After grinding investigation, Luckin Coffee confirms $300 million revenue fraud

Luckin Coffee’s drips and drops of news the past few weeks — including a boardroom feud that is pitting the company’s chairman against a special investigation committee looking into an alleged massive fraud — is now turning into a flood.

In a new SEC filing this morning, the company’s Special Committee, which was tasked with investigating claims that the one-time China-based coffee darling overstated its revenues by hundreds of millions of dollars, has returned with its verdict. And the verdict is that the company did indeed inflate revenues by nearly $300 million.

In its filing, the company said “In the course of the Internal Investigation, the Special Committee and its advisors reviewed over 550,000 documents collected from over 60 custodians, interviewed over 60 witnesses, and performed extensive forensic accounting and data analytics testing.”

What it found is that starting around April 2019, or roughly contemporaneous with the IPO of the company on Nasdaq, the company began inflating revenues. According to the company’s analysis, revenues were overstated by $35 million in Q2, $99 million in Q3, and almost $166 million in Q4, in present day U.S. dollars.

The fraud was first discovered by unknown private investigators in a report that was later circulated online by the short-seller Muddy Waters in January of this year. That short-seller report eventually led the company to begin an investigation roughly three months ago, which led to today’s conclusions.

The filing further stated that “Following the Special Committee’s recommendations, the Board terminated its former Chief Executive Officer and former Chief Operating Officer based on evidence demonstrating their participation in the fabricated transactions.” That news was released a few weeks ago.

Now, this is where things get interesting because this week, the boardroom feud is spilling out into the open. There are competing proposals on who will run Luckin going forward, with the chairman of the board attempting to fire the board’s Special Committee, while the rest of the board is trying to fire the chairman. Yes, it’s complicated, but the vote is happening this week, with the firing of the chairman for July 2, and the firing of the rest of the board in a shareholders meeting on July 5.

We’ll be following those developments closely, but I will say this: whoever read 550,000 pages of evidence in roughly three months deserves … at least $300 million in Luckin Coffee free coupons. I’d even say it’s grounds for a permanent and free coffee subscription. Let’s just hope the board spills even more beans on what is going on here. (Okay, I am going to stop now).

Summit raises $2.2B across two megafunds, and pulls in ex-CEO of SoulCycle as newest investor

While there has been a wealth of bad news the past few months in the venture capital world as firms take account of the changing macroeconomic conditions in the wake of COVID-19, that hasn’t stopped some top investment firms from continuing to raise huge piles of capital and getting bolder in their investment theses.

Case in point: Summit Partners, a venerable investor at the growth stage for startups and focused on the ecosystems in North America and Europe, has raised two new megafunds. The firm also announced that it has hired Melanie Whelan, who formerly was CEO of SoulCycle, as a new managing director. She is currently an EIR at the firm.

Summit raised a $1 billion growth equity fund focused on North American startups, and also raised a €1.1 billion ($1.24 billion) fund focused on European startups. The firm said that the funds will target growth equity-style investments with a check size of between roughy $10 million and $60 million for North American startups, and a bit larger for their European counterparts.

In recent months, the firm has invested in companies like cyber security platform RiskIQ, workflow automation startup AppWay, interaction management service Podium, consumer bedding brand Brooklinen, and cyber-skills platform Immersive Labs, according to Crunchbase.

While Summit is traditionally known for its enterprise investments, it appears the firm wants to double down on consumer with the hiring of Whelan. She will focus on “high-growth consumer and technology-enabled services,” according to Summit.

Whelan had a long career at SoulCycle, joining the company as COO in 2012 and then took the CEO title in 2015. There, she drove market expansion and worked to ready the somewhat cultish fitness brand for the public markets, with an IPO that was scheduled in mid-2018. That IPO ended up being pulled by the company, which faced headwinds from Peloton and other fitness upstarts, and Whelan left the CEO job near the end of 2019 (which, given the near complete shutdown of in-person fitness studios, seems incredibly fortuitously timed). She officially joined Summit as an EIR in February, right before the spread of the novel coronavirus slowed down much of the venture world.

The firm today has 100 people scattered across its myriad of offices, and has $21 billion under management.

