The Curious Case Of Mojocare’s $20 Mn Funding & Inflated Revenues

Like GoMechanic, it all started with a confession. This time it was the turn of Mojocare’s founders to admit to the board and investors that they had fudged numbers.

The Mojocare story is quickly unravelling — just days after layoffs of 80% of its workforce, investors revealed that they have launched a forensic audit into the company’s accounts and financial statements, and the founders are left with hardly any control in the company.

Inc42 sources close to the company alleged that investors have appointed an interim CFO to take charge of the day-to-day operations.

“Mojocare founders approached investors in May and confessed to round-tripping of funds via inventory sold to relatives, creating fake invoices and inflating revenue. Both founders have been asked to step back and all decisions are being made by the CFO now,” a source close to Mojocare informed Inc42.

The source added that the confession came as a result of a previous audit into the company’s finances by Deloitte. The founders feared this audit would uncover the fake numbers and came forward to investors with their admission of faking numbers.

On Sunday, nearly a month after the alleged confession and a day after news about mass layoffs, investors decided to issue a joint statement pointing to financial irregularities.

“Major investors of Mojocare initiated a review of the company’s financial statements. While the analysis remains ongoing, initial findings have uncovered financial irregularities, and it has become apparent that the business model is not sustainable due to a variety of operational and market factors. As a result, Mojocare will be scaling down operations, and the investor group is working with the company through its transition,” the investor group said in a joint statement.

Further, our sources told us a forensic audit has been underway for over two weeks at Mojocare and will look into the company’s accounts, major customers, and financial statements over its lifetime.

Earlier, a report by The Morning Context had claimed that Mojocare was selling its products to companies owned by the founders’ relatives and then re-entering these goods into its inventory.

While the founders confessed to fudging numbers, the company has denied taking money out of the company. “At Mojocare, we are working closely with our investors to find a way forward. We categorically deny all accusations of money being taken out of the company. Together with our investors we are actively figuring out what’s best for the business,” a spokesperson for Mojocare said.

Given this statement, the question is, why exactly did the founders fudge revenue? The answer lies in THE vanity metric in ecommerce — GMV.

Mojocare Falls For The GMV Trap

GMV or gross merchandise value, is the top-line revenue item in ecommerce, and the actual revenue earned by the company is derived from this figure after deducting all operational costs, depreciation costs and taxes.

Many companies have relied on A high GMV figure to measure the scale and show the reach among the target audience. However, it does not necessarily mean that the company is on track to hit profitability. Indeed, companies need to spend higher and higher on marketing and other activities to boost GMV and scale over a period of time. So the profitability in ecommerce is a factor of how efficiently a company can boost its GMV.

In other words, a high GMV indicates that the company has latched on to a revenue stream and now has to reduce expenses and make its revenue acquisition more cost-effective. It’s a big signal that is leveraged to bring in investors and also a high valuation.

The GMV trap has caught many startups in their growth path, especially when competition is high. And Mojocare seems to be the latest victim.

Mojocare is among a number of companies looking to make a mark in the sexual wellness category.

The Bengaluru-headquartered startup competes with the likes of Misters, Good Health Company, Sirona, Mosaic Wellness (Man Matters), BoldCare, and Traya, among others, across different verticals in the sexual wellness and personal care category. There are a host of new brands emerging in this segment as well as labels managed by larger FMCG players.

Despite this stiff competition, Mojocare reported nearly 38X revenue growth in FY22, the first full fiscal year for the company. It saw revenue shoot to INR 12.12 Cr in FY22 from a mere INR 32 Lakh in FY21. Total expenses skyrocketed from INR 1.83 Cr in FY21 to INR 19.46 Cr in FY22, and the company had a net loss of INR 5.5 Cr (compared to INR 1.1 Cr in FY21).

It is unclear whether the FY22 filings include any inflated revenue, which the founders have confessed to. But the GMV pressure was clearly felt in FY23 now that the revenue misreporting has come to light.

Inc42 was unable to ascertain just how much GMV the company had claimed in its monthly income statements shared with investors.

As a company that raised over $20 Mn in a Series A round amid 2022’s funding winter, Mojocare would have felt the pressure to show higher GMV and revenue to its investors and attract more future investments.

