Controversy has a new favorite child with these five tech startup scandals.
Scandal in Silicon Valley came into full view of the world with John Carreyrou’s Bad Blood: Secrets and Lies in a Silicon Valley Startup.
The book documents how leadership at biotech startup Theranos raised money, built a company, and signed major partnerships for 15 years with practically non-existent technology. The company has since become a poster child for startup controversy, exposing the toxic practices at the heart of an industry purporting to be free of unhealthy workplace culture and corporate maneuvering.
Theranos may be one of the highest-profile tech startup scandals to have hit mainstream headlines, but it is far from the only one. It’s not all a basket of rotten apples, but the poor decision-making of a few within the company can often lead to company- and industry-wide repercussions.
From the Luckin Coffee scandal and the subsequent string of fraud allegations against Chinese companies, to a German fintech that misplaced over US$2 billion with no way to track it, here are the five tech startup scandals that have shaken 2020 so far.
The first of many: Muddy Waters goes after U.S.-listed Chinese companies alleging fraud, starting with Luckin Coffee
Luckin Coffee’s valuation crashed from decacorn status to a market cap of $349.34 million within five months of being caught in the hairs of a scandal kicked off by Muddy Waters this year.
The 2017-founded company was China’s response to Starbucks – a competitively priced coffee chain with a special focus on deliveries. Luckin branded itself as a new-age innovative F&B company and encouraged customers to pre-order through its app, perfect for young white-collar workers wanting to grab a cuppa joe on the go.
By 2019, the company had opened over 5000 locations in China, pocketed quarterly gross revenues of around $200 million, and raised $561 million in its Nasdaq IPO.
In the same year, a Luckin investor announced the company’s plans to expand to 10,000 locations by the close of 2021 at a tech conference in Hong Kong.
Six months later, an anonymous 89-page report turned the tables on Luckin Coffee. Made public by short seller Muddy Waters in late January 2020, the report bared the details of how Luckin was inflating its revenues based on a broken business model.
The report documented data from over 1000 Luckin locations, based on sales and foot traffic, and claimed that the coffee chain was underreporting costs, fudging order numbers, and inflating revenues by up to 88%.
Luckin acknowledged the fraud in April, the same month in which its offices were raided by a bloc of regulators led by the China Securities Regulatory Commission. Luckin eventually delisted from Nasdaq.
Moreover, the company and 43 affiliated companies who colluded in the fraud were also slapped with a $9 million fine by Chinese government watchdog State Administration for Market Regulation (who also participated in the raid) this month.
Days after Luckin acknowledged the fraud, Muddy Waters released another report authored by The Wolfpack on the inflated revenues of Chinese video on-demand platform iQiyi, and a third report in May alleging that over 73% of Chinese edtech startup GSX Techedu’s users were bots.
Luckin’s fraud and subsequent alleged fraudulent activities by other Chinese companies quickly prompted U.S. regulators to tighten the rules for those aiming for U.S. IPOs. Nasdaq eventually tightened listing criteria for companies “operating in a jurisdiction that has secrecy laws, blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S. listed companies,” widely understood to mean China.
Further, the U.S. President’s Working Group on Financial Markets released a report in August recommending stringent due diligence, disclosure requirements and listing standards targeting Chinese companies. The recommendations, if implemented, could result in the delisting of errant companies from U.S. exchanges.
Fool me twice: Wirecard loses it all after $2 billion black hole in its books
The story of German payment processor and fintech service provider Wirecard AG’s collapse starts in Hong Kong.
The company was bidding for a Hong Kong Monetary Authority license that would let it sell prepaid bank cards in the region. To qualify for the license, its Singapore-based office, which handled the company’s accounting and finance operations in the Asia Pacific region, began fudging numbers.
A 2019 Financial Times investigative report documented at length how the company went about manipulating its financials not as an isolated incident, but as a larger pattern within the entire company.
The report described how Wirecard would engage in a practice known as “round tripping”, where funds would be transferred from Germany to Hong Kong through transactions that were made to look as if they were being paid by external customers.
These round-trip transactions were meant to show that its Hong Kong businesses was generating revenues, whereas the company was merely relocating its funds without any real customers.
The scheme went bust when whistleblowers from the company raised concerns with Wirecard’s legal and compliance personnel, FT reported.