R&D tax credits are due July 15th. Neo.tax wants to help startups apply, and raised $3M to do it

All founders love “free” money, but with the global pandemic going on, the necessity of free money has taken on a whole new meaning this year. First, there was the scramble to secure PPP loans a few weeks back for U.S.-based startups, and then the second wave of PPP loans when Congress offered a second tranche of funding. Two weeks ago, I covered a company called MainStreet, which is helping startups apply for local economic development credits which cities offer to businesses relocating to their regions.

In the same vein, Neo.tax wants to help startups secure R&D research credits from the federal government — which tend to be fairly easy to acquire for most software-based startups given the current IRS rules for what qualifies as “research.”

The free money is good, but what sets this startup apart is its ambitious vision to bring machine learning to company accounting — making it easier to track expenses and ultimately save on costs.

It’s a vision that has attracted top seed investors to the startup. Neo.tax announced today that it raised $3 million in seed funding from Andy McLoughlin at Uncork Capital and Mike Maples at Floodgate, with Michael Ma at Liquid2 and Deena Shakir at Lux Capital participating. The round closed last week.

Neo.tax was founded by Firas Abuzaid, who spent the past few years focused on a PhD in computer science from Stanford, where he conducted research in machine learning. He’s joined by Ahmad Ibrahim, who most recently was at Intuit launching small business accounting products; Stephen Yarbrough, who was head of tax at Kruse Consulting, a popular consultancy for startups on accounting and financial issues; and Leonardo De La Rocha, who was creative director of Facebook Ads for nearly five years.

Neo.tax’s Stephen Yarbrough, Firas Abuzaid, and Ahmad Ibrahim. Photos via Neo.tax

Or in short, a perfect quad of folks to tackle small business accounting issues.

Neo.tax wants to automate everything about accounting, and that requires careful application of ML techniques to an absolutely byzantine problem. Abuzaid explained that AI is in some ways a perfect fit for these challenges. “There’s a very clearly defined data model, there’s a large set of constraints that are also clearly defined. There’s an obvious objective function, and there’s a finite search space,” he said. “But if you wanted to develop a machine-learning-based solution to automate this, you have to make sure you collect the right data, and you have to make sure that you can handle all of the numerous edge cases that are going to pop up in the 80,000 page U.S. tax code.“

That’s where Neo.tax’s approach comes in. The software product is designed to ingest data about accounting, payroll, and other financial functions within an organization and starts to categorize and pattern match transactions in a bid to take out much of the drudgery of modern-day accounting.

One insight is that rather than creating a single model for all small businesses, Neo.tax tries to match similar businesses with each other, specializing its AI system to the particular client using it. “For example, let’s train a model that can target early-stage startups and then another model that can target Shopify businesses, another one that can target restaurants using Clover, or pizzerias or nail salons, or ice cream parlors,” Abuzaid said. “The idea here is that you can specialize to a particular domain and train a cascade of models that handle these different, individual subdomains that makes it a much more scalable solution.”

While Neo.tax has a big vision long-term to make accounting effortless, it wanted to find a beachhead that would allow it to work with small businesses and start to solve their problems for them. The team eventually settled on the R&D tax credit.

“That data from the R&D credit basically gives us the beginnings of the training data for building tax automation,” Ibrahim explained. “Automating tax vertical-by-vertical basically allows us to be this data layer for small businesses, and you can build lots of really great products and services on top of that data layer.“

So it’s a big long-term vision, with a focused upfront product to get there that launched about two months ago.

For startups that make less than $5 million in revenue (i.e. all early-stage startups), the R&D tax credit offers up to a quarter million dollars per year in refunds from the government for startups who either apply by July 15th (the new tax date this year due to the novel coronavirus) or who apply for an extension.

Neo.tax will take a 5% cut of the tax value generated from its product, which it will only take when the refund is actually received from the government. In this way, the team believes that it is better incentive-aligned with founders and business owners than traditional accounting firms, which charge professional services fees up front and often take a higher percentage of the rebate.

Ibrahim said that the company made about $100,000 in revenue in its first month after launch.

The startup is entering what has become a quickly crowded field led by the likes of Pilot, which has raised tens of millions of dollars from prominent investors to use a human and AI hybrid approach to bookkeeping. Pilot was last valued at $355 million when it announced its round in April 2019, although it has almost certainly raised more funding in the interim.

