As embattled startup Honestbee was running out of money, ex-CEO Joel Sng was publicly flogged for its failures.
But internally, Brian Koo, grandson of the founder of Korean conglomerate LG, as well as the key investor of the grocery and food delivery service, was facing accusations.
In 2018, two Honestbee investors alleged that Koo had made deals that benefitted himself at the expense of the startup’s other shareholders.
In addition, despite claiming to be, “blessed with family fortune,” Koo had taken on debt in order to double down on the startup. He had also been slow to repay the money, multiple sources familiar with the company tell Tech in Asia. This raises questions about Koo’s ability to sustain his pet project in the months ahead.
More recently, the ex-chairman has committed to injecting an additional US$7 million into Honestbee. That’s on top of having invested tens of millions into the company – money which may never be recouped.
Honestbee is now racing to secure a new lifeline. It’s in advanced discussions with various parties to license its technology or start joint ventures outside of Singapore, the new CEO, Lay Ann Ong, said in a closed-door meeting with creditors.
Any potential investor or partner will have an important fact to consider: While Koo has resigned as the startup’s chairman, he appears to have retained influence in the company. He holds the purse strings of the firm, and two of his associates remain on the board.
Honestbee declined to comment on the story, and Koo did not respond to Tech in Asia’s messages.
Cracks started to show
Honestbee had been a rocket ship since 2015. Koo, as the key investor and dealmaker, had strung together US$80 million from various fund managers for the company by mid-2018, including US$28 million from his family and US$10 million from his own pockets, sources tell Tech in Asia.
The money was put into A Honestbee Pte Ltd, a special purpose vehicle set up to consolidate the startup’s funding. The capital was then funneled into Honestbee.
Despite the startup’s growing clout, two of its early investors were growing uneasy.
Through a lawyer, investment firms Frame Investment Capital and Finbold Limited alleged in July 2018 that Koo and Sng had breached their investment contract.
The firms said that their investments in A Honestbee in 2017 were made with the understanding that the vehicle would own Honestbee.
However, Frame and Finbold charged that Koo and Sng had altered the investment structure and valuations without consulting them.
Rather than owning Honestbee outright, as was the original plan, A Honestbee would instead loan money to it via a convertible loan agreement (CLA). In other words, A Honestbee can convert its loan into the ownership of a chunk of Honestbee, but only at a future date.
Conflicts of interest?
Frame and Finbold questioned how the CLAs between A Honestbee and Honestbee were negotiated, sources tell Tech in Asia.
The investors alleged conflict of interest: Koo and Sng had been sitting on both sides of the table, serving as investors and directors, respectively, in the two entities.
The investment firms added that Sng only relinquished his director role in A Honestbee after they brought the governance problem to Honestbee’s attention.
“The investors are very concerned by the absence of any governance documentation” at Honestbee and A Honestbee, the lawyer had said.
Koo’s and Sng’s dealmaking caused them to end up with a larger share of Honestbee while leaving other investors with less than what was originally agreed, Frame and Finbold argued.
For example, after Sng bought new shares in A Honestbee for a token sum, he sold them to Koo, also for a nominal amount. This caused other shareholders to own an even smaller percentage of the company.
The investors further claimed that there were irregularities in how Frame and Finbold’s shares in A Honestbee were calculated, causing the value of their equity to decrease for unknown reasons.
They remain A Honestbee shareholders today, a public filing shows. A source says the issue may have been resolved.
Why the need for finder’s fees?
By October 2018, Koo’s fundraising was turning expensive. Sources tell Tech in Asia that he had forked out millions of US dollars in finder’s fees – a commission paid to an intermediary for discovering a deal.
It’s unclear who those fees were paid to and why they were necessary.
Some of the investors were entities that Koo has close ties to, eliminating the need to pay a finder’s fee to access the cash.
And even as Frame and Finbold confronted him, Koo was trying to reel in bigger fish.
Honestbee was becoming a household name in Asia, even as it spent wildly and unsustainably to do so. Undeterred, the ex-chairman looked to ride on the hype by raising its biggest investment yet.
