Due diligence conducted by EY for prospective GoMechanic investors showed that the Indian auto-services firm inflated revenue, the latest headache for its backer Sequoia Capital in the South Asian nation.
(Bloomberg) — Due diligence conducted by EY for prospective GoMechanic investors showed that the Indian auto-services firm inflated revenue, the latest headache for its backer Sequoia Capital in the South Asian nation.
EY’s research alleged that about 60 of the more than 1,000 GoMechanic service centers may have violated accounting norms to overstate revenue and divert funds, according to people with knowledge of the matter, who asked not to be identified discussing sensitive information.
GoMechanic’s investors are “deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue,” firms including Sequoia and Chiratae Ventures said in a joint statement Wednesday without providing more details. “All of this was kept from the investors.”
The statement follows a post earlier Wednesday from a GoMechanic founder.
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“We made grave errors in judgment as we followed growth at all costs, particularly in regard to financial reporting, which we deeply regret,” Amit Bhasin, one of the founders, said on LinkedIn, without sharing details. “We take full responsibility for this current situation and unanimously have decided to restructure the business while we look for capital solutions.”
The investor group, led by SoftBank Group Corp and Khazanah Nasional Bhd., that hired EY pulled out of talks to invest in GoMechanic and informed Sequoia about the lapses, the people said. Representatives for SoftBank and Khazanah didn’t respond to emails seeking comment.
Sequoia’s Headache
It’s another headache for Sequoia’s India business after backing Zilingo Pte and BharatPe, which both saw founders depart last year amid allegations of financial irregularities. The US-based investor is GoMechanic’s biggest shareholder and has a representative on the company’s board.
The startup will let go of approximately 70% of the workforce and a third-party firm will be conducting an audit of the business, founder Bhasin said in the post. Morning Context had previously reported about the layoffs.
A spokesperson for EY declined to comment and that for GoMechanic didn’t respond to emails and phone calls from Bloomberg News seeking comment.
“We’re big proponents of doing the right due diligence, making sure that what you’re investing in has the right infrastructure, has the right governance, has the right talent,” Carmine Di Sibio, chief executive officer of EY said in an interview in Davos on Wednesday. “We really are focused on that, and I think investors need to be focused on that, frankly, more now than ever.”
GoMechanic, which offers everything from mechanics to carwashing services on an app, bills itself as having India’s largest auto service center network. With its funding round in jeopardy, the startup is now facing a cash crunch, the people said.
–With assistance from Elffie Chew and Madison Mills.
(Updates with comment from EY CEO as penultimate paragraph)
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