Ultimately, Neo.tax is betting that a deeper technical infrastructure and a hyper-focus on artificial intelligence will allow it to catchup and compete with both Pilot and incumbent accounting firms, given the speed and ease of accounting and tax preparation when everything is automated.

Luckin Coffee’s board is forcing out its chairman (also, chairman is forcing out the rest of the board)

Sometimes you can’t just get a [L]uckin’ break.

After announcing this morning that it is ending its fight to stay listed on Nasdaq, China-based coffee chain and delivery company Luckin Coffee announced that it is requiring that its chairman, Lu Zhengyao, resign in a filing with the SEC.

It also announced in its SEC filing that the chairman has requested the firing of independent director Sean Shao through a shareholders resolution, which will be voted upon at a shareholders meeting to be held on Sunday, July 5th.

My god.

It’s getting ugly at Luckin, which is struggling to turnaround in the aftermath of revelations of a $300 million accounting fraud that has seen its stock price plummet in recent months. Shao has been leading the board’s independent investigation over the accounting irregularity.

Now, at a shareholders meeting, the board will be up for grabs, with investors in the company (yes, there are still investors!) choosing who to keep and who to fire in a devolving case of corporate governance run amok.

In addition to voting on several current directors of the company, shareholders will also vote on installing two new independent directors, Zeng Ying and Yang Jie, who have long-time business and legal backgrounds.

We had previously known about the extraordinary shareholders meeting, but now the company has upped the ante, by voting to force out the chairman by July 2 — three days before the shareholders meeting is scheduled to take place.

Honestly, at this point, it’s impossible to say what comes next. But what I can say is that Luckin is currently trading down 54% at close this Friday, and is worth barely a few hundred million dollars — down from its peak market cap of over $12 billion. Wh ever wins is going to own some truly empty cups.

YC to cut the size of its investment in future YC startups

In a blog post this Friday afternoon, Y Combinator’s president Geoff Ralston said that the accelerator would make two changes to its terms for startups.

The first would see the size of the standard deal for YC startups decline from $150,000 for 7% (roughly a $2.1 million post-money valuation) to $125,000 for the same equity (or roughly a $1.79 million post-money valuation). The deal will continue to be offered using a SAFE, which YC and a group of others pioneered as a simpler investment option compared to convertible notes.

Interestingly, the firm is always writing into its terms that it will only take pro rata up to 4% of a subsequent round’s size, which is obviously smaller than the 7% ownership that the company is buying in its financing. That 4% number is a ceiling — in cases where the accelerator has less ownership than 4%, the smaller percentage applies. Full terms of Y Combinator’s deal are available on its website.

The new deal will apply to startups who join Y Combinator in the Winter 2021 batch, and doesn’t include startups in the current summer batch (who have already presumably been funded)

YC’s deal has varied over the years. When it first launched more than a decade ago, it offered terms of $20,000 for 6%.

A Y Combinator spokeswoman said that the change was in line with the fundraising and budget realties of the accelerator going forward. “The future of the economy is unpredictable, and we feel it is prudent during these times to switch to a leaner model,” she said. “In our case, we want to be set up to fund as many great founders as possible — especially during a time that is creating an unprecedented change to consumer and business behavior; with these changes comes endless opportunities for startups. And with the changes made to our standard deal, we can fund as many as 3000 more companies.”

Outside of budget, at least a couple of factors are potentially at work here. One is the increased use of Work From Anywhere, which presumably can help lower some of the running costs of a startup, particularly in its earliest days (e.g., no need to pay for that WeWork flex desk).

Y Combinator has also invested more of its funds into emerging markets startups, which can have dramatically lower costs of development given prevailing wages for talent in local markets.

Yet, the cutback is also a sign that the flood of capital entering the Valley in recent years has receded — if ever so slightly — in the wake of COVID-19. Valuations are depressing, and while $25,000 is not a massive loss considering the scale of later venture financings, the 16% valuation haircut is in line with other numbers we have seen in the Valley in recent weeks.

Volcker Rule reforms expand options for raising VC funds

It’s time to put on our thinking caps so we can discuss an esoteric but important policy change and how it is going to impact the VC world.

The 2008 financial crisis devastated the global economy. One of the reforms that came from the detritus of that situation was a policy known as the Volcker Rule.

