Perfect Pyramid Scheme: Vegan Food Startup Hampton Creek Used Venture Capital To Buy Its Own Products
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. – READ MORE