At the heart of this plan was a six-month-old startup called Morsebiz, which pitched itself as the “Alibaba for auto components” in its presentations to investors across Delhi-NCR, in an attempt to raise $4 million.
While it isn’t unusual for new ventures to approach investors to raise capital at an early stage, March 2022-founded Morsebiz’s journey weaves into the story of GoMechanic’s unravelling.
This is primarily because of two reasons. Firstly, Morsebiz was founded by GoMechanic founder Kushal Karwa’s wife, Salonee Chitlangia, and her brother, Raunak Chitlangia, with Karwa and other GoMechanic cofounders–Rishabh Karwa and Nitin Rana–acting as strategic advisors to the company; and secondly, Morsebiz was pitching to GoMechanic’s investors, including Sequoia Capital, Orios Venture Partners and Chiratae Ventures.
Also read: How GoMechanic unravelled after SoftBank-Khazanah funding round collapsed
Birth of Morsebiz
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Morsebiz generated revenue for the first time in August by fulfilling two orders worth $9,000. According to the pitch deck, Morsebiz estimated it would clock $519,000 in revenue by March 2023. However, there was another plan that was not a part of the pitch deck.
“We heard the pitch from Salonee (Chitlangia), and while the numbers were promising, we weren’t willing to get on board with the plan of GoMechanic hiving off its auto spare parts business, merging it with Morsebiz and picking up a 30% stake in the startup,” a New Delhi-based partner at an early-stage venture fund told ET. “For us, it would have been like investing in a subsidiary of GoMechanic, which is not aligned with our thesis,” the person said.
Emailed queries sent to GoMechanic founders and text messages sent to Raunak Chitlangia remained unanswered.
Sequoia Capital, Orios Venture Partners, Chiratae Ventures and Stride Ventures also did not respond to queries.
Another venture capital fund executive said that while there was no inherent conflict of interest seen at the time, red flags were raised internally on how the GoMechanic founders would divide their time between the two entities.
Around October 2020, when GoMechanic forayed into the spare parts business, the company launched the vertical to provide automobile spare parts to its authorised garages. Shortly after it entered this space, GoMechanic also began exporting spare parts, and it claimed to have successfully exported to South Asian, South American, African and Middle-East countries.
According to people with knowledge of the automotive industry, the spare parts business was going to be a tough nut to crack given its large unorganised nature.
“The spare parts industry in India is highly unorganised… After a point, a car or bike owner prefers to visit garages or mechanics outside of the dealer ecosystem because of the costs involved at an original equipment manufacturer (OEM)-authorised garage,” a startup founder in the automotive components business said, requesting not to be named. “A rapid growth in this area, given the current environment, was questionable,” he said.
Notably, even as GoMechanic’s topline continued to swell, it came at a significant rise in expense. For the year ended March 2022, GoMechanic’s topline grew more than 2.5 times to Rs 91 crore, compared with Rs 34 crore in FY21. Its expenses, however, surged even more rapidly–to Rs 210 crore from Rs 74 crore.
It was in 2021-22, when GoMechanic closed a funding round of $42 million, or around Rs 325 crore as per June 2021 exchange rate, from Tiger Global at a valuation of $285 million. However, under the hood of this growth and expansion in scale, “financial lapses” and “errors” were being committed, as now confessed by the company.
As ET had reported earlier, the unravelling of these lapses unfolded in the backdrop of a potential $70-80 million financing round being co-led by SoftBank Vision Fund and Malaysian sovereign fund Khazanah.
Also read: GoMechanic founder Amit Bhasin admits to financial misreporting; firm to lay off 70% employees
The spares plan
A founder of a Gurgaon-based unicorn told ET that the company’s management would ideally have an understanding of how much cash runway is left, and the level of urgency the founders need to show while raising funds. “The founders would know at least six months before they are about to run out of cash. In such a case, there’s no time to waste trying to haggle on valuations. The company and its employees need to be prioritised,” the founder said.
According to sources, SoftBank first engaged with GoMechanic in early 2022 for a potential funding deal but the talks fell through due to a valuation mismatch. ET had reported that the now beleaguered startup had met SoftBank’s founder Masayoshi Son in January-February last year. This is when the funding deal was agreed upon–in principle. But SoftBank did not agree to the valuation demand of $1.2 billion, and was willing to offer $850-900 million.
