With Just Mayo, Josh Tetrick wanted to build the first sustainable-food unicorn. He’ll need to fend off the feds first.
With Just Mayo, Josh Tetrick wanted to build the first sustainable-food unicorn. He’ll need to fend off the feds first.
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 Salesforce.com 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.”
Tetrick’s first partner, Dave Anderson, was the owner and chef at Madeleine Bistro, a popular vegan restaurant in Los Angeles. From the beginning Tetrick emphasized that they needed a technology angle, with patents, to please venture capitalists. Tetrick moved the company to San Francisco in 2012. His two-story apartment in the South of Market district doubled as the company’s research and development lab and test kitchen. It quickly became a sustainable-food showcase for activists, environmentalists, and big thinkers and spenders. When he wasn’t showing VIPs around the space or serving up fresh samples of the lab’s latest attempt at an eggless scramble, Tetrick paced the apartment on his cell phone headset, cajoling investors for everyone to hear. When he scored funding, say three former employees, he’d hang up and celebrate with jubilant profanity, like a character in The Wolf of Wall Street.
Javier Colón was an operations manager at Hampton Creek from 2012 until Tetrick fired him in 2013. They sparred, Colón says, over Tetrick’s attempts to change some employment contracts without the workers’ consent. Early Hampton Creek contracts gave employees three months of severance if they were let go. Tetrick wanted to change it to three weeks, and in some cases did so, contracts provided to Bloomberg show. In a posting last year on Medium, a site where members of the tech community regularly publish pieces of opinion and explanation, Tetrick acknowledged having altered the terms of employee contracts and said he’d honored the original terms. Colón brought an unfair labor action against Hampton Creek with California regulators and settled privately.
Colón, who was friends with Tetrick’s girlfriend, says she broke up with him after discovering Tetrick was sleeping with a Hampton Creek employee. Colón says he saw references to the affair in an unexpected way: His mobile phone broke, and Tetrick told him to take one from a pile of older phones that were company property. On the company phone, he says, he found a text exchange between Tetrick and his ex. She was furious. She demanded Tetrick fire the employee he’d slept with. Tetrick refused, texting, “Khosla would hang me—it is a huge lawsuit.” After some back-and-forth, Tetrick wrote, “I do not want drama at work—I cannot lose this company. I cannot.” In the Medium post, Tetrick acknowledged, “I did date a team member.”
In 2013, Tetrick raised an additional $5 million from sources including Khosla, a co-founder of Sun Microsystems; Founders Fund, which is led by PayPal co-founder Thiel; and a venture fund led by Kat Taylor, a philanthropist and co-CEO of a progressive bank called Beneficial State Bank. Bill Gates didn’t invest directly, but he featured Tetrick in a blog and video about re-engineering the world’s food system to feed the 9 billion people expected to populate the planet by 2050.
Hampton Creek’s Josh Tetrick
Tetrick told a great life story, with some embellishments. Raised in Birmingham, Ala., by his mom, a hairdresser, he dreamed of playing pro football and often talks about playing for West Virginia University, though he was only on the practice team, which rarely dressed or traveled. After college and law school, he spent three years working on the ground in Africa, though he says in numerous interviews it was seven. He participated in the Fulbright U.S. Student program but didn’t complete it. He embraced veganism and animal welfare under the tutelage of his best friend, Josh Balk, senior director for food policy at the U.S. Humane Society in Washington.
In 2011 and 2012, Hampton Creek’s scientists and chefs struggled to meet Tetrick’s initial goal: an egg substitute he could sell to industrial food manufacturers such as
The media loved Tetrick, taken with his blunt passion to make vegan food affordable and appetizing even to his own Twinkie-eating dad. In a December 2013 article, “Bill Gates’ Food Fetish,” Forbes called Tetrick’s mission to make the egg obsolete “Silicon Valley solutionism at its finest.” The same month, Mother Jones said Tetrick’s scientists “are on a single-minded quest to hack the egg and its 22 functional properties.”
