory management and provide personalized recommendations to customers.

The Fraud Incident

“Grave errors in judgment, particularly regarding financial reporting.” This LinkedIn post of Amit Bhasin took the internet by storm. Why and how? You may ask. You will get to know about it in this section.

Summary of the internal fraud news

The founders of GoMechanic admitted the commitment to financial fraud (indirectly though)! Now the common folks were scratching their heads while trying to digest another corporate governance shock. That too in a heavily funded startup where the key investor is Sequoia Capital. Now the bigger question is how Venture Capital investors were unaware of the financial portfolio of their startups. And guess who would be the most stressed one in this scenario? It’s key investors!

One of GoMechanic’s key investors i.e. SoftBank already sensed that something was fishy! So, before re-investment, it decided to perform thorough due diligence on GoMechanic. SoftBank left no stone unturned to find out the hidden truth of the automobile servicing startup. SoftBank hired an auditing firm i.e., EY to do the financial due diligence on GoMechanic. And the findings shocked everyone. Not only did they inflate the revenues to increase the valuation up to $1.2 billion. But it also showed a fake list of partners and customers that only existed on the papers. GoMechanic tried its best to pull the wool over the eyes of its investors.

Impact on GoMechanic’s reputation and operations

The fraud news GoMechanic had spread like wildfire in the market. Most of the investors like SoftBank, Sequoia Capital, Tiger Global Management, etc. pulled out of the deal. It was very disappointing for everyone. As a result, it felt the chills of the funding winter of the Indian startup market. It began with major layoffs that impacted 70% of its workforce. 

Measures taken by the company to address the issue

As soon as the fraud stuff became public, things turned around. The founders were left with no choice but to admit their fault. Once anticipating the market valuation of $1.2 billion, GoMechanic was looking to sell the company at merely $30 million. To get acquired, the founders reached out to everyone including Cars24 and Spinny. But they rejected the offer. Finally, a consortium of Lifelong groups came as a savior of GoMechanic and acquired it without disclosing the amount.

The Funding Crunch

As you have read above, funding is the crucial aspect of a successful startup. But to secure consistent funding from investors, you need to perform well in the market. This is where things went downhill for GoMechanic. It faced numerous challenges that had severe consequences on the business growth.

Challenges faced by GoMechanic

• The car servicing business has thin profit margins.
• People service their cars only once or twice a year.
• GoMechanic could retail to only 40% of its customers.
• Quality control is not under the control of GoMechanic because it depends on the garage’s manpower.
• Improper standardization. Levels of services varied from one garage to the other.
• Unit economics was at a loss because it had to spend Rs.1000 to acquire a customer and hardly earned Rs.750 from each bill.
• It laid off 70% of its workforce. 

Consequences of the funding crunch on business growth

A funding crunch had a significant impact on GoMechanic’s ability to grow and succeed. Following are the major consequences that it faced due to the funding crunch-

• Limited investment in growth initiatives and product development: The funding crunch forced GoMechanic to focus on short-term goals instead of long-term growth. Not only did it have to cut back the investments in new product development, marketing, and expansion. But also, it couldn’t improve the current problems like synchronization of services in garages, retention of customers, quality control, etc.
• Reduced Workforce: The workforce faces a huge blow due to the funding crunch. Recently, GoMechanic laid off 70% of its workforce. Eventually, it impacted the company’s growth. Also, it heavily struggles to keep up with the demands of the customers.
• Unable to attract new investors: Funding crunch traps the startups in a vicious cycle. Due to a lack of funding, you are unable to improve your services and make good profits. As a result, new investors seem disinterested in investing in your company. This is the same tragedy with GoMechanic. Due to a funding crunch, it couldn’t improve its services and profits. Therefore, it was harder to raise capital from current or new investors.
• Damage to brand reputation: A funding crunch forces a company to compromise with its products and services. As a result, it loses the trust of customers. Apart from that the financial fraud of GoMechanic severely hampered its reputation. Not only it lost the trust of investors, but it lost numerous growth opportunities too!

Strategies adopted by GoMechanic to overcome the crisis

To overcome the crisis, GoMechanic used the following strategies-

• Cost-cutting measures: The company implemented cost-cutting measures to reduce its expenses, including reducing salaries, cutting down on office expenses, and renegotiating contracts with suppliers. Laying off its employees was one of these strategies.
• Focus on revenue generation: GoMechanic focused on revenue generation by introducing new services such as doorstep car servicing and offering discounts to attract customers. The company also launched a subscription-based service, GoMechanic Plus, which offered additional benefits to its customers.
• Strategic partnerships: GoMechanic formed strategic partnerships with other companies to expand its reach and offer additional services. For example, the company partnered with ICICI Bank to offer easy EMI options to its customers.
• Digital marketing: The company increased its digital marketing efforts to reach more customers and improve its online presence. It also launched a new website and mobile app to make it easier for customers to book services.
• Fundraising: GoMechanic raised additional funds from existing investors, including Sequoia Capital, Chiratae Ventures, and Orios Venture Partners, to tide over the funding crunch crisis before 2023.

All of these measures were taken by GoMechanic before the exposure of financial fraud. Once the fraud came into the limelight, it couldn’t raise funds anymore. Lastly, Lifelong Group took part in the GoMechanic acquisition and bought it with a maximum stake. 

VC-Led Turnaround

A Venture Capital (VC) led turnaround refers to a type of corporate restructuring where a VC firm takes a significant stake in a struggling company. Thereby it uses its expertise, resources, and network to make the acquired business profitable. In the case of GoMechanic, the VC-led turnaround changed the scenario. 

The sale of GoMechanic was initiated by its board members and shareholders. Also, it got a considerable amount of support from the venture debt investor “Stride Ventures” to sell off the financially struggling Gurugram-based firm. The investors badly scrambled to sell the company since January 2023.

A car care startup i.e., the Servizzy consortium of Lifelong group participated in the GoMechanic acquisition and acquired it in March 2023. Although, they didn’t disclose the amount of the deal it was the strongest bidder in the GoMechanic acquisition process. The firm’s equity investors and venture debt investors managed to recover some of the funds through this process.

Brief information on GoMechanic Acquisition

GoMechanic was acquired by its rival Servizzy. Now coming to the Lifelong Group. It was set up in 1985. It is headquartered in Delhi. The GoMechanic acquisition perfectly aligns with the Lifelong group’s strategic vision of synergizing its proven expertise in the automobile industry. It caters to major players in the Indian automotive industry such as-

• Hero Moto Corp
• General Motors
• Arvin Meritor
• Stanley Black & Decker

Future Prospects for GoMechanic

Founded in 2016, GoMechanic connects car owners with repair service providers. It was going through financial turmoil since covid. The lifelong group acquired the financially distressed firm GoMechanic. Being a major player in the automotive industry, it won the auction of the GoMechanic acquisition. This transaction will assist to preserve the ecosystem of GoMechanic by providing continued livelihood to its employees. As of now, GoMechanic operates 800 workshops and serviced over 30,000 vehicles. After its acquisition by a major automotive firm, it is hoping for new leads ahead!