According to sources, Koo claimed in investor pitches that someone had offered to invest in Honestbee at a valuation of US$500 million or acquire the company for US$700 million. He also claimed that an investor had made a “soft” commitment to investing US$250 million at a valuation of over US$1.4 billion.
By October, he said that Honestbee had signed a deal at a pre-money valuation (the valuation minus the investment sum) of US$700 million.
None of those deals materialized in the end.
Around this time, Koo was fighting another fire involving Yello Mobile, a South Korean unicorn once valued at US$4 billion that was backed by his firm, Formation Group.
The company’s CEO, Lee Sang-hyuk, had been fending off lawsuits filed by borrowers looking to claw back a total of US$46 million, according to The Korean Herald.
As Honestbee’s fundraising dragged on, Koo began borrowing money. He took out personal loans using his own stake in Formation Group as collateral, according to public filings. It wasn’t clear what those funds were for.
Rather than raising an equity round or convertible loans, he convinced some investors to buy put options – a type of debt instrument – in A Honestbee, Tech in Asia understands. Essentially, investors would buy shares in the company on the condition that they have the option to resell them back.
All of this – the debt and finders’ fees – would’ve been loose change had the company obtained a gigantic war chest.
Some of the investors ended up exercising their options, though Koo had delayed payments to them, sources tell Tech in Asia. It’s unclear if he honored the obligations in the end.
Media catches on
Even as investment talks fell through, Honestbee’s management kept believing it could seek a high valuation.
By late April, Honestbee’s troubles were aired in the media. The startup had turned down a US$10 million lifeline from regional super app Grab in exchange for its technology, intellectual property, data, and some of its employees.
Sng did not believe the deal was in Honestbee’s “best interests.”
Later on, news of his firing was leaked to TechCrunch. He derided it as fake news.
It turned out that he had emailed Koo a week before and recounted being asked to give up his shares and step down as CEO.
He also asked to be indemnified from any liabilities he may face as a former board member of the company. It’s uncertain if that request was granted.
Sng cleared out his office in the end, and Koo came in as the interim CEO.
For a while, Honestbee seemed to have found stability. It’s been paying the salaries it owes in tranches and had kept its supermarket, Habitat, going. It was also working toward a relaunch.
Koo had funneled close to US$6 million into Honestbee since July 2019, according to a presentation seen by Tech in Asia. He seems intent on keeping his Honestbee dream alive, calling it his “passion project.”
Yesco, a Korean listed firm linked to his family, remains the largest shareholder of A Honestbee, according to a public filing.
Honestbee’s immediate task is to clear its huge pile of debt. It has floated a proposal to pay creditors 3 cents for each dollar they are owed. The remaining 97 cents would be converted into equity in Honestbee’s new Singapore entity.
This meant that the creditor’s shares in the company would be worth more than US$223 million on paper.
In contrast to the huge valuation, Honestbee’s cash crunch wasn’t improving. Soon after details of the scheme leaked to the media, it announced the temporary shuttering of Habitat. The closure, however, might become permanent as it’s turning out to be too expensive to run.
The company is now in talks to license the technology behind its grocery concierge service as part of a joint venture.
It’s also exploring the creation of “quick-service restaurants” that would be spun-off from the 16 food and beverage concepts that were developed at Habitat.
Meanwhile, Honestbee’s talks with a large overseas retail conglomerate for a US$50 million cash injection have stalled. The conglomerate is reluctant to “fund the debt restructuring” of Honestbee and is deterred by the “uncertainty” caused by the Covid-19 outbreak, a court filing reveals.
Give us a chance to rebuild the business.
It seems Koo remains the startup’s sole backer for the time being.
Some investors have questioned Honestbee’s valuation. While it claims to have a strong upside because of its technology, right now it’s little more than a fancy and cash-strapped store.
Citing Apple as an example, Honestbee’s Ong tried to convince creditors at the closed-door meeting that the company can still turn things around.
“Give us a chance to rebuild the business,” he pleaded. “Honestbee’s issues are somewhat large, but that’s because we dreamed big.”