Tetrick went back to investors in early 2014. Hampton Creek, he told them, was on the precipice of breathtaking growth. He based his case on two main propositions: that his scientists were finding plant proteins capable of making numerous delicious foods with dramatically less environmental impact than animal products, and that it was cheaper to produce food from plants than from animals. Hampton Creek had a huge cost advantage, the company said in a pitch deck provided to potential investors. Its plant-based egg equivalent cost about half as much as a real egg. In the case of Just Mayo, that meant Hampton Creek could easily undercut
From those assumptions flowed visions of vegan grandeur. Hampton Creek’s 2014 sales would reach $28 million, the deck forecast. Just Mayo alone would bring in $13 million; vegan cookie dough would add $10 million; and Just Scramble, an eggless egg product, would contribute $5 million. (Just Scramble still hasn’t been introduced.) The company would be profitable immediately, with a gross profit margin of 15 percent. By year five, revenue would hit $1.1 billion, with a gross profit margin of 41 percent.
Led by Li’s Horizons Ventures in Hong Kong, investors put in an additional $23 million in February 2014, bringing cumulative investment in Hampton Creek to about $30 million. That valued the company at $80 million, Tetrick told employees. The money came just in time: According to an internal accounting document, after losing about $3.5 million in 2013 trying to develop a product, Hampton Creek had only $78,000 left in the bank.
Tetrick’s pitch deck to investors this past March forecast revenue of $106 million for 2016.
Flush with new cash, Tetrick bulked up R&D and hired seven data scientists, led by Dan Zigmond, who’d been Google’s data chief for YouTube and Maps. While Zigmond gave media interviews and helped woo investors, his team of six Ph.D.s—a mix of biochemists and experts in artificial intelligence—grew frustrated with the paucity of plant data to analyze. The research was “super, super basic,” consisting mostly of mixing and matching plant extracts to see what worked, says a former member of the team. “There was no attempt to infer causality,” he says. “That’s not really science.”
Still, in August 2014, Tetrick told investors in an e-mail that “the application of machine learning to plant biological data is increasingly becoming the focus of our tech platform.” A year later, after Hampton Creek completed another fundraising round, its biggest yet, four of the seven data scientists were gone, including Zigmond, now director of analytics at Facebook and co-author of the new book Buddha’s Diet. He praises Hampton Creek’s ambition and perseverance but says he left to work for a company more focused on data science. “I didn’t want to feel like a sideshow,” he says. The company says it has 58 professionals working on food science—and it claims the latest data suggests its cookie may be better for the environment after all.
Tetrick’s own strength has always been marketing, and in 2014 the company developed a powerful ground game. Working through the Humane Society, Hampton Creek recruited cadres of impassioned young vegans, environmentalists, and animal welfare activists eager to proselytize for Just Mayo and serve samples in store aisles. The Creekers, as Tetrick called them, were more than 100 strong and earned about $12 an hour. They got pep talks from Tetrick or other managers on weekly conference calls and shared their considerable passion on their own Facebook pages. Hampton Creek played brilliantly to these millennials’ sense that the world’s agro-industrial complex was evil. Dolloping spoonfuls of Just Mayo on crackers inside grocery stores, the Creekers proudly wore black T-shirts with a question emblazoned on their backs: “What would you attempt if you knew you could not fail?”
Tetrick was asked in an interview with NextShark, a digital business and technology publication targeted at young Asians, about the most important lesson he’d learned as an entrepreneur. His answer: “That all the rules that we have set, all the rules about how fast we can build a brand, all the rules about who we can raise money from, all the rules about how many people we can hire or not hire, how fast you can go in terms of research and development, every single rule that you think exists, is probably wrong and was probably created by people no smarter than you and no smarter than me. We can look at all those rules and totally ignore them and do whatever we want.”
In January 2014 a Creeker on the West Coast, who asked not to be identified, received an assignment in an e-mail under the subject line “Secret Shopper Squad Stores.” She was directed to buy 20 bottles a week of Just Mayo from each Whole Foods store in a large territory. She was also told to hide what she was really doing. Under the heading “BACKSTORY,” the e-mail said, “You are working for a catering service, which chooses Just Mayo because of its amazing taste and because it is really good for people with allergies. We avoid saying the word vegan because we want everyone to think of Just Mayo as a mainstream mayo.”
After the secret purchases, the e-mail instructed, she should open one or two bottles at home to check for quality—specifically, whether the mayonnaise had separated. If the jars were all right, she could donate the rest to a food bank or give it to friends. “Do not return them to Whole Foods,” the e-mail said. It also included a link to a quality-assurance survey the Creeker was supposed to fill out for each store. But no one noticed when she didn’t do it. Within weeks she had bought so much Just Mayo that her friends and local food banks couldn’t handle any more, so she began dumping it. She spent almost $12,000 purchasing the product, she says, and she could tell the buybacks had nothing to do with quality control. “But I really didn’t think about it because I cared so much about the cause.”