“It’s surprising why GoMechanic founders did not take the offer a year ago… the cash position wasn’t great even back then… but they stuck to the valuation demand… Few months on, the technology world changed dramatically…,” the founder said.
Six months later, GoMechanic went back to SoftBank and restarted its discussions for a potential $30-35 million investment at a much lower valuation of $600-650 million. This time around, the company was also drawing in monies from Malaysia’s sovereign fund Khazanah.
Last month, in a post on LinkedIn, one of GoMechanic’s cofounders, Amit Bhasin, confessed to financial lapses, laying off 70% of its staff and initiating an audit of the firm. The investment due diligence, which was being conducted by EY India for SoftBank and Khazanah jointly, highlighted issues like fictitious garages, selective payments to certain garage units, and discrepancies in revenue and user metrics at the Sequoia Capital and Tiger Global-backed company.
Also read: Back to the garage! Decoding how GoMechanic ignored financial reporting, corporate governance issues
While there is no clarity on whether Morsebiz will continue to operate as a separate business in the automotive component export segment, the company’s website has been taken down.
For GoMechanic, however, there could be more bad news.
Even as EY conducts a forensic audit of GoMechanic, the company’s investors have begun looking for potential suitors, but not many are interested. “We were close to signing a deal with GoMechanic to supplement our own line of business when the fallout happened. Now, people from their team have approached us informally for a buyout but there is no value that we see the business could add at this point,” a CEO of a Gurgaon-based auto-tech startup said, adding that his company refused to take the discussions forward.
Right now, GoMechanic is estimated to be servicing 800-1,000 cars per day, multiple people in the know said. “Someone might think, I can buy this company, clean up the mess and grow this number. But for some people, the value proposition is much smaller,” said a founder who was approached for the acquisition.
“We are approaching it in a way that GoMechanic is doing 800 cars a day, of which 40-50% are repeat customers. But I don’t know how to run this business, so I might cut down around 70% of its presence. So for me, the value comes from not 800 cars a day but much less than that,” he said, requesting anonymity as the talks are private.
As per multiple sources, GoMechanic’s venture-debt investor Stride Ventures is driving the sale process.
Business at standstill
Following the recent events, the company’s business has slowed down in a big way, according to several garages that ET visited. Seven out of eleven garages listed on Google Maps as GoMechanic branded ones that ET surveyed across South Bengaluru do not exist. According to one of the car garage owners, the company had often paid in spare parts instead of cash.
“That’s where we started sensing trouble. We had to pay our mechanics and incur the cost of products but they would send us spare parts from their own business,” a garage owner said. According to him, garages realised there were fake locations created on maps. “It would typically be in the same vicinity…We would receive calls later that the customer is around 1.-1.5 kms away,” he said.
Besides, spare parts being sent in lieu of payments, GoMechanic was often at conflict with the firm over pricing the servicing a car. “Especially, in the last one year, they would list and sell services at a steep discount of say at Rs 8,000. The total cost for this job would be Rs 13,000 including labour charges…There is no way I can service it at Rs 8,000. So, garage owners have had to put cheaper goods or even put two units of something instead of three,” this person said, adding he had several pending payments from the company.
Interestingly, this garage owner told ET that investment officials had visited his premises for diligence and these officials were under the impression that GoMechanic had invested in the garages. “I made it clear to them that this is only a branding partnership to bring in customers–like restaurants opt for Swiggy or Zomato. GoMechanic doesn’t own our garages,” he said, adding the officials were taken aback by his response.
Some of the car garage owners also expressed concerns over slowing leads from GoMechanic in the last 20 days, most likely a fallout of less number of customer representatives from GoMechanic’s side.One of the owners that ET spoke to said he has asked the customer representatives responsible for this garage to not bring in any more leads who prefer online payments as he has heard of payments stuck to the tunes of Rs 4 lakhs accrued at each garage level. When customers choose for offline payment, garages get the money directly instead of through GoMechanic’s systems. The startup takes a 15% commission cut from any billed amount.
“I’m not taking their leads unless offline payment is chosen. The number of leads have drastically come down as there aren’t enough customer representatives from the company,” he added.