After all, funding for B2C brands is largely for acquiring new consumers and growing the customer base. Cash burn for customer acquisition is high in categories such as sexual wellness with a long list of rivals.

As far as syphoning of funds is concerned, Inc42 could not independently verify any details that were alleged in the TMC report cited earlier in this story.

Even if there was no syphoning, the fundraise in August 2022 meant the company had no option but to show a higher scale compared to FY22.

But the stiff competition in this sector and the fact that neither of the founders had any background in healthcare would have been significant disadvantages for the company. The previous work experience of the founders is particularly interesting given that they have no real background in the healthcare and sexual wellness industry.

Founders And Early Investors: Curious Connections 

Till date, Mojocare has raised more than $24 Mn from the likes of B Capital, Chiratae Ventures, Peak XV Partners’ early stage accelerator Surge and Better Capital. Most of these VCs backed the company in its $20 Mn round in August 2022.

The company operated a D2C brand and also offered allied healthcare services such as consultancy.

Chiratae is the largest stakeholder in Mojocare with 14%, while Peak XV (Sequoia) has close to 12% stake, B Capital, which came in during the Series A round, holds 10% stake, while other investors have about 4% shareholding in the company.

Mojocare was founded in October 2020 by Ashwin Swaminathan and Rajat Gupta and raised its first round immediately from Peak XV’s Surge, Chiratae and a host of angel investors.

This includes noted entrepreneurs such as CRED’s Kunal Shah, Lenskart’s Peyush Bansal, 1MG’s Gaurav Agarwal, Snapdeal’s Rohit Bansal as well as Mobile Premier League’s (MPL) Sai Srinivas Kiran G and even GoMechanic cofounder Amit Bhasin.

Curiously, both Mojocare founders raised funds from their past employers.

Cofounder Swaminathan was an investment advisor at Chiratae from June 2018 to August 2020, while Gupta was formerly the vice-president of marketing at gaming unicorn MPL.

Incidentally, GoMechanic’s Bhasin, another angel investor, was in the headlines for publicly admitting to fudging revenue numbers via a LinkedIn post. GoMechanic and Mojocare have Peak XV Partners and Chiratae as common investors.

Another of Mojocare’s investors has a Chiratae connection — Karan Mohla, general partner at B Capital, was a partner at Chiratae till December 2021. Moreover, his stint at Chiratae coincided with Mojocare cofounder Swaminathan’s time at the VC firm.

Did Founders Even Have The Expertise To Run Mojocare? 

So, there are quite a few connections in terms of the early stage VC funds and angel investors at Mojocare and its two founders’ previous work experience. Given that both lacked any healthcare experience before Mojocare, the question that needs to be asked is did Swaminathan and Gupta raise funds purely on the basis of their past relationship with their earliest backers?

D2C as a category is extremely sensitive to founder backgrounds and the insights or experience they bring to the table.

In our past conversations with early-stage VCs across categories, one common evaluation criteria is the expertise or the skill set that the founder can leverage for success in their specific sector.

For instance, Vinay Singh, partner at D2C investor Fireside Ventures told Inc42 earlier this year, “We seek founders who can educate us on what’s around the corner. When they can see much beyond what we can see, that’s a great starting point of a conversation.”

Similarly, Kushal Bhagia, founder of All In Capital told us previously, “Essentially,it’s [success] about the key skills that a founder needs to have to be able to crack the opportunity. What is the key risk and what are their earned secrets?”

Given their varied backgrounds, Mojocare’s Swaminathan and Gupta certainly had particular skill sets, but there is nothing to suggest that they had what it takes to succeed in the healthcare sector — more than any other sector, healthcare is not for generalists. And now Mojocare is paying a steep price for this deficiency.

Corporate Governance Issues Plague Indian Startups

Interestingly, now we are seeing more and more founders confess to fraud. GoMechanic was the first; now Mojocare seems to be following the precedent set by one of its angel investors.

Sources tell us that more frauds are very likely to come to light now — investors are closely scrutinising a number of companies and conducting audits in the bulk of their portfolio.

Cases of investors backing a startup across multiple rounds — Zilingo, BharatPe, Broker Network, GoMechanic and now Mojocare — strengthen the arguments and criticism in the public sphere about the lack of VC due diligence.

As Indian startups and VCs continue to face the heat and tough questions about corporate governance, the persistence of these issues has just made answering these questions much harder.