Eventually, the report prompted a raid by the Singapore police at Wirecard’s Singapore office on the basis of alleged fraud and false accounting.
Wirecard was unable to take this lying down, and subsequently sued FT. A year later, Wirecard was raided once more, this time at its Munich headquarters, and FT released a second investigative article into fraud by the company.
This time, the fraud was related to non-existent third party acquirers (TPAs). Where Wirecard could not provide solutions to any businesses due to network or licensing restrictions, the company referred such clients to TPAs who would then share the commission with Wirecard for the referrals.
The problem was that many of these TPAs simply did not exist. In one case, the second FT report tracked the location of one of Wirecard’s TPAs, a company called ConePay, only to find that the location housed the living quarters of a retired seaman.
According to Wirecard’s books, however, ConePay had earned the company millions of euros as a TPA.
By 18 June this year, Wirecard’s auditor EY announced that EUR1.9 billion (about $2 billion) were missing from the company’s books and could not be traced.
Before the month ended, Wirecard admitted that this money probably never existed, CEO Markus Braun was arrested in Germany, the company filed for insolvency, and its Munich headquarters and offices in elsewhere Germany and Austria were raided.
The growing woes of SoftBank’s Vision Fund
Until mid-2019, SoftBank was hailed as an investing mammoth, counting some of the world’s biggest startup companies including co-working space WeWork, ride-hailing app Uber and hotel chain Oyo in its portfolio.
Fast-forward to 2020, and Goliath hath nearly fallen. SoftBank recorded the worst ever losses in its history, writing off almost $17.7 billion from its books.
The company also doubled the amount it will spend on buy-backs, and saw the departure of Alibaba’s Jack Ma from its board, where he was director for 13 years. Further, SoftBank also announced plans to sell assets worth $41 billion as a recovery effort.
The source of SoftBank’s troubles is its Vision Fund. Of the near $18 billion that it lost, $10 billion alone were contributed by WeWork and Uber, both funded under its Vision Fund.
SoftBank announced its Vision Fund I in 2017, a $100 billion fund for tech investments. Some of the world’s biggest and most popular startups can be found in its portfolio, including ByteDance, Tokopedia, Unacademy, Didi Chuxing, DoorDash, and Grab, in addition to WeWork, Uber and Oyo.
In July last year, it announced Vision Fund II, a $108 billion sequel to its earlier fund. A month later, its poster child company – touted to be “the next Alibaba” – WeWork filed its IPO paperwork.
The IPO paperwork triggered the company’s downward spiral. Amongst other things, the documents showed that the company had been running losses for four consecutive years, and CEO Adam Neumann had cashed stock options worth $700 million prior to the IPO. The company also faced backlash for accusations of poor governance and discrimination.
By September, its IPO was stayed indefinitely, the company’s valuation had plunged to just over a fifth of its earlier $47 billion, and Neumann resigned from the company.
The WeWork fiasco took place on the back of Uber’s lackluster IPO, where the company raised significantly less money than anticipated. Meanwhile, another crisis was brewing for Masayoshi Son’s embattled SoftBank.
SoftBank’s lucrative real-estate bet Oyo had pushed its overseas operations to breaking point at Son’s behest. With the COVID-19 outbreak disrupting travel and tourism, Oyo has had to pull back from minimum guarantee payments with which it recruited hotel operators, freeze many of its global operations, and put thousands of furloughs into motion.
Despite being hit by a plague of tech startup scandals, however, SoftBank has been able to remarkably turn its luck around. Despite its substantial previous losses and its Vision Fund II now reduced to $38 billion, the company reported $12 billion in quarterly profits in August this year.
The upswing is largely due to rising valuations of Vision Fund-backed companies Uber and Slack, the company said.
Honestbee’s cash crunch is a royal pain
With 80% of its staff laid off, its hybrid grocery store Habitat closed for operations, and legal notices served to two former executives, Singapore-based grocery delivery startup Honestbee has not been having its best year.
Since its founding in 2015, Honestbee had raised $46 million in funding including a $31 million Series A round, and a further $49 million since that Series A.
And yet, trouble started in 2019 when the company paused its overseas operations as well as its delivery service in Singapore amid a crippling cash crunch. It also fired Co-founder and CEO Joel Sng.