A Creeker’s photograph of one day’s mayonnaise haul.
With the buyback program in full swing, Tetrick celebrated the product’s success. “Wow! Some @WholeFoods are selling 100+ jars of #justmayo/day,” he tweeted on Jan. 30. Four months later, a company tweet said: “Proud to announce that #justmayo is now the #1 selling mayo at @wholefoods.”
By then, Tetrick had moved on to a much bigger conquest: Safeway stores. On April 22, Caroline Love, who ran Hampton Creek’s corporate partnerships and is now vice president for mission, sent an e-mail to a group of Creekers who’d been specially selected, she said, for the Safeway assignment. First, she thanked the unit, which became known inside Hampton Creek as the special projects group, for their “hard work in Whole Foods.” Then she tried to inspire them. “We are winning because of you,” she wrote. “We are reinventing the food system because of you. We are changing the world because of you.”
“This is mainstream,” she continued. To ensure “huge sales out of the gate” and “put an end to Hellmann’s factory-farmed egg mayo,” Love gave the Creeker elite five days to purchase “at least” 12 jars of Just Mayo at Safeway stores assigned to them. Use the self-checkout lane or multiple cashiers to avoid suspicion, she instructed. And don’t wear Hampton Creek gear—“This is an undercover project.” There was no pretense of quality monitoring. Subsequent assignments were for 20 jars per store.
Creekers did buybacks throughout 2014 and into 2015, according to five of them. They hit Costco, Kroger, Target, and Walmart stores, in addition to Safeway and Whole Foods, former employees say.
Another West Coast Creeker says Tetrick was like a religious pastor who inspired his charges—many of them women under 35 like her—with his vision of fixing a corrupt corporate food system. “He was such a dude—really raw, such a presence, entirely authentic,” she says. He made this Creeker feel like she could make a difference in the world. “I honestly felt blessed to have met him,” she says.
Her first buyback assignment was in April 2014. That year she hit multiple Safeways, purchasing more than 500 jars of Just Mayo in all. Quality control never came up, she says. She donated the jars to hospitals, passed them out to friends, and finally started leaving boxes on the street. Now she suspects she was helping commit fraud, and it gnaws at her.
“Why was I willing to work so hard for so little money?” she asks. “Why did I do things that made me really uncomfortable, that I knew weren’t right? I’m really struggling with those questions.”
In late July, two Bloomberg reporters visited Hampton Creek’s offices to ask about the buyback program. Having outgrown Tetrick’s home, the company occupies a 90,000-square-foot former cookie factory in San Francisco’s Mission District. When reporters arrived, Jordan Tetrick, Josh’s younger brother, who also works for Hampton Creek and is engaged to the company’s communications director, was out front walking his golden retriever puppy.
Once upstairs, the reporters sat across from Josh Tetrick on bar stools at the edge of a large room filled with young employees. Another golden retriever puppy, this one Josh’s, nestled nearby. A huge poster of Tetrick and Gates loomed above, inscribed with the word “LEAP” in red letters. On the kitchen fridge was a photo of Tetrick in his football uniform.
He said the company had spent only $77,000 on buybacks, all for quality control. He summoned two employees to explain the program and showed the reporters a spreadsheet of Creeker survey results to prove his point. Asked several times why some of the assignment e-mails hadn’t mentioned quality control, Tetrick repeatedly deflected the question. Finally, he left for a few minutes and returned with Love, the former Creeker handler. Love said the e-mails didn’t always mention quality control, and asked Creekers to disguise themselves during buybacks, because the company wanted the Creekers to have a genuine customer experience.
A few days later, the reporters asked Tetrick to explain another mystery: Why were hundreds of purchases Bloomberg had documented using Creeker receipts not among the $77,000 worth of buybacks in Hampton Creek’s quality-control spreadsheet? Tetrick didn’t answer; he asked for more details about which purchases were missing. Bloomberg, to protect its sources, didn’t provide specifics.
Part of the answer may be buried on Line 62 of that profit and loss statement from 2014: Inventory Consumed for Samples and Internal Testing. The line is blank from 2011 through February 2014. From that March through July, the entries total $1.4 million. Hampton Creek’s spokesman says the category did not include buybacks; it covered samples sent to customers and potential customers and tested in-house. He declined to elaborate.