The rule, proposed by former Fed chairman Paul Volcker and passed into law with the Dodd-Frank Act, was designed to limit the ways that banks could invest their balance sheets to avoid the kind of cataclysmic systemic risks that the world witnessed during the crisis. Many banks faced a liquidity crunch after investing in mortgage-backed securities (MBSs), collateralized debt obligations (CDOs), and other even more arcane speculative financial instruments (like POGs, or Piles Of Garbage) in seeking profits.

A number of reforms are underway to the Volcker Rule, which has been a domestic regulatory priority for the Trump administration since Inauguration Day.

One of the unintended consequences of the rule is that it limited banks from investing in certain “covered funds,” which was written broadly enough that it, well, covered VC firms as well as hedge funds and other private equity vehicles. Reforms to that policy (and to the rule in general) have been proposed for a decade with little traction until recently.

Now, a number of reforms are underway to the Volcker Rule, which has been a domestic regulatory priority for the Trump administration since Inauguration Day.

First, a simplification to some of the rule’s regulations was passed late last year and went into effect in January. Now, a final rule to reform the Volcker Rule’s applications to VC firms, among other issues, was agreed to by a group of U.S. regulatory agencies, and will go into effect later this year.

Atmos wants to make building a house a one-click effort

Homebuilding is not for the faint of heart, particularly those who want to build something custom. Selecting the right architect and designer, the myriad of contractors, the complexity of building codes and siting, the regulatory approvals from local authorities. It’s a full-time job — and you don’t even have a roof built over your head.

Atmos wants to massively simplify homebuilding, and in the process, democratize customization to more and more homeowners.

The startup, which is in the current Y Combinator batch, wants to take both the big decisions and the sundries of construction and combine them onto one platform where selecting a design and moving forward is as simple as clicking through a Shopify shopping cart.

It’s a vision that has already piqued the attention of investors. The company disclosed that it has already raised $2 million according to CEO and co-founder Nick Donahue from Sam Altman, former YC president and now head of OpenAI, and Adam Nash, former president and CEO of Wealthfront, along with a bunch of other angels.

It’s also a vision that is a radical turn from where Atmos was before, which was centered in virtual reality.

Donahue comes from a line of homebuilders — his father built home subdivisions as a profession — but his interests initially turned toward the virtual. He dropped out of college after realizing process engineering wasn’t all that exciting (who can blame him?) and headed out to the Valley, where he built projects like “a Burning Man art installation and [an] open-source VR headset.” That headset attracted the attention of angels, who funded its development.

The concept at the heart of the headset was around what the team dubbed the “spatial web.” Donahue explained that the idea was that “the concept of the web would one day flow from the 2D into the 3D and that physical spaces would function more like websites.” The headset he was developing would act as a sort of “browser” to navigate these spaces.

Of course, the limitations around VR hit his company as much as the rest of the industry, including limits on computation performance to build these 3D environments and the lack of scaling in the sector so far.

The thinking around changing physical spaces though got Donahue pondering about what the future of the home would look like. “We think the next kind of wave of this is going to be an introduction to compute,” he said, arguing that “every home will have like a brain to it.” Homes will be digital, controllable, and customizable, and that will revolutionize the definition of the home that has remained stagnant for generations.

The big vision for Atmos going forward then is to capture that trend, but for today at least, the company is focused on making housing customization easier.

To use the platform, a user inputs the location for a new home and a floorplan for the site, and Atmos will find builders that best match the plan and coordinate the rest of the tasks to get the home built. It’s targeting homes in the $400,000-800,000 range, and its focus cities are Raleigh-Durham, Charlotte, Atlanta, Denver, and Austin.

It’s very much early stages for the company — Donahue says that the company has its first few projects underway in the Raleigh-Durham area and is working to partner and scale up with larger homebuilders.

Photo by KentWeakley via Getty Images.

Will it work? That’s the big question with anything that touches construction. Customization is great — everyone loves to have their own pad — but the traditional challenge for construction is that the only way to bring down the cost of housing is to make it as uniform as possible. That’s why you get “cookie-cutter” subdivisions and rows of identical apartment buildings — the sameness allows a builder to find scale: work crews can move from one lot to the next in synchronicity saving labor costs and time while building materials can be bought in bulk to save costs.

