Although India has more than 100 unicorns, less than 20 of those have actually turned profitable, more than a decade after the startup success narrative took India by storm. Innovative ideas have managed to attract big investors such as Sequoia and Softbank among others, but cases of mismanagement are also raising red flags. After Byju’s reported a 17 fold increase in losses when it changed the method to calculate revenues and BharatPe accused its own founder Ashneer Grover of embezzlement, now a scam has been unearthed at GoMechanic.
One authentic audit blew the lid off
It started with the garage chain announcing layoffs to join a list of new-age Indian startups which have fired more than 18,000 employees. But it opened a can of worms, that revealed how 60 of its 1000 garages were overstating revenues, and those favoured by GoMechanic had been making too much money. The findings of the latest audit, just ahead of a fund infusion by Softbank and Malaysian fund Khazanah, show how the company’s books were reflecting garages that didn’t exist, alongside inflated numbers.
The rot runs deeper
With this shocking revelation, GoMechanic became the fourth Sequia funded startup in India caught mismanaging funds, after BharatPe, Zilingo and Trell. Prospective investors Softbank and Khazanah also steered clear of the tainted firm, and informed the existing stakeholders who were caught off guard. Founders themselves confessed about the irregularities, which were flagged by reputed audit firms such as PwC and KPMG, before EY finally blew the lid off the scam.
Audit firms repeat offenders?
Apart from the lack of research and follow up by angel investors regarding the operations at startups that they fund, the GoMechanic fraud once again brings audit firms under the scanner. Affiliates of KPMG and EY had also been blamed for failing to raise an alarm about discrepancies at IL&FS, while a scam was taking shape at the firm. Audit firms had also come under the scanner for failing to warn the world about the 2008 economic crisis, and in other corporate scams as well.
The startup model has so far been functioning with a focus on raising funds to achieve high valuations which can turn firms into unicorns. GoMechanic was also negotiating for a $1.2 billion valation and was relentless, as it kept misreporting revenues till its finances were hit by funding drying up last year. As startups are buckling up to become profitable and investors are looking for returns, the cost cutting measures are unfortunately taking a toll on the workforce, which is suffering due to layoffs.