Ali Partovi suspected something was wrong shortly after joining Hampton Creek in September 2014. He and his twin brother, Hadi, are among Silicon Valley’s most successful angel investors. Their parents, scientists from Iran, fled the Islamic Republic when the boys were 11. Both earned computer science degrees at Harvard. In the 1990s, Hadi co-founded Tellme Networks, which he sold to Microsoft for $800 million; Ali co-founded LinkExchange, which Microsoft bought for $265 million. The brothers were early investors in Dropbox, Facebook, and Airbnb, among other companies, and founded the nonprofit Code.org, which promotes programming instruction in U.S. public schools.
A big believer in greening the food chain, and now an investor in Hampton Creek competitor Clara Foods, Ali Partovi grew smitten with Hampton Creek after meeting with Tetrick in 2013 and seeing his pitch deck. The Partovis invested in Hampton Creek in 2014. That September, Ali joined the company as a senior executive. His main responsibility was fundraising, particularly helping land Hampton Creek a “tech company valuation” in its next round, e-mails show.
Partovi dug in to the company’s financials. A week later, he sent Tetrick an e-mail documenting his belief that Hampton Creek was misleading investors and board members and risking potential fraud lawsuits. As of that August, the company was on pace to have less than $4 million in sales in 2014, not the $28 million projected in the pitch deck, and it was losing more than $2 million a month, according to an internal P&L statement. Partovi recommended revising the 2014 sales forecast for investors to $7 million to $9 million. Deceiving investors is a big mistake, he warned Tetrick. “This path is especially dangerous because the farther one goes down it, the harder it is to pull back,” he wrote. “Hadi and I personally feel duped.”
The Hampton Creek spokesman says Tetrick told Partovi that investors were made aware of the company's financial performance on a regular basis. The two men met, and Partovi resigned. He had been at the company nine days. He notified Hampton Creek’s two outside board members, from Khosla Ventures and Horizons, that he suspected Tetrick was misrepresenting the company’s finances. Both firms stuck by the CEO, and the board launched no formal investigation. The board reviewed documents provided by the company, spoke with both Partovi and Tetrick, and concluded that “no further action was warranted,” according to a spokesman for Khosla and Horizons. “Frankly, Josh is the company,” says one investor close to the board.
Partovi didn’t push the matter. After resigning, he declined to sell his Hampton Creek stake back to the company under the terms offered, and he complimented Hampton Creek in an interview on CNBC in March 2015. Eight months later, Partovi sold his shares to Benioff at a profit. Two people familiar with the transaction say Partovi told Benioff he believed Tetrick had been dishonest with investors. Hampton Creek says Partovi “made no allegations of fraud” when he sold.
Founders Fund, after hearing of Partovi’s sudden departure, asked Tetrick for a copy of Partovi’s resignation e-mail. The fund had been planning to lead Hampton Creek’s next round of financing with a $20 million investment, but after reading the e-mail, it withdrew, according to a person involved in the investment decision. Khosla Ventures and Horizons, the company’s two largest investors, stepped in to co-lead the funding round.
Tetrick pleaded with Founders Fund to make at least a token investment, lest other investors get spooked. Founders agreed to put in $500,000. The Hampton Creek spokesman says the company never received a term sheet from Founders Fund to lead the financing round and Founders Fund “continues to be supportive” of the company. Ultimately, Hampton Creek raised $90 million, bringing its valuation, Tetrick told employees, to $190 million. Its value had more than doubled in 2014, the year of the Creeker buybacks.
Tetrick’s pitch deck to investors this past March forecast revenue of $106 million for 2016, nearly four times the 2015 sales. When he gathered his employees in August, he announced that a recent funding round had raised $100 million, at a valuation of $750 million, according to someone who heard him speak. The next financing round, which would anoint Hampton Creek a unicorn, was ready to go to the board any day, Tetrick said. Investors, he said, would include a German media group, some large funds from the U.K., existing investors in Asia, and a wealthy person in Silicon Valley.
After Tetrick spoke, an employee asked what the Creeker program was for.
“These are 100-plus people who gave a f--- about your company, who helped us get to where we are right now, who worked their asses off to make this happen,” Tetrick answered. “These are the people we’re talking about.”
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