With better technology and some controls, Atmos might be able to find synergies between its customers, particularly if it gets market penetration in individual cities. Yet, I find the longer-term vision ultimately more compelling for the company: redefining the home may not have made much sense three months ago, but as more people work from home and connect with virtual worlds, how should our homes be redesigned to accommodate these activities? If Atmos can find an answer, it is sitting on a gold mine.

Atmos team pic (minus two). Photo via Atmos.

In addition to Altman and Nash, Mark Goldberg, JLL Spark, Shrug Capital, Daniel Gross’ Pioneer, Venture Hacks, Yuri Sagalov, Brian Norgard and others participated in the company’s angel/seed round.

China’s GPS competitor is now fully launched

For decades, the United States has had a monopoly on positioning, navigation, and timing technology with its Global Positioning System (GPS), a constellation of satellites operated by the military that today provides the backbone for location on billion of devices worldwide.

As those technologies have become not just key to military maneuvers but the very foundation of modern economies, more and more governments around the world have sought ways to decouple from usage of the U.S.-centric system. Russia, Japan, India, the United Kingdom and the European Union have all made forays to build out alternatives to GPS, or at least, to augment the system with additional satellites for better coverage.

Few countries though have made the investment that China has made into its Beidou (北斗) GPS alternative. Over twenty years, the country has spent billions of dollars and launched nearly three dozen satellites to create a completely separate system for positioning. According to Chinese state media, nearly 70% of all Chinese handsets are capable of processing signals from Beidou satellites.

Now, the final puzzle piece is in place, as the last satellite in the Beidou constellation was launched Tuesday morning into orbit, according to the People’s Daily.

It’s just another note in the continuing decoupling of the United States and China, where relations have deteriorated over differences of market access and human rights. Trade talks between the two countries have reached a standstill, with one senior Trump administration advisor calling them off entirely. The announcement of a pause in new issuances of H-1B visas is also telling, as China is the source of the second largest number of petitions according to USCIS, the country’s immigration agency.

While the completion of the current plan for Beidou offers Beijing new flexibility and resiliency for this critical technology, ultimately, positioning technologies are mostly not adversarial — additional satellites can offer more redundancy to all users, and many of these technologies have the potential to coordinate with each other, offering more flexibility to handset manufacturers.

Nonetheless, GPS spoofing and general hacking of positioning technologies remains a serious threat. Earlier this year, the Trump administration published a new executive order that would force government agencies to develop more robust tools to ensure that GPS signals are protected from hacking.

Given how much of global logistics and our daily lives are controlled by these technologies, further international cooperation around protecting these vital assets seems necessary. Now that China has its own fully-working system, they have an incentive to protect their own infrastructure as much as the United States does to continue to provide GPS and positioning more broadly to the highest standards of reliability.

Marietje Schaake is ‘very concerned about the future of democracy’

In the ten years she spent as a member of the European Parliament, Marietje Schaake became one of Brussels’ leading voices on technology policy issues.

A Dutch politician from the centrist-liberal Democrats 66 party, Schaake has been called “Europe’s most wired” politician. Since stepping down at the last European Parliament elections in 2019, she has doubled down with her work on cyber policy, becoming president of the CyberPeace Institute in Geneva and moving to the heart of Silicon Valley, where she has joined Stanford University as both the International Director of Policy at Stanford’s Cyber Policy Center, as well as an International Policy Fellow at its Institute for Human-Centered Artificial Intelligence.

I spoke with her about her top cyber policy concerns, the prospects of greater U.S.-EU cooperation on technology and much more.

Can you tell me about your journey from MEP in Brussels to think tank in academia?

There were a variety of reasons why I thought a third term was not the best thing for me to do. I started thinking about what would be a good way to continue, focusing on the fight for justice, for universal human rights and increasingly for the rule of law. A number of academic institutions, especially in the U.S. reached out, and we started a conversation about what the options might be, what I thought would be worthwhile. [My goal] was to understand where tech is going and what does it mean for society, for democracy, for human rights and the rule of law? But also how do the politics of Silicon Valley work?

I feel like there’s a huge opportunity, if not to say gap, on the West Coast when it comes to a policy shop — both to scrutinize policy that the companies are making and to look at what government is doing because Sacramento is super interesting. 

So from a policy perspective, what areas of tech are you thinking about most?

