Call it the perfect pyramid scheme for the "new normal."
In the latest example of the venture capital euphoria that has dominated the US in recent years, not to mention potential fraud, Bloomberg reports that vegan food startup Hampton Creek, had a novel idea of how to spend the venture funding it had raised: by buying up its own product. To wit:
In late 2014, fledgling entrepreneur Josh Tetrick persuaded investors to plow $90 million into his vegan food startup Hampton Creek Inc. Tetrick had impressed leading Silicon Valley venture capital firms by getting his eggless Just Mayo product into Walmart, Kroger, Safeway, and other top U.S. supermarkets within about three years of starting his company.
What Tetrick and his team neglected to mention is that the startup undertook a large-scale operation to buy back its own mayo, which made the product appear more popular than it really was. At least eight months before the funding round closed, Hampton Creek executives quietly launched a campaign to purchase mass quantities of Just Mayo from stores, according to five former workers and more than 250 receipts, expense reports, cash advances and e-mails reviewed by Bloomberg. In addition to buying up hundreds of jars of the product across the U.S., contractors were told to call store managers pretending they were customers and ask about Just Mayo. Strong demand for a product typically prompts retailers to order more and stock it in additional stores.
Wait is that legal? Well, technically it is not illegal, although it is extremely unethical (imagine if, gasp, Facebook was using click-farms to fabricate users - it's the same concept) however it underscore the money printing culture permeating the VC community, which through its generosity may be implicitly enabling fraud. Case in point: Theranos, and now Hampton Creek.
“It is highly questionable for a company to purchase its own goods,” says David Larcker, a professor of accounting at Stanford Graduate School of Business. “Revenue is an important number for evaluating growing companies, but the companies need to be transparent about the source of that revenue. They also need to be transparent about their growth. If the sales are not generated from legitimate customers, that needs to be disclosed and is important information for investors to evaluate.”
Bloomberg stumbled on the company's illicit practices by reviewed expense reports which showed contractors buying back jars of Just Mayo from Safeway stores. Former workers say Hampton Creek also purchased its own products at Kroger, Costco, Walmart, Target, and Whole Foods locations across the country. While a November 2014 e-mail from the corporate partnerships team said the company would stop store buyouts, three former contractors who worked for the company in 2015 say the practice continued, and directions were given verbally.
“We need you in Safeway buying Just Mayo and our new flavored mayos,” Caroline Love, Hampton Creek’s then director of corporate partnership, wrote in an April 2014 e-mail to contract workers known as Creekers. “And we’re going to pay you for this exciting new project! Below is the list of stores that have been assigned to you.” Love’s memo also referenced a key competitor: “The most important next step with Safeway is huge sales out of the gate. This will ensure we stay on the shelf to put an end to Hellmann’s factory-farmed egg mayo, and spread the word to customers that Just Mayo is their new preferred brand. :)”
Tetrick, Hampton Creek’s chief executive officer, was ready to spin the finding, saying the primary purpose of the purchases was to check the quality of the mayonnaise. “Because of this, we now understand the impact of trucking and shipping our product and enabled the system we have today that mitigates the risk of extreme temperatures,” Tetrick wrote in an e-mail. “Assessing the product from the customer perspective, more than anything, gets us out of the bubble of typical manufacturing. This was and always will be the primary purpose of it, which is why we’ll continue doing it.” Melanie Myers, an executive who worked in the company’s corporate partnerships team, says in a statement that the program was primarily for quality-control purposes but “we also thought it might give us a little momentum out of the gate.”
A little momentum, and a little "profit" which could then be shown to more VC investors who would then hand over even more cash to the company, and so the entire pyramid scheme could be repeated. Sure enough:
Earlier this year, Hampton Creek was looking to raise additional funds to help pay for an ambitious vision that imagined as many as 560 new plant-based products, which could include vegan “oysters,” “blue cheese” and an egg-substitute product it calls “Just Patty,” according to an investor presentation reviewed by Bloomberg. The company is still trying to close the round and is seeking investors in Asia, according to two people familiar with the matter.
In light of these revelations, it may have to put its expansion plans on hold.