The company was steeped in debt worth $180 million and had to file for protection from creditors with the Singapore High Court to restructure its debt. By January, Honestbee creditors were owed $230 million.
Bizarrely, one major factor in the company’s woes was a string of absurd lies told by Sng, and his misuse of company’s funds.
Amongst some of Sng’s tall tales was the fabrication that Sng was a descendant of Chinese revolutionary Sun Yat-sen, going as far as creating a sham company, Sun Group Capital, which Sng claimed was a family office with investments in global markets.
Sng also claimed to have made investments in Razer, Xiaomi, Airbnb, Uber, and Facebook, and that he had links to several government offices in Singapore, including the Prime Minister’s.
His ruse helped ingratiate him to investors, and he co-founded Honestbee in 2015. Almost immediately, Sng started spending a preposterous amount of company funds on himself.
This included a $1.1 million personal property in Japan and its maintenance costs, $422,000 in rentals for Sng and Honestbee ex-director Jeffrey Wong’s company The Cub, a $5.4 million purchase of Sng’s ewallet company PayNow, and Sng’s extravagant lifestyle as CEO, all of which was paid for by Honestbee funds.
This year, Honestbee has not only retrenched 100 people off its 130-member team, but has also shut its grocery store Habitat until further notice.
Further, legal action has been initiated against Sng and Wong over breach of fiduciary duties.
The company received an infusion of $7 million in January this year from its existing investors to help pay off the debt, and even sold furniture, equipment and perishables worth over $86,000 for working capital.
However, after the COVID-19 pandemic outbreak officially became a global health emergency, two of its bailout investors started to reconsider the funding in March this year. The Singapore High Court rejected a second plea by Honestbee for protection from creditors just a day later.
The dismissal of the plea exposes Honestbee to potential bankruptcy.
“Following the court’s dismissal on the company’s application for a scheme of arrangement, Honestbee is currently considering next steps,” CEO Lay Ann Ong told *Jumpstart* at the time.
Mega bitcoin attack targets celebrities on Twitter
During a virtual conference earlier this month, Twitter CEO Jack Dorsey told attendees that “Blockchain and Bitcoin point to a future, point to a world, where content exists forever. We’re not in the content hosting business anymore, we’re in the discovery business.”
Dorsey was indicating that blockchain and Bitcoin could possibly play a bigger role at Twitter HQ in the future.
Ironically, Twitter had become the site of a major crypto attack only two months ago. Attackers hacked the profiles of various celebrities on the site, spamming Twitter with the message that users could receive $2000 by transferring $1000 Bitcoin to a specific address.
This kind of spear-phishing using spam links is not a new cybersecurity threat – such attackers often make routine appearances in personal inboxes. What was new – or rather, scandalous – about this attack was its high-profile nature.
Accounts from which these spam tweets went out include political figures Barack Obama, and Joe Biden, magnates Jeff Bezos, Bill Gates, Warren Buffet and Elon Musk, celebrities Kim Kardashian and Kanye West, and even tech companies Apple and Uber.
In some cases, the tweets reappeared despite Twitter deleting them. Eventually, the micro-blogging service disabled large parts of its platform for a few hours until it was able to curb the spread of the scam.
Internal investigations claimed the hack was a social engineering attack that compromised the accounts of several employees with access to Twitter’s internal systems. Social engineering is a kind of hacking activity where users such as employees are manipulated into divulging confidential information.
Of the 130 accounts that the attackers hit, they were able to crack into 45 from which the tweets were sent out. The hackers made $121,000 off the scam, a paltry sum considering that crypto hacks have made billions before.
More alarming is the fact that the hack was executed by four young people, and masterminded by a 17-year-old Florida teen.
The four met via hackers’ convention website OGusers.com under usernames “Kirk”, “lol”, “ever so anxious” and a fourth unconfirmed name, according to an NYT report.
2020 is nearly at its close and has already been rocked by some sensational tech startup scandals this year. In the course of these occurrences, perhaps the year has also packed in a few lessons for the tech startup community on the dangers of leaving fencing unsecured and loopholes unattended.
And much like SoftBank’s turnaround, perhaps these incidents remind the community that sometimes, recovery may be hard and unpleasant, but not impossible.