Thursday, September 22, 2016

Just May Owe: "How Hampton Creek Sold Silicon Valley On A Fake-Mayo Miracle"

Just Pay-O?

Either way, Elizabeth Holmes breathes a sigh of relief as she drops off the front page.

From Bloomberg BusinessWeek:
In April employees at Hampton Creek, in San Francisco, received a stunning e-mail. With Earth Day coming up, Sofia Elizondo, vice president for business operations, wanted colleagues to know about some changes in the vegan-food company’s sustainability profile. For years, Hampton Creek had trumpeted its environmental credentials, crafting a story that had produced a cultlike following among green-minded foodies and a wave of excitement among Silicon Valley investors. The company’s Facebook page said a 30-ounce jar of Just Mayo, its signature product, saved 80 gallons of water, a full bathtub’s worth. It also makes vegan cookie dough and cookies: A Cookie Calculator on the company website showed that a single egg-free, dairy-free Hampton Creek chocolate chip cookie saved 35 grams of carbon emissions and almost 7 gallons of water, compared with a nonvegan cookie.

Except, the e-mail said, that was wrong. Hampton Creek had hired a consulting firm, Lux Research in Boston, to do a full audit of the environmental impact of its products. Lux found that, as a colleague of Elizondo’s said in a later e-mail, “the numbers look pretty different to the ones we’ve previously been using.” Lux had examined the footprint of all of Hampton Creek’s ingredients, not only the egg and dairy replacements. Employees were told to trash the old numbers and start limiting claims to individual ingredients. “You can say something like: ‘Pea protein saves 1.3 gallons of water for every jar of 30 oz Just Mayo,’ ”  Elizondo wrote.

Hampton Creek never publicly admitted its numbers were wrong. It scrubbed its site of sustainability claims, and the Cookie Calculator vanished. Such quiet backpedaling might be forgivable at many young companies—overeager math isn’t unheard of in Silicon Valley. But at Hampton Creek, it fits a pattern of mistaken or exaggerated claims that may prove to be deliberately deceptive.

In August the U.S. Securities and Exchange Commission and the Justice Department launched probes of Hampton Creek for possible securities violations and criminal fraud. The investigation follows an Aug. 4 Bloomberg article that revealed the company deployed a national network of contractors to secretly buy back Just Mayo from grocery store shelves. Hampton Creek denies any wrongdoing. When news of the SEC inquiry became public, the company’s founder and chief executive officer, Josh Tetrick, wrote in an e-mail, “We’re aware of the informal inquiry and we’ll be sharing the facts, as opposed to the inaccuracies reported by Bloomberg.” The company declined to comment on the DOJ investigation.

Tetrick used supermarket sales figures much as he used the environmental claims—to raise venture capital from a cast of billionaires including founder Marc Benioff, tech investor Vinod Khosla, Hong Kong developer Li Ka-shing, and entrepreneur and venture capitalist Peter Thiel. Investments in the company have reached almost $220 million, he told his employees in an all-hands meeting a few days after the Bloomberg article appeared.

Every entrepreneur has a story. Tetrick’s was eggs. In 2011 his company—essentially just him and a vegan chef, operating out of Los Angeles—landed $500,000 in seed funding from Khosla Ventures to develop a plant-based substitute for chicken eggs. His pitch: He would liberate billions of hens from the fetid misery of overstuffed cages—and in the process save water and grain and cut carbon pollution. Profane, charismatic, and built like the linebacker he once was, Tetrick became a tenacious evangelist for eliminating animal protein from the world’s diet. (It’s “Just” Mayo as in “righteous,” not “simply.”) At the same time, he billed Hampton Creek as more than a food company. What it was learning in the lab and through computational analysis about plant-based proteins would make it a sustainable-food power, not just a company with a handful of niche products. It’s the kind of big thinking that pays. Tetrick told his employees he was negotiating a new round of financing that would soon make Hampton Creek one of Silicon Valley’s vaunted unicorns—private companies valued by investors at $1 billion or more.

First, though, he’ll have to fend off the feds. Tetrick contends that the mayo buyback program was primarily for quality-control purposes and cost just $77,000. Two of his famous investors, insisting on anonymity because the company hasn’t authorized them to speak publicly, say PwC confirmed Tetrick’s explanation in a recent audit. But Bloomberg has reviewed contractors’ receipts for hundreds of Just Mayo purchases not represented in a Hampton Creek spreadsheet that Tetrick says covered the entire buyback program. A former accounting employee who worked with the company’s profit and loss statements says costs for the buybacks were included in several expense categories on the P&L, including one line item called “Inventory Consumed for Samples and Internal Testing.” As buybacks surged in 2014, Hampton Creek expensed about $1.4 million under this unusual category over five months, compared with $1.9 million of net sales in the period. A company spokesman says all buybacks were expensed elsewhere as “sales and marketing costs.” He wouldn’t comment on why Hampton Creek spent so much money consuming its own inventory in samples and testing.

While the company’s contractors raced from store to store, surreptitiously buying Just Mayo off the shelves, Tetrick kept promoting the product’s success and raising more money. “We’re the #1 selling mayo in Whole Foods,” he wrote in an e-mail to investors that August. The previous month, according to the P&L statement reviewed by Bloomberg, Hampton Creek spent $510,000 for Inventory Consumed for Samples and Internal Testing. The company had total sales that month of $472,000.

“Everyone knew about the buybacks,” says the former employee, who agreed to speak only on the condition of anonymity because of a severance agreement he signed with Hampton Creek. Along with other employees at headquarters, he did buybacks himself. “I drove all over one night buying the entire shelf of every store I passed,” he says. “I felt ridiculous, but it was so culty I couldn’t push back.” The buybacks, he says, were separate from the quality-control program Tetrick cited in response to the initial revelations.

In 2014, Tetrick was called out by one of his high-profile investors, Ali Partovi, who went to work for the company as a liaison to potential investors. He lasted nine days before objecting to Tetrick’s sales projections and telling the board the CEO was deceiving investors. “It’s only a question of time before the consequences catch up with us,” Partovi warned Tetrick in an e-mail. “If an investor discovers it during due diligence, we could lose financing and run out of cash. If they don’t, they’ll realize they were duped within months, and they might have a case for fraud.”...MUCH MORE
Previously on Phi Scamma Jamma::
August 26, 2016
"Hampton Creek Faces U.S. Criminal Probe Over Mayo Buybacks"
This thing has always had a whiff of Frat-boys-do-create-a-corp. about it. 
August 4, 2016 
"Just Mayo" Guys, Hampton Creek, Used Investor Money To Buy Its Own Product Off Store Shelves
Stay classy bro....
August 2015
Silicon Valley's Favorite Futuristic Food Company, Hampton Creek, May Be A Bit Fraudy
August 2015
FDA Says "No Eggs, Not Mayo": VC-backed Hampton Creek's CEO Is Defiant
September 2014
Forget GMOs. The Future of Food Is Data—Mountains of It
September 2013
Which Came First: The Artificial Plant-based Egg That Bill Gates and Peter Thiel Are Backing