I’m very concerned about the future of democracy in the broadest sense of the word. I feel like we need to understand better how the architecture of information flows and how it impacts our offline democratic world. The more people get steered in a certain direction, the more the foundations of actual liberalism and liberal democracy are challenged. And I feel like we just don’t look at that enough.

Free money for startups? It’s possible with MainStreet’s platform for economic development incentives

Startups need money. State and local governments need startups and the employment growth they offer. It should be obvious that the two groups can work together and make each other happy. Unfortunately, nothing could be further from the truth.

Each year, governments spend tens of billions of dollars on economic development incentives designed to attract employers and jobs to their communities. There are a huge number of challenges, however, for startups and individual contributors trying to apply for these programs.

First, economic development leaders typically focus on massive, flagship projects that are splashy and will drive the news cycle and bring good media attention to their elected official bosses. So, for example, you get a massive, $10 billion Foxconn plant in Wisconsin tied to hundreds of millions of incentives, only to see the project sputter into the ground.

Then there is the paperwork. As you’d expect with any government application process, it can be arduous to find the right incentive programs, apply for credits at the right time, and max out the opportunities available.

That’s where MainStreet comes in.

It’s CEO and founder Doug Ludlow’s third company. He previously founded Hipster, which sold to AOL, and The Happy Home Company, which sold to Google. After that transaction, Ludlow went on to become chief of staff for SMB ads at the tech giant, where he saw firsthand the challenges that startups and all small companies face in growing outside of major urban hubs like San Francisco.

When he and his co-founders Dan Lindquist and Daniel Griffin first started, they were focused on what Ludlow described as “a network of remote work hubs.” As they were experimenting, last November they tried paying people to leave the Bay Area, offering them $10,000 if they moved to other cities. The offer caused a sensation, with outlets like CNN covering the news.

While the interest from customers was great, what ignited Ludlow and his co-founders’ passions was that “literally dozens of cities, states and counties reached out, letting us know that they had an incentive program.” As the team explored further, they realized there was a huge untapped opportunity to connect startups to these pre-existing programs.

MainStreet was born, and it’s an idea that has also attracted the attention of investors. The company announced today that it raised a $2.3 million round from Gradient Ventures, Weekend Fund, and others.

Startups apply for economic incentives through MainStreet’s platform, and then MainStreet takes a 20% cut of any successful application. Notably, that cut is only taken when the incentive is actually disbursed (there’s no upfront cost), and there is also no on-going subscription fee to use the platform. “If you identify the credit that you’re able to use six months from now, we will charge you six months from now, when you’re actually getting that credit. It seems to be a business model that is aligned well with with founders,” Ludlow said.

Right now, he says that the average MainStreet client saves $51,000, and that MainStreet has crossed the $1 million ARR run rate threshold.

Right now, the company’s core clientele are startups applying for payroll credits and research and development credits, but Ludlow says that MainStreet is working to expand beyond its tech roots to all small businesses such as restaurants. The company also wants to expand the number of economic development programs that startups can apply for. Given the myriad of governments and programs, there are hundreds if not thousands of more programs to onboard onto the platform.

MainStreet’s team. Photo via MainStreet

While MainStreet is helping startups and small businesses, it also wants to help governments improve their operations around economic development. With MainStreet, “we can report back to cities and states showing exactly what their tax dollars or tax credits are being utilized for,” Ludlow said. “So the accountability is orders of magnitude greater than they had before. So already, there’s this better system for tracking the success of incentives.”

The big question for MainStreet this year is navigating the crisis around the global pandemic of COVID-19. While more small businesses than ever need help navigating credits, state and local governments have suffered huge shortfalls in revenues as taxes have dried up and Washington continues to debate over what if any aid to offer. There’s no money for economic development, yet, economic development has never been more important than right now.

Ultimately, MainStreet is pushing the vanguard of economic development thinking forward away from massive checks designed to underwrite industrial factories to a more flexible and dynamic model of incentivizing knowledge workers to move to cities outside the major global cities. It’s an interesting bet, and one that at the very least, will help many startups get the economic incentives they rightly have access to.

Outside of Gradient and Weekend Fund, Shrug Capital, SV Angel, Remote First Capital, Basement Fund, Basecamp Ventures, Backend Capital and a host of angels participated in the round.